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Indonesian operations drag down profits at Bajaj, TVS

Indonesian operations drag down profits at Bajaj, TVS
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First Published: Tue, Jul 07 2009. 10 46 PM IST

 Overseas challenge: Workers at a Bajaj Auto plant in Chakan, Pune. The company’s Indonesian subsidiary posted a net loss of Rs48.75 crore in fiscal 2009, pulling down Bajaj’s consolidated net profit
Overseas challenge: Workers at a Bajaj Auto plant in Chakan, Pune. The company’s Indonesian subsidiary posted a net loss of Rs48.75 crore in fiscal 2009, pulling down Bajaj’s consolidated net profit
Updated: Tue, Jul 07 2009. 10 46 PM IST
Mumbai: The Indonesian subsidiaries of two-wheeler makers Bajaj Auto Ltd and TVS Motor Co. Ltd have dragged down profitability at the two firms.
Overseas challenge: Workers at a Bajaj Auto plant in Chakan, Pune. The company’s Indonesian subsidiary posted a net loss of Rs48.75 crore in fiscal 2009, pulling down Bajaj’s consolidated net profit by 28.5%. Santosh Verma / Bloomberg
According to Bajaj Auto’s annual report, Bajaj Auto Indonesia PT, the company’s subsidiary in which it has a holding of 97.5%, posted a net loss of Rs48.75 crore in fiscal 2009, pulling down Bajaj Auto’s consolidated net profit by 28.5% to Rs535 crore.
Similarly, TVS’ consolidated net loss widened 125% to Rs63 crore in the year to March over the last year. It’s not known how much of it is attributable to PT TVS Motor Co. Indonesia. TVS did not respond to emails sent by Mint.
Analysts believe the Indonesian subsidiary accounts for at least two-thirds of TVS’ consolidated losses.
Mahantesh Sabarad, an analyst with Centrum Broking Pvt. Ltd, pegged the company’s losses at the Indonesian unit to be around Rs40 crore. Another analyst from a different brokerage firm, who did not want to be named, said as the company reported a profit of Rs31 crore on a stand-alone basis, the consolidated losses are largely on account of Indonesian operations.
TVS, which sells the Neo and Apache brands in Indonesia, sold 10,000 two-wheelers in 2008-09 and expects to at least triple the sales volumes in the current year mainly on back of enhanced sales and distribution network, said Sabarad.
“Even with these volumes, the company will not be able to break even, at least for another two years,” he said. TVS sells its products in 13 provinces through a network of 105 dealers.
Bajaj’s annual report states that considering the challenges involved in setting up an appropriate dealer and service network, creation of brand awareness, appropriate tie-ups with finance agencies, understanding customer behaviour and preferences, in addition to setting up an assembly plant, the gestation period is expected to be long but eventually profitable. Hence, diminution in the value of the investments made in Indonesia is not considered to be of a permanent nature.
Both Bajaj and TVS have adopted different market entry strategies for the country. Bajaj Auto adopted a low-risk strategy and chose to tap into the high, premium-end bike market and started operations through an assembling facility for semi-knocked-down (SKD) units.
TVS chose to enter in the mass-market segment and established a unit that can assemble the Indian models and also develop models that are specifically meant for the Indonesian market.
To get a foothold in the six million-plus per annum Indonesian two-wheeler market, which is a stronghold of Japanese two-wheeler makers Suzuki Motor Corp., Honda Motor Co. and Yamaha Motor Co., Bajaj and TVS entered Indonesia in fiscal 2006 and 2007, respectively.
The firms, however, have not been able to make a dent into this market so far and continue to be fringe players. Bajaj Auto Indonesia sells the Pulsar and the XCD models in the country through its 63 showrooms in 46 cities. It sold at least 19,000 two-wheelers in fiscal 2009.
To be able to price its products more competitively and expand the product offerings in the region, Bajaj Auto also plans to commence assembly of completely knocked-down (CKD) kits in the second half of the current year. The move, the annual report said, will help the company trim the high customs duty on the imports. Duty on imported CKD parts in Indonesia is 15%, 10% lower than that of SKD parts.
Mohit Arora, director, India, JD Power, says one of the reasons why the Indian manufacturers have not been able to make a difference in a market, which is the third largest for two-wheelers by volume after China and India, is the low recall value and low awareness of the Indian brands.
“Unlike Honda and Suzuki, they are not global brands. They, hence, need time to prove themselves with their products before this market blossoms for them,” he said.
Arora believes that Indonesia being a competitive market, Indian players cannot succeed by merely exporting bikes made for India into this country and they have to develop models that have been designed specifically for the region. “In this sense, TVS, which has a full-fledged manufacturing unit, is said to be better off,” he added.
He believes with the Association of Southeast Asian Nations (Asean) being a promising but competitive two-wheeler market, Indian manufacturers in order to rake in enough volumes, need to have a well rounded strategy for the whole region and not one specific country. “Asean sells more two-wheelers than China and India put together.”
In 2008, China sold 25.9 million two-wheelers while India sold 9.7 million. What works in favour of the Indian manufacturers is the Indo-Asean free trade agreement, which waives excise duty on all exports, he added.
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First Published: Tue, Jul 07 2009. 10 46 PM IST