Home / Companies / News /  Royal Enfield takes the middle path in global ride

New Delhi: The year was 2000. Siddhartha Lal, then 26, had just returned home from the UK with a Master’s degree in automotive engineering from the University of Leeds.

One morning, over breakfast, he and his father Vikram Lal, the chief executive officer (CEO) of the family-run Eicher Motors Ltd, had a talk about what he wanted to do in life.

That was around the time when the senior Lal had been approached by the board of Eicher to pull the plug on Royal Enfield, its ailing Chennai-based bike-making unit. The group’s core tractors business, too, was performing badly, and the board wanted to “cut off one limb to fund the other", the son recalls.

“Think about it. If you are 20-something, you are not going to be fascinated by tractors, right? You will be more fascinated by motorcycles, especially if you ride one," Lal, who is now managing director and CEO of Eicher Motors, said in a recent interview.

“That’s when it sort of popped out and I said ‘you know, may be, I would like to give it (Royal Enfield) a shot.’ Perhaps, he was waiting for me to say that," said Lal, who was—and is—passionate about bikes, having ridden a red-coloured Bullet, an iconic Royal Enfield bike, during his days as an economics student at Delhi’s St. Stephen’s College before going to the UK.

Fourteen years later, Lal can say he has pulled it off. In the last calendar year, which is also Eicher’s financial year, Royal Enfield sold a record 302,592 bikes, 70% up from 178,000 units in 2013, and helped double its parent’s net profit to 559 crore on a 78.04% increase in revenue to 3,031 crore.

This year, Royal Enfield expects to sell 450,000 of its 500cc Continental GT, Thunderbird, Classic and Bullet bikes, the last three of which come in 500cc and 350cc variants. The bikes cost between 1.05 lakh and 1.92 lakh. By the firm’s own reckoning, sales should more than double to 942,000 units by 2021.

Compare that with 2000, the year Lal took over the Royal Enfield unit. The company sold 24,000 bikes and Eicher had a net profit of 23.50 crore on revenue of 392.10 crore.

The company has a waiting period of three-five months for its most popular bike, Classic, at a time when the automobile industry is facing choppy times. Now that the turnaround in the home market is complete (more on that later), Lal, 42, is looking to conquer overseas markets, where he sees a sweet spot awaiting Royal Enfield. That spot is for what he calls the middle-weight motorcycles, with engine capacity between 250cc and 750cc and priced between $3,000 and $7,000.

The global motorcycling market is largely made up of two extremes—the commuter segment, with a size of around 50 million, and the leisure biking segment (dominated by Harley-Davidson Inc.) in which one million big and bulky mean machines are sold every year.

In India, Royal Enfield has successfully managed to create a market space for itself between the two extremes. The rise of young, aspirational buyers with high incomes in the years that dovetailed with the fastest decade of economic growth in India has propelled this segment.

“Everyone has looked at it and pulled it apart and said ‘we will go for this, or this’; but for me, the world is going to converge in the middle market; we have been able to show in India that if you give a good offer, then people move to middle-weight motorcycles...," Lal said,

It is this Indian phenomenon that Lal wants to replicate globally. Lal sees the market for middle-weight motorcycles worldwide rising to anywhere between 5 million and 10 million bikes a year by 2030 and wants Royal Enfield to capture a 50% share of that.

To achieve his ambition, in the last nine months, Lal has brought on board some big names in the world of motorcycling.

Royal Enfield has hired Rod Copes, former sales and customer service head at Harley-Davidson, to head its North American business. Rudratej Singh, who was based in Singapore with Unilever as vice-president, South Asia, HPC (home and personal care) and foods marketing operations, has become president of Royal Enfield. Ex-Ducati designer Pierre Terblanche will lead Enfield’s industrial design division. Industrial designer Mark Wells is the new head of global product strategy.

Lal is clear about what he doesn’t want to do. Royal Enfield will not enter overseas markets with big-bang announcements of setting up manufacturing facilities; and it won’t bombard markets with a slew of new products. “We are not going in with a set formula. We have some ideas… We have to go in with our eyes open," Lal said in the interview at a Royal Enfield merchandise store in Delhi’s Khan Market.

“We are going to make mistakes. We are going to learn a lot. But we have to change course with that learning and try something different."

That he learned the hard way in turning around Royal Enfield should help. When he took over the bike maker, he thought it would be a cakewalk. “I was very naïve then," he concedes now.

The firm was bleeding because of over-capacity that took its toll by increasing fixed costs. Although the Bullet enjoyed a cult following, there had been complaints about its design and that the bike was hard to maintain.

“There were all sorts of issues—from quality to management; a plant that opened (newly) and the two plants could not see eye to eye. There was a cash-flow problem. I did not even understand the concept of cash flow. It was really basic," Lal recalled.

With their backs against the wall, Lal and B. Govindarajan, chief operating officer, spent days and weeks doing a detailed analysis of costs and crunching numbers to figure out solutions.

The firm shut its new plant in Jaipur to get rid of idle capacity. People were let go. Changes in the corporate structure to make it leaner and thinner meant Lal was left with only two vertical heads—the human resources head and the finance head. There was no one to head manufacturing or sales. Costs came under control, offering Lal some breathing space.

Royal Enfield customers had developed a habit of negotiating for discounts. The firm had no choice but to incentivize dealers as sales were plummeting. An average 3,000 discount on a bike meant the firm was losing 60-80 lakh every month. Lal put an end to the discounting practice. “We wrote one proper letter to all dealers saying that from now onwards Royal Enfield will not offer discounts," Lal said.

