Will Mahindra’s bet on two-wheelers pay off?6 min read . Updated: 07 Jun 2016, 03:46 PM IST
Mahindra is revamping its two-wheeler business in the backdrop of tepid sales growth for at least two consecutive years
Mumbai: Mahindra Two Wheelers Ltd, an arm of Mahindra and Mahindra Ltd, is restructuring its business to improve its standing in the intensely competitive domestic motorcycle and scooter market, said three people familiar with the plans. The revamp comes against the backdrop of tepid sales volume growth for at least two consecutive years.
In the year that ended on 31 March, Mahindra Two Wheelers sold 144,355 scooters and motorcycles, down 12% from the previous year. The performance lagged that of the broader two-wheeler industry, which posted volume growth of 3% to 16.5 million units in the same period, data from industry lobby Society of Indian Automobile Manufacturer (Siam) shows.
In the year ended 31 March 2015, too, Mahindra Two Wheelers’s unit sales had dropped 18%, compared to an 8% rise for the two-wheeler industry that year.
The low sales have been taking a toll on the company’s profitability. In 2014-15, the company reported a loss of ₹ 528.87 crore, wider than the ₹ 459.29 crore loss reported a year ago, according to corporate database provider Capitaline. Mahindra and Mahindra invested ₹ 1,862 crore in Mahindra Two Wheelers in fiscal 2015, according to the parent firm’s annual report.
In 2015, Mahindra Two Wheelers engaged consulting firm AT Kearney Ltd for a material-cost optimization project.
“They have worked with us for a year and we have got tremendous benefit," said a Mahindra spokesperson without divulging specific details.
When asked about the challenges, the Mahindra spokesperson pointed to the firm’s strong performance in the scooter segment and in the export market.
“MTWL had a growth of 81% in the scooter segment in FY16, when industry growth was 11%. Similarly, in exports, MTWL’s growth was 53%, whereas Indian two-wheeler exports was flat," said the spokesperson.
To be sure, the growth came on a small base and a buoyant scooter market that has been clocking a healthy growth aided by a strong demand in urban India. Mahindra Two Wheelers’s volumes pale in comparison to that of rivals. It sold 84,064 units in 2015-16 as compared to 46,369 units a year ago—much smaller than the market leader Honda Motorcycle and Scooter India Ltd’s 2.7 million units, and Hero MotoCorp Ltd’s 8.18 lakh units in the same period.
Mahindra Two Wheelers currently sells the Centuro and Mojo motorcycles and the Gusto, Rodeo and Duro scooters. The segment is dominated by tried and tested brands from Hero, Honda and Bajaj Auto Ltd, among others.
“The volumes have been less than what the company had planned for," said one of the three persons cited above.
This has prompted the company to look at restructuring the business. This will include pruning costs across all functions, including sales, marketing, production, advertising and promotions. The restructuring will also involve re-alignment of the product portfolio and sharpening focus on segments through new models which have a higher potential, this person added.
In an interview to The Economic Times in July 2012, Anand Mahindra, chairman of Mahindra Group, said he would like to see Mahindra Two Wheelers sell million units in a two-wheeler market which is slated to grow to 30 million units by 2020.
The reality, however, is far removed from what Mahindra had envisaged. At the end of fiscal 2015-16, Mahindra’s market share in the two-wheeler segment stood at 0.88% as against 1.4% last year. In each of the five fiscal years since 2011-12, with the exception of 2012-13, sales volume at Mahindra Two Wheelers has declined. In fiscal 2013, the company had reported a 93% jump to 202,701 units.
To a great extent, the problems of Mahindra Two Wheelers have to do with company’s “four -wheeler mindset", said the second of the three people.
Mahindra has not been able to approach the business with the frugal mindset required to run two-wheelers, he said pointing to the high cost structure at the company. “They have now realized it and plan to course correct," this person said, adding that the course correction could include cutting expenses and a reduction in headcount. “The product coming out of their factory now is comparable to the best in the class, but marketing continues to be a weak link."
The Mahindra spokesperson declined to comment on plans for reducing the headcount and said that Mahindra Two Wheelers continues to invest in new products and marketing efforts.
Mahindra Two Wheelers has launched two new products in last few quarters which include the 300cc sports tourer Mojo and a new 125cc scooter Gusto 125, said the Mahindra spokesperson quoted above.
“Both the products have been launched with significant marketing investments and have been received very well," said the spokesperson.
Mahindra Two Wheelers is also pinning its hopes on Peugeot Motocycles, the French two-wheeler firm that it bought in October 2014. Having concluded market research, Mahindra plans to launch the Peugeot-branded models sometime next year, said the first person cited earlier.
“As was announced in March 2016, we are exploring some new markets for Peugeot scooters to enter, including India. There are significant synergies and opportunities between Mahindra and Peugeot scooters including R&D, engineering, aggregate sourcing and market synergies," said the spokesperson.
Shubhabrata Marmar, editor, two wheelers, at auto publication Overdrive, said the company seems committed to a segment in which the payback period could be long.
“Doubtlessly, both models (Mojo and Gusto) indicate that the company has come a very long way since it first launched the Stallio (the firm’s maiden motorcycle offering launched in 2010)," said Marmar. However, “the firm’s top management is almost all-new, and their decisions and plans will determine how successful the firm becomes, going forward."
The journey so far...
Mahindra launched its maiden motorcycle offering Stallio (110cc) with much fanfare in October 2010, engaging movie actor Amir Khan to endorse the bike. But neither Khan’s celebrity status nor its selling point—India’s most fuel-efficient bike—could help move the Stallion. Plagued by gear box issues, sales tumbled, forcing Mahindra to pull the plug on the bike in February 2011.
The company went back to the drawing board to try and strengthen its technical capabilities and rejig its sales and marketing functions. It established a new research and development center in Pune at an investment of ₹ 100 crore.
Powered by an indigenously developed engine, Mahindra Two Wheelers launched a new motorcycle brand called the Pantero in March 2013 targeting the entry level segment of the market. But even Pantero’s volumes didn’t pick up as it competed with the likes of the Hero Splendor and Bajaj Discover. Mahindra Two Wheelers phased out the Pantero in March 2015.
The two-wheeler segment where Mahindra Two Wheelers has seen success is in scooters, on the back of the Gusto 125, a gearless scooter launched in February.
A tall order...
Nitesh Sharma, analyst at Phillip Capital India Ltd, said the company would need to achieve annual sales of at least half a million to survive. That is almost five times the current level of sales reported by the company.
Market leader Hero sells six times more and Honda Motorcycle and Scooter (the second largest in the pecking order) sells a little more than three times in a month as compared to what Mahindra Two Wheelers sells in a year.
“It’s a tall order given the strong position of the incumbents in terms of brand, products and reach," said Sharma.
An analyst at a domestic brokerage said Mahindra’s entry into the segment is late and without any merit.
The tales of failures in the two wheeler segment are far too many and success stories too few, said this analyst citing the examples of LML Ltd and the failed partnership between TVS Motor Co and Suzuki Two Wheeler. He declined to be identified as he is not authorized to comment on the company.
The mass two-wheeler market continues to be dominated by the big four companies—Hero, Honda Motorcycle, Bajaj and TVS—that account for more than 80% of the market. Others, such as the local arms of Yamaha Motor Co. and Suzuki Motor Corp,. continue to be on the fringes of the market even though they have been present in the market for some time now, the analyst pointed out.
In an email response, a Mahindra spokesperson said, “Efforts to optimize all business processes and cost structures to improve efficiency is a regular exercise in any company and the same is true for Mahindra Two Wheelers also."