"We will not roll out as many new models in 2016 as we did last year. Our priority is to upgrade all models to BS IV for 2017."
Honda Motorcycle & Scooter India’s President & CEO, Keita Muramatsu and Vice-President (Sales & Marketing), YS Guleria on addressing the demand backlog for the Activa, getting ready for ABS & CBS fitment, and Honda’s advantage in scooters.
Honda Motorcycle & Scooter India’s President & CEO, Keita Muramatsu and Vice-President (Sales & Marketing), YS Guleria on addressing the demand backlog for the Activa, getting ready for ABS & CBS fitment, and Honda’s advantage in scooters. An interview by Amit Panday.
The second assembly line at the Gujarat plant is estimated to reach peak production capacity by October 2016. This means that overall capacity at the Gujarat plant will be fully saturated within 12 months of the plant opening in February 2016. All the other plants are already running full capacity. What are your plans to address the soaring demand?
Guleria: This plant (Gujarat) was a big risk because we had never made a scooter-only factory before. However, once that decision was taken, we now stand in a better position, thanks to the continuing momentum of the growing scooter market. Yes, if within the next 3-4 months, the second assembly line also reaches its peak capacity, that would mean that all our four plants would be running at full capacity.
We are already under preparation to boost production capacity at our Bangalore plant simultaneously. We have additional land at that site where we can expand operations. We have laid out plans for levelling, construction, building and have started work there. However, we haven’t taken a decision on commencing operations. That will depend on how the market behaves during and after the festive season later this year.
Preparation-wise, we are all set. Total production capacity is expected to soar beyond 6 million units by mid-CY2017.
(HMSI will become the largest contributor to Honda’s global two-wheeler sales. With 5.8 million unit capacity fully operational, HMSI will be number one in terms of installed production capacity and market, surpassing Indonesia.)
How much new investment will create additional production capacity at the Bangalore plant entail?
Guleria: A rough investment of around Rs 500-Rs 550 crore goes into setting up an additional assembly line.
What is the current demand backlog for the Activa?
Guleria: Demand backlog stands at 25,000 units, which is after the first assembly line at Gujarat plant commenced operations. Around April 2016, our backlog stood close to 36,000-37,000 bookings of all scooters put together. By April-May 2016, we were also ramping up production of scooters on the line one, which reached its peak production capacity in June. So we managed to supply more Activa and Dio scooters to our dealerships and that led to bringing down the backlog to 25,000 units.
The second assembly line should bring the existing backlog down further. We estimate it to come down below the 20,000-unit mark.
Muramatsu: For the first time we are going to address the demand in the festive season with this scale. Unfortunately, last year we lost the sale opportunity by many units. But this year, we are very keen to fulfil as many bookings as possible.
Guleria: Opportunity loss will be minimal this year. Because as Muramatsu-san said rightly, a scooter customer puts his money to get the delivery on an auspicious day or during the period. If we are not able to deliver the scooter to our customer physically, he goes elsewhere to buy one. This is an opportunity loss for us. For this year’s festive season, we don’t want this to happen.
How much was the sale volume loss due to capacity constraints last year?
Guleria: A minimum of 30 percent or so were lost due to capacity (or logistical) constraints. Some customers don’t mind patiently waiting for their products.
While the Activa has achieved an iconic status, the Dio and Aviator continue to fetch decent sales every month. Once this demand-supply gap is balanced in the short-/medium-term, will there be new variants under these three scooter brands or will there be an all-new scooter series?
Guleria: All models have to evolve in their lifecycles, which includes minor model changes and, at times, even complete makeovers. In the future, certainly, a lot of changes will happen across the brands that will be directed at driving the growth momentum for Honda two-wheelers in India.
The Activa, which was earlier a 102cc automatic scooter, evolved into a 110cc scooter after almost six years in 2007. Later combi-brake technology was added as a safety feature. In 2012, we added HET technology for low friction and enhanced fuel efficiency. You will see similar evolution across our entire product range in the future.
Muramatsu: We have a long new product plan to keep going.
The 125cc motorcycle segment has always been Honda’s forte with the CB Shine being the class leader. However, Hero’s Glamour, which has been performing almost at par with CB Shine for the past 8 months, is now outselling it. What is Honda doing to reinstate its top position in this category?
