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Copyright 2015, Forbesindia.


Eicher Motors: It's all in the

by N Madhavan | Jul 22, 2015

A substantial part of Eicher Motors' success story can be attributed to

Siddhartha Lal's conviction in Royal Enfield, a struggling business back in
When Siddhartha Lal got married in the winter of 2004, he chose to ride a
modified red Bullet for his baraat, forgoing the traditional horse. His
vehicle of choice wasnt a gimmick or a quirk. It was an acknowledgement
of the then 30-year-olds unabashed passion for the bike, produced by
Royal Enfield, a division of his family-controlled Eicher Motors Ltd.
The same passion had, four years earlier, helped him thwart an attempt by
Eicher Motors, the flagship company of the Eicher Group, to sell or close
down Royal Enfield. The iconic Bullet motorbike, despite its die-hard
enthusiasts, had been facing several roadblocks at the time. Demand was
low with sales barely crossing 2,000 units a month against the production
capacity of 6,000. Reliability issues such as engine seizures, oil leakages
and electrical failures were rampant and the bike was increasingly being
seen as too difficult to manage. Also, emerging emission and other
regulatory norms raised questions about the future of the bikes. The Eicher
Motors management did not see value in the bikes: They contributed only a
fraction of the overall business, which included commercial vehicles.
However, Lal, who had just completed his Masters in automotive
engineering from the University of Leeds, UK, viewed the situation
differently. Royal Enfields bones were good and it was in a segment that
had a promising future, he tells Forbes India. Conviction in hand, he asked
his father Vikram Lal for two years to effect a turnaround.
Lal Sr did well to listen to his son.
Fifteen years later, Royal Enfield contributes 40 percent of Eicher Motors
turnover, 80 percent of its operating profit (Ebitda) and almost all of its net
profit as per first quarter results of 2015-16 (the companys financial year
began on January 1 and will culminate after a 15-month period on March
31, 2016). As a business, it has grown consistently at a compounded annual

growth rate of 50 percent over the last three years. Its operating profit
margin is 24 percent and it has a market share of 96 percent in the midweight (250 cc to 750 cc) leisure motorcycle segment, which includes global
players such as Harley Davidson, Ducati and Triumph. Despite a five-fold
increase in capacity in the last four years, the waiting period averages
between two and four months. Our ability to sell is constrained by our
ability to produce, says Rudratej Singh, president, Royal Enfield. Some
might call it a happy problem. Investors have rewarded this transformation
and the Eicher Motors stock has risen from around Rs 22 in 2000 to Rs
19,000 levels now.
Authentic versus Modern
But change is never easy, as Lal was to find out. For one, the Bullet buffs
wanted the bike to remain authentic. This meant the cast-iron engine and
the gear box should stay separate (which was causing oil leaks), brakes
should be on the left-hand side (the opposite was true for all other bikes)
and persisting with the existing, difficult kick-start instead of an electric
Lal, therefore, had to consider whether his attempt to modernise the
product and attract new buyers would result in alienating existing
customers. If we had listened only to the hardcore enthusiasts and
retained everything authentic, we would have failed. More than the loudest
voice, we had to listen to the unsaid voicespeople who wanted to buy a
Royal Enfield product but were dissuaded by reliability and other issues,
says Lal, today the managing director and CEO of Eicher Motors.
How did he strike a balance? The classic design, the ubiquitous thump and
the low torque were retained; changes such as a shift to an aluminium
unitary engine with the gears and the engine as a single unit, disc brakes
placed on the right and an electric starter were introduced. In some cases,
that meant working against the laws of physics. For instance, the
aluminium engine, with 30 percent less moving parts and 30 percent more
power, failed to reproduce the loud thump that Royal Enfield bikes were
known for. International consultants were called in and sound mapping
was conducted to find a solution. Extending the exhaust pipe helped but the
final decibel level was still 30 percent lower than earlier.
It is a remarkable story of how a physical product was modernised without
the brand losing any of its characteristics that gave it the iconic status, says
Professor Abraham Koshy, professor of marketing, Indian Institute of
Management (Ahmedabad), who also co-authored Marketing Management
A South Asian Perspective along with Philip Kotler.

Lal also changed the way the bikes were soldfrom rickety, basic, even
dirty shops in dingy bylanes to state-of-the-art showrooms in upscale areas
like Delhis Khan Market. Over the years, the company also widened its
product line to include, apart from the traditional Bullet, models such as
Classic, Thunderbird, Desert Storm and Continental GT.
Sales began to rise and soon demand started to overtake capacity. In 2011,
the company had sold 74,626 bikes; this figure jumped to 1.78 lakh units in
2013 and to 3.02 lakh units in 2014. The target is to close 2015 at 4.5 lakh
units. Today we are selling whatever we are producing. Not able to meet
the surging demand is a good problem to have but we are expanding
consistently to ensure that our customers need not have to wait long for
their bikes, says Singh. The manufacturing capacity at Royal Enfield will
touch 6 lakh units by March 2017, he adds. Eicher invested Rs 600 crore
during 2013 and 2014 and will put in another Rs 500 crore in 2015. The
bulk of these funds have been used for capacity expansion. But this appears
insufficient as the order book continues to overflow.
Royal Demand
Royal Enfield enjoys a unique position among Indian premium
motorcycles as its distinctively-styled bikes fulfil the customers key
aspiration of owning differentiated products at a reasonable price, says
Nitij Mangal of CLSA, a broking and investment firm, in his latest report.
Says Lal, At a time when manufacturers launch newer models every year,
forcing customers to upgrade, we offer bikes whose look and feel has not
changed for the last 80 years and will not change for the next 80 years.
The brands individuality, in a largely commoditised world, sells. What
bike you ride communicates who you are. Royal Enfield has successfully
positioned its products as a quintessential macho mans bike. A product like
Bullet, for instance, differentiates the rider from the crowd of commuter
bikes on the road, points out Koshy. Unlike other two-wheeler
manufacturers, Lal isnt the one to go for a publicity blitz. We dont feel
advertisement is a way to build a lasting brand, says Lal. So much so that
when he was looking to hire someone to head Royal Enfield, he initially
avoided FMCG executives. They tend to think only above the line, he
adds. But eventually he chose Singh, an 18-year Hindustan Unilever (and
20-year FMCG) veteran. Singh had an orientation similar to us, Lal
explains quickly. It is to promote riding instead of just selling the bikes.
The company organises riding excursions like the Himalayan Odyssey and
Tour of Tibet to add value to the brand. There are numerous Royal Enfield
clubs that dot the country, with each conducting its own rides. Our
evocative bikes have the capacity to connect man, machine and the terrain
in unison, says Singh.

