Bajaj, Kawasaki to ride together to capture new markets

The country's largest two-wheeler exporter Bajaj Auto announced a strategic alliance with Japanese Kawasaki in an effort to penetrate deeper into new markets. The proposed alliance will see Bajaj Auto using Kawsaki's network in Indonesia and other Asean countries which are seen as potentially big motorcycle markets, Ronojoy Banerjee of CNBC-TV18 says that Bajaj shares the key highlights of the new arrangement apart from talking about specific Bajaj plans in these new markets.

Below is the edited transcript of Rajiv Bajaj's interview.

Q: There is already an existing arrangement with Kawasaki for the Indian markets. So how different will this alliance now be for the export markets?

A: Bajaj and Kawasaki have decided to take their partnership to the next level so this development. Let me give you some background about export business. Our exports were almost nil some time back but they have grown rapidly in last 7-8 years to 1.5 million vehicles, which included – about 1.2 million motorcycles with the total export value of Rs 6,500 crore. The exports have grown by almost six times in last five years. Our strategy is to be a motorcycle specialist, having limited ourselves to one segment of the market which is motorcycles, and then in order to scale our business we need to approach every possible motorcycle market in the world, so that we can grow the business every year meaningfully.

Q: Which export markets is Bajaj Auto looking at through this alliance with Kawasaki?

A: In the developed market we compete with KTM and in the smaller market where we are already doing well. There is a bunch of large motorcycle markets that are significant. India is the second largest market, in terms of volume Indian market is smaller than China, it is supposed to be more profitable. From 2013, Bajaj and Kawasaki will start participating in such markets together. We have plan enter Indonesian market.

Q: In which areas Bajaj Auto and Kawasaki would be collaborating with each other. Will we also see co-branding by the two manufacturers?

A: The two companies will partner together right from the starting point of the brand for the products that we present in Indonesia. More likelihood it will be a joint branded products like Kawasaki Bajaj.

Q: Your arrangements with Kawasaki appear to be very different from the one you have with KTM because with KTM you actually own a 47% stake in that company. So, is that on purpose?

A: The two relationships are almost the opposite. In case of KTM we have a lot of enormous commonality in backend because we are developing the new KTMs and the new Pulsars with the Duke 200 and the Pulsar 200 from the same platform. However, the front-end is completely independent. India is a relatively new and small market where they sell 800 motorcycles, whereas KTM and Bajaj has own independent distribution. It is completely independent in terms of brand marketing sales, service and spare parts.

With Kawasaki it will be exactly the opposite. The backend is totally different. We are not developing Ninja’s and they are not developing Pulsar’s. However, the frontend is common because we will both be selling out of the same dealership.

Q: Are you planning to increase your stake in KTM from 47%?

A: There are no plans to increase stake in KTM.

Q: Currently, over one third of your overall motorcycle volumes come from export now following this announcement do we see your export volumes going up in the coming three to five years?

A: If Bajaj gets progressive year after year over the next five years access through Kawasaki's distribution in the major motorcycle markets of the world through such a partnership then definitely our motorcycle exports should grow handsomely year on year.

Q: In this fiscal we have seen the 125-150cc segment coming under immense pressure. You are the market leader with two of your flagships brands operating in this segment how much are you concerned?

A: It is not a good sign when a market appears to down trade. Bajaj holds 40-45% market share in 125cc and above segment. So, it certainly doesn’t help our calls. At the same time, there is nothing a manufacturer can do to change that because this is a trend in the market that comes because of very significant factors to do with the economy.

One cannot fight it, one should not resist it, one has to accept it and adapt to it and do better and better. In our case in the sub 125cc segment, which we have been doing with the launch of Discover in April. On the other hand, ultimately the test of a company's strategy comes not only at a time when the going is good, the true test of a company's strategy lies in more turbulent times. So, Bajaj has been clocking industry leading EBITDA of 20% for the last three years or so. I am very confident that even in this market situation we will be able to maintain the same performance that we achieved in the first quarter that shows how deep and robust the strategy of the company is.

There might be some down trading, it certainly affects us a little more than it affects others but I am confident that the business model is robust enough to continue delivering the performance that we have come to be associated with.

Q: With the petrol prices on the higher side, is the market finally ready for a diesel motorcycle?

A: I don't know; you are touching upon an area of innovation. I am sure that companies must be working on ideas of diesel or electric vehicles. We must consider one practical aspect that most of the motorcycles that at least India and similar markets buys are under 250cc. In fact, most of them are under 150cc, diesel engines by the very nature of their combustion are generally bigger, heavier and more expensive. So, I cannot easily envision a 150cc Pulsar diesel but possibility cannot be ruled out.

Q: Are you working on a diesel bike?

