FROM FOLLOWER TO MARKET LEADER: BAJAJ AUTO LTD.

In a competitive environment, a substantial amount of the managements focus is directed at

establishing their companies as the market leaders. In a concentrated industry where 3-4 major
players enjoy a large market share, such a problem becomes even more important. This article
attempts to identify the right strategy that competitors should adopt to become market leaders,
by taking the case of Indias two wheeler industry. The recommendations are based on the
analysis of Bajaj Auto Ltds strategy in the last few years.

Bajaj Auto is one of the oldest and the second largest two wheeler manufacturer in
India. In addition to coping with fierce competition from other players in the two
wheeler segment, it also has to protect its market share from the impending
onslaught of low price small cars such as Tata Nano. Holding on to its position in
such a challenging market environment requires innovative strategies and deep
understanding of consumers needs. The article analyses the two wheeler market in
India and Bajaj's positioning therein. Based on the analysis, the article proposes the
strategic options available to Bajaj.

Two Wheeler Industry: An Overview

The Indian two-wheeler industry has witnessed spectacular growth in the last few
years. The market dynamics of the industry has substantially changed with a
majority of the customers preferring bikes to scooters and mopeds. This is primarily
due to better fuel efficiencies, dynamics, looks and longer product lives of
motorcycles.
The motorcycle segment constitutes about 81.5% of the two wheeler market in
India1. It also contributes to three-fourths of the total exports in the two wheeler
industry. Exhibit 1 shows that Bajaj is the second largest player in this segment after
Hero Honda.

Exhibit 1. Market Shares of the major players in the two wheeler market segment
Product and brand differentiation are seen as the primary means of sustaining
competitive advantage. In order to sustain brand equity, players spend large
percentages of their revenues in advertising and brand building activities. The
supply and distribution networks are decisive factors in staying competitive and
normally need a huge capital investment.
The two wheeler industry is capital intensive with large fixed cost requirements and
new model introductions mandatory at frequent intervals in order to sustain the
demand. This involves substantial design and R&D costs. Such high fixed costs can
be offset only by achieving economies of scale. Moreover, developing a distribution

channel is extremely difficult in a country like India. Therefore, it is difficult for a

new player to enter this industry.

Demand and Growth Drivers

The following factors play a major role in increasing the demand for two wheelers in
India.
Personal Income, demography and penetration level are key growth drivers in the two wheeler industry.

Personal Income
Demand increases as the income increases, only to be substituted later by the
demand for four wheelers. Income has been steadily growing in India and is
projected to stabilise at a growth rate of 9-12 percent range by 2012 2.

Demography and Inspiration

The bigger the young and working population, the greater is its need for
commutation. The IT and BPO revolution has influenced this movement. This is a
favourable factor since Indias workforce is young.

Penetration Level
The lower the penetration levels in the market, the better the scope for future
demand. As the penetration of the rural market is significantly low, it is going to be a
significant long term growth driver.

Other Factors
Improvement in infrastructure increases competition, while simultaneously
improving the public transport. The average time period taken to replace an existing
bike with a newer model has decreased from 7 years to 5 years, resulting in
replacement demand growth.

Problems in the Two Wheeler Industry - Negative Growth

Negative growth is the major problem being faced by companies in the two wheeler
industry. The two wheeler industry has been shrinking continuously 3. From a peak of
over 40% growth in 2002 it is currently facing a growth of -12% in the second
quarter of 2008. Exhibit 2 shows the recent trends.

Exhibit 2. De-growth in the industry

Analysis of the different segments leads us to the conclusion that the main reason for
negative growth in the two wheeler market is the fall in demand for the 100 cc
segment which has traditionally enjoyed the maximum market share as shown in
Exhibit3.
FY06

9M/07 Q4/07 Q1/08 Q2/08

Motorcycles

19%

18%

4%

100cc

7%

14%

-12% -20% -23%

125cc

121% 31%

71%

10%

11%

150cc

29%

43%

28%

22%

22%

-10% -12%

Exhibit 3. Segment-wise analysis

Many factors have contributed to this phenomenon. A few of them are discussed
ahead.
Interest Rates
Interest rates are one of the prime reasons for the sharp fall in demand. Many banks
have increased interest rates which make two wheelers costlier.
Credit Crunch
Difficulty in availing loans, rising defaults, tightening of loan recovery laws and
various other factors have dissuaded consumers from availing loans and led to
further problems in credit lending.
Oil Prices
Increasing oil prices have deterred many lower middle class families from buying
two wheelers.
Launch of Low Priced Cars Like Tata Nano
Introduction of low priced cars will directly affect the market. The family segment
would want to gradually move from two wheelers to four wheelers. The major impact
of this phenomenon would be experienced in the 100-125 cc two wheelers whereas
the performance segment i.e. > 125cc will continue to grow strongly.
Tightening Regulations (Emission Standards)
With the introduction of the Bharat-4 norms, it will be more challenging to meet
these stringent norms whilst simultaneously offering competitive prices.
In spite of these factors, demand drivers are present for the foreseeable future and
are favourable for the two wheeler industry. However, to capture this growth, any
player will have to correctly position itself to appeal to the consumer.

