Good news about Royal Enfield– Kevin Mahoney
The parent company of Royal Enfield is Eicher Motors, a public limited company. The current head of Eicher is a young man named Siddartha Lal. The Lal family is currently the single largest shareholder in the company. He is has a highly sophisticated executive with a graduate level degree in automotive engineering from a prominent British University. To call him a motorcycling enthusiast would be a gross understatement. When he was being groomed to take over the parent company, he spent time as the CEO of Royal Enfield and it is his personal passion. He looks at the motorcycle company as a personal challenge. During his tenure at Royal Enfield Motors (REM) he developed a vision for the company that has been its guide over the past couple of years.
Since the time that Eicher purchased REM (mid to late 90’s) they have been investing large amounts of money into the company and have totally modernized the plant and invested heavily in R & D. Since Siddartha took over, this process has accelerated dramatically. I have been involved with this company for over 8 years and the changes I have witnessed are remarkable.
Sales at REM have been so strong both in the US and the rest of the world that we have run out of bikes twice ourselves this year and have struggled to get production slots to make up the difference as the plant is running near capacity. We sold more bikes by April than we usually sell by August. These increased sales have put a lot of pressure on us to keep with parts an daccessrries and we ahve had to add several people to our staff in the past couple of months just to keep up.
Siddhartha’s vision for the company is to accelerate its growth with a strong focus on export markets. Royal Enfield produced about 30,000 bikes last year which is more than they have ever produced. 30,000 may not seem like a large number of bikes compared to other manufacturers in India like Bajaj (who over sell 2,000,000 units in a year), but one has to understand the economics of the situation. Bajaj and the other manufacturers make 100cc-175cc bikes for the mass market. Royal Enfield is a niche player in the high-end market which is much more profitable on a unit by unit basis. They don’t need to sell the same numbers of bikes to be profitable that the large mass-market companies do. Being in a niche market they do not compete on size or price.
Since the economic explosion in India, the market has shifted quickly and dramatically from bicycles and scooters to small cc motorcycles. The concept of a motorcycle as a leisure object is a new one in India. REM has captured that market and is expanding upon it. There is a new middle class with disposable income exploding in India and they are the focus of REM’s sales. It is a very similar story to Harley Davidson in the US. Royal Enfield mostly sells 350cc and more recently 500cc motorcycles in the domestic market. This bike is perceived as huge in size and has over twice the cc’s of any other bike sold in India. While it was originally sold only to the police and military, and then later as a workhorse to the public, it is now seen as a status symbol and a lifestyle product. This is hard to see from our perspective in the US, but it is the state of affairs in India.
Siddartha and his team are accomplishing their goals as evidenced by the following:
Record sales, plant modernization, new product and the recruitment of a new top-notch management team. Over the past year he has put in place at all levels in the company some of the best motorcycle and manufacturing executives in India, if not the world. There has been some publicity about the hiring of a new CEO, Mr. R. L. Ravichandran last September, but that is the tip of the iceberg. Mr. Ravichandran has recruited some world-class executives and has overhauled the entire management team over the past 6 months. I have met Mr. Ravichandran several times myself and am very impressed with his abilities. We were visited here yesterday by the new head of quality Dr. K. P Nair. He was responsible for Bajaj Motors achieving Japanese-level quality and lowering the warranty costs from over $20 per unit to less than 50 cents. Dr. Nair is a truly impressive individual and wowed us with his presentation about the latest strategy for quality improvem ent. While there is much to be done, the train has left the station!
Part of the overall strategy is to greatly expand sales in the export and domestic markets. Most of the future strategies have already been put in place but have not been made public at this point, These are realistic goals given what is going on at Royal Enfield and in India at present. In order to become a solid player in the international market REM recognizes the need to attract strategic partners. Some of the areas one would think about are technology and capital. REM believes (as I do) that they (REM) are a very attractive partner, particularly given their recent successes, modern plant and equipment and experience in manufacturing.
Making REM an independent entity in the current restructuring was necessary in order to free up the company to attract those strategic partners. Securities law dictates that much of what is in the works cannot be talked about publicly at this point, but the reasons for the spin-off are easy to understand and do not relate to “turmoil” (as nay-sayers would like to imply), but rather to success.
As I said earlier, Eicher is a public limited company. In order for them to link up with partners and not dilute the holdings or change the structure of the parent company, REM needs to be an independent although wholly owned subsidiary. The restructure part of the story is not the story. This is the first public step in a larger good news story. Unfortunately, Royal Enfield has never been good at telling their own story and feel even more constrained currently because of Indian Securities law.
The good news for us in the US is that export markets are getting more attention and this will eventually lead to larger motorcycles with world class quality. REM will not abandon our bread and butter, the Classic bike, but our total product line will get bigger and better over time.
India is a rapidly moving place with a lot happening right now. There will be more and more components and motorcycles manufactured there in the future. Several major motorcycle players are looking for manufacturing capacity in India and all of the Japanese manufacturers are already there. It is a much better and more comfortable place to do business in than China. Business relationships are more straightforward and the business people are more reliable as partners. The workforce is better educated and because it is a solid democracy, outside investment is much better protected than in countries such as China.
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