To be sure, sales were down the first month. But by the end of the second month, sales started moving up. “Within 12 months, we were able to break even and we were not requiring cash from the mother company any more," Lal said.

Then came engineering and design changes to the bikes that addressed customers’ complaints while retaining the individuality and rugged exterior of the bike.

Royal Enfield had come back from the nearly dead.

The story of Royal Enfield in India dates back to 1954, when the government ordered 800 rugged motorcycles for use by security personnel on the Pakistan border. The chosen bike was Royal Enfield Bullet 350, built in Redditch, UK, by Enfield Cycle Co.

In a prescient move the following year, Enfield partnered with Madras Motors to form Enfield India, first to assemble and later build the bike in what eventually was to become its home market.

In 1971, Enfield Cycle went out of business, but the Royal Enfield Bullet continued to chug along in India. In the 1980s and 1990s, the bike faced significant competition from fuel-efficient, commuter-friendly bikes of Japanese origin with hyphenated brands such as TVS-Suzuki, Hero-Honda, Escorts-Yamaha, and Kawasaki-Bajaj.

By 1990, sales of Royal Enfield were sputtering. That year, Eicher Motors, a venerable Delhi firm that made its name selling tractors, formed an alliance with the Chennai bike-maker. Four years later, it bought the firm and also the rights to use the Royal Enfield name.

Today, Royal Enfield is the oldest motorcycle brand in the world still in production, with the Bullet enjoying the longest motorcycle production run of all time.

That’s the pedigree of the bike that Lal now wants to take global after 15 years of hard work that revitalized the brand, which now enjoys more visibility, more customer interest and more demand than it ever did, reinforced by well-spread distribution and dealer networks.

“When I look at it personally, I have spent 15 years in the first phase and I say I have a maximum of 15 years left now for phase II. So, phase II is a longer-term idea of making Royal Enfield a global brand. That’s what we want to do," Lal said.

To be sure, success may prove elusive in the short run. Lal can live with that for two to three years. What Royal Enfield wants to do is to become relevant in the markets it enters and carve out a space for itself—like it did in India.

“We are still a very Indian firm. So, to become a global firm, we need to go there and really imbibe their way of doing things," he said.

For that, it is important that the brand be close to the leading market of the world. The UK is the birthplace of the brand and Lal thinks it is extremely important for him to establish Royal Enfield there. He is moving his base to London, where he has set up a small technical centre, with 30 people. The count is likely to go up by another 50 people.

“So, the UK is a nerve centre for us," Lal said.

Apart from the UK, other potential markets are the rest of Europe and the US, where last year it launched the Continental GT. Royal Enfield is planning to push into Latin America and South-East Asian markets to boost profits, Lal told Reuters in May. The firm exports its middleweight motorcycles to these regions, but it plans to boost local sales networks and could even consider setting up production units, Lal was quoted as saying.

On paper, Royal Enfield has a potentially lucrative global opportunity to tap, said Deepesh Rathore, co-founder and director, Emerging Markets Automotive Advisors (EMAA). The affordable classic mid-size bike market is under-penetrated. But then, Royal Enfield also has quality issues it needs to fix to make a mark overseas, he said. “Even though build quality has improved, it is nowhere near the Japanese defined benchmarks," Rathore said. And then, it operates in the classic bike market segment, a segment that’s the most forgiving on quality issues.

For Lal, quality could prove to be a humbling experience in the big overseas venture.

“Essentially, the idea is that we want to create a real honest, simple, evocative, classic motorcycle brand which is very experiential," Lal said.

To do that, he has the option of replicating Royal Enfield’s Indian brand-building strategy.

Royal Enfield has shied away from mass media advertising, concentrating more on building its brand around its perceived cult status. Advertising agencies, says Lal, do not understand the essence of the brand.

In India, the firm promotes leisure motorcycling as a lifestyle. It organizes annual events and rides such as the Himalayan Odyssey, The Tour of Rann of Kutch, The Tour of NH 17 (Mumbai to Goa), the Tour of Rajasthan and the Southern Odyssey.

It’s not only the clattering thump of the engine that draws attention. The leather jackets, faded jeans and boots, and leisurely riding style, as opposed to racing superbikers, set apart the serious Bullet enthusiasts from the rest of the crowd on the highways.

The club is exclusive. Enfield riders typically head in groups to destinations such as Leh, Ladakh, Manali, the Siachen border and the Khardung La pass in the Ladakh region. “It is not a typical corporate strategy when you go to a market with a huge manufacturing and distribution set-up. The strategy is about creating 1-2 nucleuses with people and retail," Lal said.

Retail will be its second nucleus.

“Rather than 20 stores, I will rather have two of these styled stores in the top cities of that country. We want to generate interest in our bikes through our stores," he said.

Rathore of EMAA has a different take about generating interest through branded stores.

Parts, accessories and merchandise (PAM) sales are a serious revenue source for heritage brands, Rathore said. For some like Ferrari, they are the core. For others like Harley-Davidson, they account for nearly 17% of revenue. Royal Enfield is yet to seriously explore this market.

The problem with PAM is it’s an ecosystem that needs to be developed from scratch. Part of it is to identify and nurture vendors who will provide top-notch quality and designs that extend the brand’s attributes. “Royal Enfield has taken the first baby steps in this direction," Rathore added.

Lal is not dreaming big.

“Small is good for us. We want to be small and focused. Our end game is 15 years from now and it is not three years from now."

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