Positioning of Bajaj Auto in the Two Wheeler Industry

Bajaj Auto is the flagship company of the Bajaj Group of Companies. Bajaj Auto
Limited (BAL) is currently India's second largest two wheeler and three wheeler
manufacturer. The core competency of Bajaj Auto Ltd is its technology and
innovation. Both DTS-i (Digital Twin Spark Ignition) and DTS-Fi (Digital Twin Spark
Fuel Ignition) are technological breakthroughs by Bajaj. BAL is also a pioneer in
product innovation having introduced technologies such as ExhausTEC (Exhaust
Torque Expansion Chamber), LED Tail Lamps, LCD Display, SNS, Spare parts
(Tubeless tyres, rear disc brakes), Black colour scheme etc.
Thus we observe that BAL which used to be a Defender in 1970-1990 through Bajaj
Chetak radically moved towards becoming an Analyzer (1990-1997) by focussing on
bike segments and has now become a Prospector (1997-date) with several patents in
its kitty and new bike launches every year. Therefore, for a follower to move on and

become a market leader it is essential that it focus on innovation and consumer

demand.

The Way Ahead

Graduating Customers from the 100cc to Higher Segments
There are several reasons why Bajaj should concentrate on its core segment, i.e.
greater than 125cc segment. With the introduction of DTS-i and DTS-Fi technology,
Bajaj Auto Limited has led the way in pioneering technology along with style.
The Profitability Pyramid in Exhibit 4 shows that the margin is very low in the sub125cc segment but volumes are high. BAL wants to shift users from 100, 115cc
segment to 125cc and higher. Thus Bajaj not only wants to play on the margins but
also wants to increase the market share of 125cc bikes. With its recent launch of
XCD 125cc, it has brought in competition for its own 100cc model, Platina by
delivering a bike that is better in all respects (including fuel efficiency).

Focus on Gearless Scooters

The market share of gearless scooters is increasing at a healthy rate. Bajaj is
virtually absent in this range that caters to the needs of women and families.
Presently Honda, Hero Honda and TVS are big players in this segment.

Entry into Four Wheeler Segment

Bajaj has entered into a joint venture with Renault-Nissan in the development of a
small car priced at $3000 4. This is a significant move because it directly competes
with Tata NANO. Bajaj has also displayed its small car prototype in the recently held
auto expo. It promises double the mileage as compared to any car in the economy
segment and is also considering the option of introducing Diesel and LPG variants.
The four wheeler segment will also be able to hedge any risk that might arise
because of the two wheeler industry and would profit from retaining consumers
switching from two wheelers.

Scaling Up Service Centers

BAL needs to scale up its service centers both in numbers and in capacity. Keeping in
line with its growth target for the next 5 years, its service centers should not only
cater to two wheelers but should also be upgraded to cater to the needs of four
wheelers that Bajaj plans to launch.

Focus on Easy Credit Lending

In the present economical crisis, Bajaj can utilize its subsidiary, Bajaj insurance in
coming up with schemes that will help consumers buy two wheelers on friendly
terms.

Investment in Research and Development

We have already identified that the core competency of Bajaj is its R&D and
investment in technology. In order to increase market share and become the market
leader, Bajaj needs to invest heavily in R&D. They have to introduce efficient and
powerful bikes as well as develop alternate energy vehicles.

Focus on Exports and Global Market

Bajaj Electricals has already setup a manufacturing unit in China. As set up cost and
export costs are extremely cheap in China, we recommend the same strategy for
BAL. By doing so, Bajaj can utilize low cost exports.
Bajaj is not yet a global name. Considering the fact that it is one of the oldest two
wheeler companies and is doing very well in India, it should definitely target global
markets. A movement is seen in this direction since it is focusing on the British cult
bike company, Triumph as its target takeover. Triumph, given its niche positioning,
cult brand image and strong product line-up, is an attractive target for the Pune
based firm.

Disbanding of Dedicated Sales Force for each Product

Because of the differentiation in the products that Bajaj currently possesses and is
expected to launch in the near future we recommend Bajaj to discontinue its current
strategy of dedicated sales force for each product line. This would eventually achieve
synergies in selling thereby leading to a reduction in costs.

Conclusion

Through this article we have tried to identify various factors that would impact
growth of a company in two wheeler industry. We reflected on the importance of
innovation and consumer demand. To graduate from being followers to market
leaders, companies need to invest in the right technologies and develop the right
products at the right time. Bajaj has shown the willingness to change and thus has
been able to achieve strong sales growth. To further consolidate its position and gain
market share in the industry, Bajaj needs to do strategic rethinking and assess its
product focus. The new strategy should also be backed by efficient on the ground
customer support and continuous research for product innovation.