A: It would not be accurate to say we have never considered that. One must keep oneself open to all such options but it's not the most feasible of options when it comes to these motorcycles. If we were a maker of 500cc touring motorcycle like Siddharth with his Royal Enfield than it would be a little more meaningful. I think it is not quite meaningful for a manufacturer like Bajaj.

Q: In August, we saw leading two wheeler manufacturers being forced to cut production for the first time baring Honda, TVS Motor drastically cut down their production – HeroMoto Corp cut production, Bajaj had to cut production compared to August last year so will this trend continue in September too?

A: Yes. I certainly do. The reality is that since April, or one or two months here and there, the industry has been either flat or negative. Some manufacturers like us have responded to that immediately by cutting production even before and others have continued to produce more than was necessary and have thereby build stocks in the market place. Those who did not curtail production early enough will have to now in fact take deeper cuts to compensate for that. So, overall as an industry I think for sometime we will continue to witness this kind of a cut backs and de-growth.

September, in fact, may look particularly harsh because last year Dussehra and Diwali were both in October and September therefore was a big month for the industry because we push a lot of stock at that time into our dealerships, which is absolutely fair, because it gets retailed out in the festive month. With the sales in the festive month typically increasing by 50% over the normal sales, so that is the kind of stock that one had to build last September.

This time, Dussehra comes towards the end of 24 October and Diwali spins over into November, so there would be no point. Bajaj is not going to push any stock to dealership now because it makes no sense to do it so early. So, stock building is going to take place in October. So September will look worse than it is actually is. October and November will look better than they actually are.

The true picture will only emerge from December, and as of now we should assume that it is not going to be a positive picture because the industry has been in a negative space for the last few months.

Q: You expect September to be worse than August?

A: If you compare it year-on-year basis then it will look worse, if you compare this September with this August it maybe similar but it will look bad compared to last September because last September was big month.

Q: What is your capacity in the three manufacturing plants?

A: We are scheduling about 3,20,000 motorcyles every month and our capacity is close to about 3,75,000 to 400,000 because capacity in the end is not just what we have internally, but the capacity that exists with our suppliers. It is difficult to put an exact number on it but I would suspect that we run somewhere between 85%-90% capacity which is good so I feel that our results will continue to be good.

Q: Any update on the fourth manufacturing unit- Bajaj Auto was planning to set up. We understand that you had zeroed down on Gujarat?

A: We had not zeroed down on Gujarat. We had expressed certain difficulties that we faced in terms of our operating environment in Maharashtra. For example, the VAT problems we were facing. Not only Bajaj Auto, many other companies talked the same.

At that time last time we spotted Gujarat as a potential place to set up a fourth plant. But as of now, we have completed our expansions as were necessary last year at our existing three plants. We are expanding our Aurangabad plant for the four wheeler segment. We don't see ourselves immediately in the near future going in for a new site whether in Maharashtra or in any other state.

Q: On RE60, have you heard from the government by when will they come ou with the final specification, the safety requirements that a quadricycle will have to meet. Mahindra & Mahindra is also very supportive of having a segment, call the quadricycle within the overall passenger vehicle space?

A: The short answer is no, a committee has been formed, as per the directions of the ministry of transport and this concerns or constitutes various agencies including the industry that is represented through SIAM, and this committee, to the best of my understanding, has been effectively told that the introduction of quadricycles in India as a principle is fine, but now the committee has to deliberate in detail on what this category is about and what should be the appropriate policies and regulations etc. that should apply.

So, work is in process and this is a very big step, to create a new category of vehicles is a very big step. So, I am sure that it will take some time for those who are working on it to put their minds around it and come up with the recommendation. I am unaware of Mahindra & Mahindra’s or any other company's official view on the matter, but the reality is that the world of cars is a real red ocean.

Very few car companies are able to demonstrate consistent profitability. Also, the technology standards, the quality standards that global car-makers have achieved are really very high. At the same time, I would say that not all sophistication is necessary in emerging markets like India and especially in our cities, we could do with vehicles that are simpler, that are smaller, that are greener, that are more fuel efficient and these are vehicles that are very amenable for – if I may say so even on behalf of companies like Tata and Mahindra and Bajaj, TVS etc. These kind of companies that have basically good R&D facilities, good engineering capabilities, in my view can put together such vehicles very competitively, perhaps this is what Carlos Ghosn meant when he referred to India's strength in "frugal engineering." So, we may not be exactly capable at this point of making truly the world-class cars and SUVs, but we don’t have to be apologetic about it.

I think the creation of such a category of vehicles is a huge opportunity for Indian brands and therefore I would expect that Indian companies like Mahindra, Tata and TVS would be supportive as Bajaj is of creation of such a category.

Q: Have you heard from Renault-Nissan so far since you unveiled the product in January, this year?

A: No, we have not received any feedback from them, one way or the other after sharing our development with them at the Auto Expo. They have assured us, they will study the matter and come back and we are waiting to exhale.