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Rajiv Bajaj | The numbers game is not important, but profitability is

Rajiv Bajaj | The numbers game is not important, but profitability is
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First Published: Thu, May 13 2010. 12 30 AM IST

Brand conscious: Bajaj says that because of its brand-centred strategy, the company has been able to post record margins of 22-23%. Fabrice Coffrini / AFP
Brand conscious: Bajaj says that because of its brand-centred strategy, the company has been able to post record margins of 22-23%. Fabrice Coffrini / AFP
Updated: Thu, May 13 2010. 10 30 AM IST
Mumbai: Rajiv Bajaj, managing director, Bajaj Auto Ltd, will continue to ride on the brand game. In an exclusive interview with Mint, Bajaj said the focus of the firm is not volume of sales but profitability as “ultimately, the strength of the strategy has to be judged by the profit it delivers”. He also said one day Bajaj’s exports will overtake its domestic sales. Currently, exports account for 25% of its revenue. Edited excerpts:
Brand conscious: Bajaj says that because of its brand-centred strategy, the company has been able to post record margins of 22-23%. Fabrice Coffrini / AFP
Your margin is now the best in the two-wheeler industry.
Unlike an FMCG industry that competes on brands, the auto industry has always competed on products. We changed out strategy a couple of years back to move from product-based to a brand-centered strategy. There are only two categories of consumers -- a sober guy who wants a reliable motorcycle and then there is this fun-loving, sporty guy who wants more than just a commuter bike. We told ourselves that there should be only two brands and there is no point in putting out ten different bikes under ten different brands. That’s how we narrowed our focus on Discover for the first category and Pulsar for the second category.
It’s because of this brand-centered strategy that we have been able to post record margins through the year far higher than rest of the industry -- two-wheeler as well as four-wheeler.
Can you sustain this?
What makes the difference is not the raw material, labour and electricity costs as they cost the same for everyone. If you can command a premium for your brand and focus on few brands, it pays. Compared to competition, the Discover and Pulsar are sold at a premium of 3% to 4%.
Also the cost of sales makes the difference. By cost of sales I mean not only the above-the-line advertising but also the below-the-line, subventions in the finance schemes, incentives to dealers, financiers, etc. This can again take away 3-5% if you’re trying to push sales for certain brands for categories that don’t exist. The combinations of cost of sales and price premium can make a difference of 5% to 10%. The fact that we have 22-23% margin as opposed to the industry’s 13%-15% comes out of these two factors.
So, no more new brand?
We will continue to put out meaningful upgrades and variants. The mistake the manufacturers usually make is to look for a third and the fourth brand. But if there is no third and fourth category (of buyers), who’s going to buy them? So the idea is not to put out more brands but to go to markets that can address the brands.
So it’s Pulsar and Discover for consumers and Bajaj name won’t matter any more?
The Bajaj name is associated with various segments ranging from hair oil to insurance and hence for a consumer the brand is not and cannot be Bajaj as it stands for too many things. Hence, the consumer’s brand is a Discover or a Pulsar and in case of a three-wheeler, a RE.
The consumer finds the bikes in Bajaj dealerships. So the impression that we are distancing ourselves from the name Bajaj is not correct. We are giving a far more prominence to he product brand as that’s what a consumer buys at the end of the day.
How do you create strong differentiators between the two brands?
There are three ways to create a brand.
In 2001 when the market leader (Hero Honda) was making economical motorcycles, we did the opposite by making a Pulsar which was a powerful motorcycle because if we were to make another motorcycle, the consumer will only see it as an endorsement of the fact that somebody else makes economical motorcycle (Splendor). So we make something which is the opposite of what is already selling and it gets noticed. The consumer only responds when you give him something different.
Nobody took away markets share from Bajaj by making scooters but making a product that was opposite of a scooter — the Splendor was opposite to Chetak in several ways.
So, the brand-centric approach alone has helped you gain the traction against market leader Hero Honda?
Yes, it’s only brand centricity that has helped. Unlike the telecom and pharma industry, success in auto industry depends on brands. Companies may claim that they compete on quality, technology or cost but no body’s quality or technology is inferior, it’s the same for everybody except for the cost to sales.
Some say they compete on distribution but it’s not correct. If some one is buying a bike worth Rs50,000, the person would not mind travelling little bit as it’s an important purchase decision. While all other factors are important, companies can compete successfully only on brands. It’s only when you create a brand with a unique position, can you be successful.
Maruti succeeded because it was opposite of everything that an Ambassador or Fiat Padmini stood for.
How soon can you overtake the market leader?
We don’t know. We are far from that. Our own guidance for the current year is 3.6 million bikes and 400,000 three wheelers. For us, the number game is not important. What is more important is the profitability game.
If one looks at our profitability, it has been by far the best in the industry not only in percentage margins but also in absolute terms. Our profit before tax is higher than competition in the fourth quarter. At lower volumes we have been able to match the profitability in absolute terms. Ultimately, the strength of the strategy has to be judged by the profit it delivers.
How critical are exports in the overall scheme of things?
The exports have grown by almost 50% last year and this year it should be over one million units. The share of exports currently (two- and three-wheeler) is 25%.
We continue to enter new markets in all the three continents. In Indonesia, we are looking for a big presence. We are market leaders in Sri Lanka, Bangladesh and the Philippines.
In Latin America we have just entered the Argentinian market and getting into newer markets in Africa.
We will continue to grow exports aggressively as the markets of Latin America, Africa and Asian put together are bigger than Indian market and one day the exports of Bajaj will be greater than domestic sales.
Do you plan to raise your stake in European bike maker KTM Power Sports AG?
Our stake is already 35% and it’s hardly an issue. We are anything but a passive investor in the sense that our whole priority is to develop, manufacture and sell the KTM motorcycles.
Over the last two years we have struck a relationship with KTM and been developing them in Pune. From next year, we will start making them out of our plant in Chakan. There’s a complete operational synergy in terms of development manufacturing and sales and without that we would never have invested a single rupee in KTM as we are not a financial investor but a industrial partner.
For us the ability to raise our standards to be able to make the kind of motorcycles that are worthy of KTM brand is what we wanted to learn and next year we should be able to demonstrate that.
Won’t the Greece crisis and its impact on the Euro zone hit your export plans?
The only impact it can have is to put pressure on us to deliver faster because if the European markets continue to be under pressure for premium products, it’s very hard to increase sales when consumer confidence is low. The only option one has is to bring new products and lower the cost structure. When we produce out of India while they (KTM) can maintain the price premium in that market, their production costs will come down. That should have a positive impact on KTM.
shally.s@livemint.com
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First Published: Thu, May 13 2010. 12 30 AM IST