But Royal Enfield has still not fully leveraged the strong pricing power it
has in the market. The company has exercised some prudence by not
taking up prices too much so as to expand the overall market rather than
solely maximising profitability, says Mangal in the CLSA report. Eichers
CFO Lalit Malik sees no reason for upping prices. Raising prices is the
easiest lever to improve profitability. We are looking at more challenging
options like improving operating ratios, he says.
That is already happening on the ground. With volumes ramping up over
the past few years, fixed cost as a percentage of sales has declined sharply
from 17 percent in 2010 to 10 percent (in Q1 of FY16). This has also brought
down material costs to less than 60 percent of sales as against 70 percent
five years ago. The operating profit margins have thus touched the highest
levels of 24 percent in the first quarter of this year. We are not a luxury
brand. For us, the miracle happening in the marketplace is because we are
seen as an affordable and aspirational lifestyle brand, adds Malik. This
pricing policy has ensured that Royal Enfield products do not have much
competition. Its costliest bike Continental GT is priced at Rs 2.25 lakh while
the price of Harley Davidson Street, its nearest competitor, is Rs 4.33 lakh.
Other products from Triumph and Ducati are priced even higher.

The strong demand, little

competition and high margins that
Royal Enfield enjoys may not last
forever and Lal is aware of this. He is
already putting in place a strategy
that will power the company for the
next 15 years. We are one platform
and one country but that is
changing, he says, hinting at both
geographical and product portfolio
expansion. In India, the company is
deepening its distribution network
and will be adding hundred-plus
dealers in the next two years. It will
drive thought leadership through the
launch of new engine platforms (and
bikes), new gear and new stores.
Outside the country, it has started
taking steps to become a global
brand. A big position is available in the global market where the middleweight category has not been adequately addressed. That is the next big
journey. We need to build a brand truly relevant in the international

market, says Lal.

The company has created a 300-strong technical team in India and the UK
to come up with cutting-edge design and technology. The UK centre,
headed by Pierre Terblanche, a leading design mind from Ducati, will focus
on larger bikes in the 250 cc to 750 cc category while the Chennai centre
will work on smaller bikes. Both centres will work in tandem and share
knowledge, he adds. The company has already tasted early success in
international markets, like the UK and Colombia. Last year, exports grew
46 per cent.
The Truck story
While Lal chose to revive and create a strong brand on his own in the
motorcycle business, he did the opposite when it came to Eichers truck
business. With trucks, it was not a turnaround story. We were only a
segment player present in the 5-15 tonne category in a market dominated
by two large playersTata Motors and Ashok Leyland, he says. That apart,
many multinational companies such as Daimler, Scania and Mann had
announced plans for India. To face emerging competition and to take
advantage of future growth, Eicher Motors needed capital, technical
capability and reach. It was clear that a good partner who believed in the
same futuremodernising the Indian trucking sectorwould help, says
Lal. In Volvo, Eicher found such a partner and Volvo Eicher Commercial
Vehicles Ltd (VECV) was set up in 2008 with a 46:54 shareholding with
Eicher holding the majority. Rather than having the whole of a small pie, I
felt it was better to have a smaller share of a larger pie, he says.
Volvo and Eicher have complementary strengths. Volvo has world class
technology as well as processes and we have our frugal methods of product
development, says Vinod Aggarwal, CEO, VECV. In the first three years
(2008 to 2011) of the joint venture, volumes doubled from 24,000 units to
48,000 and then recession struck. VECV closed 2014 with sales of 40,000
units. Though the JV is yet to realise its full potential, it has begun to show
some results. In the light- and medium-duty segments, our market share
has risen from 28 percent since the formation of the JV to 33 percent in
2014. In buses, the share has grown from 6 percent in 2008 to 15 percent in
2014. In the heavy-duty truck segment, the VECV market share has risen to
4 percent from 1 percent in 2008, says Aggarwal.
But Lal did not sit idle during the longest recession in the history of the
Indian commercial vehicle sector. VECV has invested Rs 2,300 crore in the
last four years to set up an engine plant that produces Euro VI compliant
engines for Volvos global use. A new bus body building plant has also been
commissioned and Eichers truck plant has been modernised and
expanded. The company has also adopted Volvos processes in

manufacturing, quality control, product development, after-sales and

marketing. The most significant is the development of an entire range of
trucks and buses by adopting Volvo technology in our frugal ways, says
Aggarwal. We are launching an entire line of Pro-series products from 5
tonne to 49 tonne. Says Lal, In three years, the Pro series will modernise
trucking in India. And as the person who ensured that the Bullet continues
to rev, Lal is a difficult man to doubt.
This article appeared in Forbes India Magazine of 24 July,