The small displacement motorcycle market

posted Oct 18, 2011, 7:17 PM by Loose Tube   [ updated Jan 13, 2012, 8:53 PM ]

In 1994 Piaggio launched its first subsidiary in Vietnam to manage the importation of scooters, particularly the Vespa brand which enjoyed a favorable image in the mind of the Vietnamese. In order to stimulate domestic manufacturing, the government followed the example of other South East Asian countries and applied import tariffs on completely assembled units lacking in local content. In view of the market's potential, Japanese makers set-up manufacturing operations soon after (Suzuki in 1996, Honda in 1997 and Yamaha in 1998). Following a price and quality war with Chinese assemblers, by 2005 the Japanese makers had begun to dominate, with top products selling for under $2,000.

In the meantime Piaggio incorporated the sizable import tax into its prices and continued selling its 125cc scooters at a premium of over $5,000, focusing on branding activities as a differentiation path to success. Annual volumes of unmodified European spec vehicles were sufficient to convince management to open a manufacturing plant in Vietnam in 2009. However, the key point is the significant number of customers willing to pay a premium for a scooter in a country whose GDP per capita is $3,100, much lower than other developing markets in the region, implying the existence of untapped sales potential across the region.

This level of segmentation and sophistication was not reflected in the low cost small displacement under-bone cub-derivatives, basic backbone motorcycles and plain scooters available across Asia until the Kawasaki Ninja 250R appeared at the Tokyo Motor Show in the winter of 2007. Since then there has been an increase in model types and Honda have addressed this by rolling out a comprehensive plan that brings together, advanced technology products (CBR250R), low cost production and a revolution in motorcycle racing regulations. The choice of Thailand as a manufacturing base reflects a confidence in its supplier base and intellectual property rights protection in Thailand. In October 2011 Suzuki in conjunction with Haojue announced the launch of the Suzuki GW250 "Baby B-King" targeting the Chinese market, further exemplifying the increased competition among small displacement vehicles and a different approach to the intellectual property rights issue in China.

As society and infra-structure changes across Asia, more opportunities for new products will appear, albeit highly nuanced and specific in nature, as the industry in the region switches from a production to a customer focus. With big bike sales slumping globally, this will be the main area of growth in the industry. For example, a combination of paved and unpaved roads would imply that products comfortable in both of these environments would thrive. Indeed America's Motorcycle Industry council sought to promote off-road products in China in 2010.

What of the non-Asian response? Established brands such as Triumph, Ducati, BMW, Moto Guzzi, MV Agusta and Harley Davidson all have models in their museums that could provide a historical reference for a new small cc product. So it came as no surprise when it was leaked that Triumph may be planning a 300cc street bike. Various versions of such a product manufactured in Thailand would permit the rapid expansion of Triumph's distribution network across Asia and Latin America, in advance of those markets transitioning to larger displacement products in the coming years.

Although WTO participation and other trade agreements bring a general reduction in trade tariffs, it still leaves European and American production costs higher than Asia. To be competitive, such manufacturers need Asian manufacturing bridgeheads. The launch of Triumph's factory in Thailand gives them more than 5 years head start in terms of sourcing suppliers and establishing relationships over the non-Asian competition. It's of strategic importance that Triumph moves forward with this small displacement bike project before their advantage is eroded.

However, there are other routes to success. The merger of KTM and Bajaj would appear to be a win-win situation for both parties, which leverages Bajaj's low cost production and existing distribution in low cost markets, with KTM's off-road fame, technical prowess and global distribution. The rapid conception, development and launch of the 125 Duke reflects well on this partnership and would appear to have already thrown down the gauntlet. In addition, Bajaj's alliance with Kawasaki which sees them assembling and distributing the Ninja 650R and distributing the Ninja 250R through their Probiking network in India is a further example of creativity in distribution.

Where will the next surprise come from? Perhaps Qianjiang's legendary Benelli brand will offer us a surprise. However, even if it were true, this is unlikely to make an impression due to weaknesses in distribution and technical concerns. It's more likely that Piaggio will use its base in Vietnam to develop new motorcycle products under the Aprilia brand and Ducati to answer from their new base in Thailand.

The discussion so far ignores the potential of such products to reinvigorate the industry in developed markets. The Ninja 250R, 125 Duke and CBR250R have all achieved excellent sales results in developed markets as fun entry level products. Is this the start of a truly global phenomenon?