Guleria: We have the prioritisation of what we need to produce on our production lines. Since now we have flexible manufacturing, we prioritise scooters within the existing production capacity since they have been growing faster with backlogs piling up.
We introduced the CB Shine SP last year to boost sales for this model. Unfortunately, for the CB Shine SP, we reached peak capacity very soon. Now next month onwards (July-August 2016) we are adding this model at our Bangalore plant and you will see the recovery in CB Shine sales soon.
What kind of new investments will HMSI make for upcoming mandatory safety (CBS for models up to 125cc, ABS for 125cc and bigger models) and emission norms (BS VI by 2020)?
Muramatsu: We already offer CBS (Combi Brake System) technology in our two-wheeler models up to 125cc. For example, we already supply CBS technology on our existing scooter models. We can also introduce ABS technology on our two-wheeler models bigger than 125cc. There will only be a price increase for the customer.
For emission norms, we have already upgraded (new models) to BS IV standards. BS VI emission norms are very challenging. This will be a very demanding period for the overall industry. Historically, the transformation of vehicular emission standards from Euro 3 to 4 to 5 and 6 evolved over a long time. However, in India, we will have BS IV (pan-India by 2017) and three years after that, BS VI.
There may be a price increase in products and it is likely that all two-wheelers will have to have fuel injection instead of carburettors. Almost all motorcycles and scooters in India are using carburettors. Nearly 20 million carburettor units (forecast for 2020) will make way for fuel-injection technology. We already have fuel-injection technology in our models in countries like Indonesia, Thailand and others. However, for India, it is not so long a time to change all models from carburettor-fed engines to fuel injection based engines.
We have four factories now, and to bring that change we will go step-by-step. The Activa is manufactured at all factories. It requires a one-time change to fuel injection. Suppliers also have to consider increasing the production capacity of fuel-injection units.
We hope that the government decides not to change the timelines of these mandates anymore once the industry starts investing in bringing these technologies and building capabilities.
The existing engines will have to see a change in carburettors and mufflers,they may also need to have OBDs (onboard diagnostics) to indicate emissions. For cars, it is easy to find a place for OBD units but it’s difficult to find adequate space to accommodate an OBD unit on a small motorcycle.
On the other hand, with new ABS units (on existing motorcycles), the balance of a two-wheeler also changes because it adds weight. Subsequently, a lot of other changes and testing will have to be executed.
Do you see the implementation of BS VI emission norms opening up a global export opportunity for HMSI?
Guleria: Yes, we see that there is a huge window of opportunity. Since our own emission norms will become at par with global standards, we will be able to export made-in-India products anywhere in the world.
Muramatsu: Yes, we can then try exporting products from here to Japan also. If we want to export any product there currently, we have to adjust it with several features and homologate it there according to Japanese standards. However, after the implementation of BS VI norms, we will be in a position to freely supply two-wheelers to anywhere in the world.
When will the local assembly of Africa Twin adventure bike commence?
Guleria: The plan of bringing the Africa Twin to India is slightly delayed because the development in terms of making the kits, parts-study from an assembly point of view is led by the engineers at the Hamamatsu factory, Japan. The Hamamatsu factory is the mother plant for all Honda superbikes sold in the world. Unfortunately, following an earthquake there recently, the plans involving several projects were disturbed. However, now all plans are aligned and as per that alignment, there could be some delay (in the India-launch). Hence, that model could come in by the middle of next calendar year or even later.
The midsize motorcycle segment (250cc-800cc) is seeing a lot of traction. Although there are two models (CBR250R and CBR650F) currently, Honda loyalists look forward to more action in this evolving league?
Guleria: I would say that we would take one step at a time. In a war, you cannot open all the fronts and fight. So the first priority for us to establish and expand in areas where we are strong. For example, in the scooter segment, we have to consolidate our existing 58 percent market share. If in Gujarat we can have a 70 percent market share, why can’t we command that kind of market share across India?
Last year, we launched a couple of new motorcycle models, and it’s time that they deliver. We have to focus on them and ensure that customers understand these new products and buy them. Then we need to look at the export business.
We acknowledge that the midsize motorcycle segment is growing. We are definitely watching the evolving segments. However, it’s a question of priority for us in terms of addressing this market.
Last year,most two-wheeler OEMs had launched many models to push for sales in a sluggish market. This year, however, we notice good monsoon forecasts have uplifted market sentiment and all the companies seem to be waiting for the market to gather momentum, essentially pushing many new product launches for 2017. Is HMSI too following this business cycle in 2016?
