By upgrading its bestselling product – Honda Activa – to the BS VI regime by not just making regulatory upgrades, but overhauling the entire scooter in a major way in its Activa 6G avatar, the country's second-largest two-wheeler manufacturer, Honda Motorcycle & Scooter India (HMSI) is now set to commence BS VI-only production at all four of its plants in India from next month. It says the entire supply chain is well aligned with its changeover plans and chances of a fire sale on leftover BS IV stock in March are non-existent.
What is HMSI's approach in fulfilling this task of transitioning to BS VI?
Honda has always seen the transition to BS VI as an opportunity and that is why we were the first movers to commercially start selling a mass-segment model (Activa 125 BS VI), back in September 2019 itself. When you are the first one, you sort of create a benchmark. At that time, nobody knew what are going to be the price points and there were lots of rumours on the kind of price hike that would come with the BS VI upgrade. We followed up the Activa 125 with the SP 125 BS VI motorcycle.
Why we feel we have an edge is because within this 10-15 percent price hike on account of BS VI, we have not just done regulatory change alone, but have brought in a completely new platform in terms of the engine and frame, starting with the Activa 125 and also added a whole lot of new features. Only doing BS VI upgrades could have been one approach but why we maintained that we were looking at it as a bigger opportunity is because price point anyhow was supposed to change and in this new price, our intent was to offer a new value which is differentiated and also gives a wow factor to our customers.
Also, all BS VI products are going to come with an industry-first six-year (3+3) warranty package from Honda. That gives more peace of mind to our customers and further consolidates and raises the bar of trust for brand Honda. We are confident that customers will appreciate our efforts and slowly they will get converted into retail sales.
What is the latest update on the current BS IV stock situation for HMSI and how soon do you think BS VI products will start moving in the market?
We have to see this changeover in a very holistic way as it is not just about manufacturers, but there is a whole supply-chain involved. There are vendors who are helping OEMs in making the products, logistics providers offering transportation solutions and lastly, the network partners who are going to sell these products to customers.
We have aligned the entire strategy and have discussed the same with our partners, well ahead of the schedule. Most of our partners have been well aware of Honda's next step and strategy of when we are going to change. While there were lots of doubts and scepticism about us launching our first BS VI-compliant product as early as September 2019, six months prior to the actual deadline, but once we explained to them our strategy and the background of this early launch, it made our task much easier. Most of our network knows the entire schedule of changeover and the ramp down of BS IV. We had discussions with regional teams and network owners and finished this exercise by end-December (2019) by which most of the network was aware of the entire game-plan of Honda.
I don't know about others but as far as Honda is concerned, I can confidently say that we are in a much better position and reasonably confident that we will not be held up with BS IV stock from March onwards.
We are on the verge of closing production of BS IV models and February onwards, we will only be producing BS VI at all four of our factories, which in itself brings the burden and stress down on our network in the sense that there is no new BS IV stock that is going to come from the factory February onwards.
After getting the 3+3 warranty with your BS VI products, what scope of improvement do you see at the aftersales side and key things that you plan to address in the coming fiscal?
When you have a big transformation like the BS IV to BS VI, and especially on the technology front, it has to be planned in a streamlined manner, taking into account all the stakeholders.
So, we had challenges at three fronts:
First were the manufacturing-related challenges, wherein we needed to upgrade our technology to be able to make the products compliant to the new set of regulations and for that we were very confident because of having the global experience of Honda as well as the strong backing of the R&D at Honda Motor, Japan.
Second comes the suppliers, where we had taken care of them; many of whom are joint ventures with Japanese suppliers, and aligned them to the overall changeover plan.
Third is the network and even there, we started training our manpower and made them familiar with the fuel-injection technology and then arranged the diagnostic tools for them, took care of training the technicians. All these things were done in advance.
Today, I am proud to say that our network is already servicing BS VI because we started selling (Activa 125 BS VI) in September and customers are already back for their third service. So, our personnel are already accustomed to offering aftersales support for BS VI vehicles and hence, I would say that the first mover advantage is not only in selling but in aftersales as well, and Honda has simply taken an edge.
What all investments did HMSI make to facilitate this entire shift to BS VI?
We had to upgrade some of the machines and tools at our factories in order to build BS VI-compliant vehicles and similarly, we also had to invest in our network and infrastructure as well.
Then, there is the New Model Development Fee. Considering that almost our entire line-up except for some four to five models which will not be carried forward into BS VI, is based on new platforms including powertrain, we had to pay the NM development fee to the R&D in Japan. On top of that, we are still going ahead with the construction of our third line in our fourth factory in Gujarat.
So, overall, we would be ending this year with an investment of around Rs 1,800 crore around all these areas. It takes care of BS IV to BS VI, tooling, new model development fee as well as the plant expansion.
When does this new line go on stream?
That depends upon market demand. Once our existing lines reach 100 percent capacity, that is when we will take a call of commencing production on the third line at Gujarat.
This is an investment taking into consideration long-term demand and anyhow we are hopeful that there still exists a further scope for growth in the two-wheeler segment as well as for penetration of brand Honda in India.
The new line has a capacity of 600,000 units annually and that would take up the total volumes of HMSI to over 7 million units, annually.
When do you see this whole environment of downturn changing and when could we see an uptick?
In the near future, up to the next two quarters of the coming financial year (FY2021), we don't see it turning positive. Since we will be starting the new fiscal from a zero-base, meaning there won't be any existing BS IV stock and certainly, given the ramp up that is happening, it wouldn't be practically possible for the entire two-wheeler industry to transition to BS VI at once. And, with the new price points coming into the picture, consumer will compare those products and the new value being offered. So, the first six months will go in settling down to the new price points. The only big trigger will be the festive season of CY2020 and that's when we can hope for some positivity coming in. But, since the first half of the financial year will go in the red, it's very difficult to predict if we can have a positive fiscal (FY2021) for the two-wheeler industry. We are not very hopeful as of now.
Having said that, going forward, once the prices have settled down and maybe all the announcements of the Budget show an on-ground effectiveness, along with the bouncing back of the rural economy on the back of a good monsoon, I think all these aspects would become clear only around the festive season.
What are your expectations from the Budget for FY2021?
Many may have their own list of expectations, but from SIAM's side, all the industry expectations have been put forward. We are not very hopeful of getting any reduction in GST as such, now the only thing is how the liquidity could be improved with the NBFCs because they are going to play a major role especially in the Tier 2 and Tier 3 towns with the new price points of BS VI.
On top of that, more employment in the service sector is also what we are looking at; anything on the income tax front to increase the disposal income in the hands of the people, and some measures to revive the real estate sector. I think all these will start see some spending coming back in the market.
Would manufacturers need to aggressively market BS VI products to make consumers aware of the new price hike and make them comfortable?
How we look at such challenging times is that we need to go back to our basics and keep our fundamentals strong. It's just about remaining at your base-line. There shouldn't be any let down on your activities or your positive mindset that one should go below their base-line. It becomes much more easier that you wait for things to turn around. We need to keep making our efforts to remain visible to customers in the market and engagement with customers is the most important thing in such times. One cannot just hide behind the economic slowdown and simply forget about the existing large customer base. They have bought your product and expect the minimum level of services. That's the basic direction that we have shared with our network partners and that's what we continue to do.