Muramatsu: This depends on the market. For 2017, we have to adjust to the BS IV emission norms. The strategy for last financial year was different. We rolled out many new models and also revived the Unicorn 150 but adhering to BS III norms. Now, all models have to change for BS IV standards.
Strategy-wise, although we launched many new models last year, we did not have enough production capacity. We were waiting for the inauguration of the Gujarat plant. When you launch a new vehicle, you need to add new capacity (or accommodate the production of a new vehicle in the existing capacity). We have a lot of work in hand this year, which will not see as many new models that were rolled out last year. Our priority is to upgrade all models to BS IV standards for next year. Any new incoming model will now adhere to the new emission norms.
HMSI has been partnering a number of financial institutions to boost sales via product financing schemes. Do you have any measure to gauge how these steps have benefitted the company in terms of additional sales?
Guleria: Yes. A couple of years ago, our finance ratio was lower than the market average. So if the market average was, say, 35 percent, we were five percentage points behind at that point of time. We have not rushed into partnerships with financial institutions. We have rather been very diligent in terms of forging such alliances as we have been watching their performances. For example, IndusInd Bank, with which we have recently entered into a partnership, is one of the top three retail financing banks in the country.
We have forged partnerships with all the top three retail financing banks in India – Shriram, HDFC and IndusInd Bank. Of course, it leads to a healthy competition among the bankers also as everyone wishes to increase their respective share in the market.
This is also beneficial for the customers, as they can compare several financing options and select the best. Further, HMSI does not have its own finance company. Therefore, such alliances are also our need.
We are now at par with the industry. Around 40 percent of our two-wheelers are sold via finance schemes. The good part is that the defaults by Honda customers are the lowest in the industry. Bankers say that the Honda customers are essentially responsible families who repay their respective loans timely. The default cases are found to be less than 2 percent among Honda customers, which, we believe, is lowest in the industry.
Our regional tie-ups are also strategic. For example, we tied up with MuthootFinance. They are very strong in the southern region, which has helped us in those states.
Are you seeing increased sales of scooters in rural pockets?
Guleria: Yes. Over the last few years, our new network strategy has extensively covered the rural pockets. We appointed our dealerships in the rural markets; probably in the first 1-2 years of operations, the ratio between scooters to motorcycles was 1:9. Now, this ratio has improved to 2:8 with two scooters sold for every eight motorcycles. So this trend is definitely catching up. There are obvious reasons behind this such as women empowerment, women working in education and health sectors employed in rural pockets, newly built motorable roads, improving the mileage of scooters, durability assured via metal-body scooters among others. These factors are helping scooters penetrate into rural areas.
Also, this government has a major focus on building new roads with several kilometres of tarmac built every day, focus on establishing last-mile connectivity, which, we believe, will further help in scooterisation in India. Maybe in the next five years, the market share of scooters in the overall two- wheeler segment will increase much more than the existing level.
Muramatsu: The scooter penetration will increase. Last year it was not as high because we had a capacity issue. But now with added capacity and the upcoming festive season, the overall penetration will grow further. After the next two years, when the CBS and ABS mandate is implemented, our scooter prices are not expected to increase (as compared to scooters from rivals). CBS technology for motorcycles (up to 125cc), on the other hand, is complex and may see a rise in costs. Scooters, therefore, will have an edge and will penetrate more.
While upcoming two-wheeler safety norms (mandatory CBS and ABS tech) are expected to result in an increase in prices, Honda’s scooters already come equipped with combi-brake systems. Will it not benefit HMSI if it manages to contain the price rise on the scooter front?
Guleria: Because of the new guidelines and homologation requirements, there may be some price disruption in the industry. With CBS requirement on the scooter side, there is a benefit to Honda. We have an edge as we don’t have to add costs. So scooter customers will continue to purchase Honda scooters at the same price, while others may have to rework their market retail prices. So on the affordability front, we will have a clear advantage.
What is HMSI’s existing network count?
Guleria: We closed last year with a network of around 4,500 outlets, of which around 880 were main dealerships. The remaining are our authorised service centres and sub-dealer branches. This year we plan to add another 800 outlets, which could take our overall network coverage in the range of 5,300-5,400 outlets.
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