Innovation, Technology and Competitive Strategy -...

Innovation, Technology and Competitive Strategy: Bajaj Auto and the Motorcycle Market (A)

November 20, 2009

This case was written by Swarna Kumar Vallabhaneni, Research Associate and Rishikesha T

Krishnan, Professor of Corporate Strategy, both at the Indian Institute of Management Bangalore,

based on publicly available information. The case draws on a project submission made by Anuradha

S, Radhika AR and Radhika Tandon, all students in the Post Graduate Program, 2007-09 at IIM

Bangalore. This case was developed solely as a basis for class discussion. It is not intended to serve as

an endorsement, source of primary data or an illustration of either effective or ineffective

management.

© 2009, Indian Institute of Management, Bangalore

Innovation, Technology and Competitive Strategy 2

2

Innovation, Technology and Competitive Strategy:

Bajaj Auto and the Motorcycle Market (A)

Bajaj Auto was the undisputed leader of the Indian two wheeler industry as long as the scooter was

the customers‟ preferred vehicle. However, it was unable to maintain this position after motorcycles

came to dominate the industry. In 2006-07, Bajaj Auto was the second largest motorcycle

manufacturer in India, having sold 2.38 million motorcycles, but was a distant second behind the

market leader, Hero Honda.

Bajaj was historically strong at the higher end of the motorcycle market (150cc+). Rahul Bajaj, the

Chairman of Bajaj Auto had set a goal of “supplying 4 million motorcycles out of a projected market

of 10 millioni” by 2010. To reach this target, Bajaj planned to move into the 125cc segment

aggressively. The company intended to introduce a new engine platform in 2007, which it hoped

would “show how customers can enjoy low emissions at low costs; and demonstrate that there can be

both good performance and great fuel economyii” The #3 player, and a keen rival of Bajaj, TVS

Motors, was eyeing the same segment as Bajaj and preparing to launch the 125cc Flame. Matters

came to a head in September 2007, when Bajaj sought a court injunction against TVS‟s launch of

Flame on grounds of patent infringement.

Historical Policy Environmentiii, iv

The two-wheeler industry in India dates back to the 1950s. The industrial policy till 1969 restricted

import of vehicles and complete kits, encouraged firms to manufacture automobiles locally and

allowed foreign collaborations. Though automobile production was a licensed activity and installed

capacity was regulated, foreign collaborations were encouraged.

The 1970s brought tighter regulation across the board through the introduction of the Monopolies &

Restrictive Trade Practices (MRTP) and the Foreign Exchange Regulation Acts (FERA). MRTP

curbed the growth of large firms like Bajaj and FERA restricted foreign investments. The regulations

resulted in technological stagnation, and few new technologies or products were introduced in the

1970s. During the same period, new developments in material design spurred a worldwide movement

to high-strength, low-weight materials, leading to lighter vehicles and more efficient engines. These

developments passed India by as Indian firms lacked access to such technology. Indian motorcycles in

the 1970s were characterized by low fuel efficiencies and high weight. The only players in

motorcycles in this period were Enfield India (Royal Enfield – 350cc), Ideal Jawa (Yezdi – 250cc),

and Escorts Ltd (Rajdoot – 175cc). All three players were present since before 1970.

A series of policy changes starting from 1980 ushered the industry into the modern era. The

modernization program in 1980 allowed technical collaborations with foreign players, and the broad-

banding policy of 1985 let manufacturers launch products in adjacent product segments. All

automotive segments were delicensed between 1991 and 1993, and automatic FDI approval limits

were increased to 51% in 1991 and 100% in 2002.

These policy changes allowed major global manufacturers – Honda, Suzuki, Yamaha, Kawasaki and

Piaggio - to enter India through various collaborations, and spurred the growth of the two-wheeler

industry. By 1990, India became the second largest market in the world after China (Exhibit 1). The

new entrants introduced smaller and lighter motorcycles, which were more relevant to demographic

and infrastructural conditions in India. The incumbent players – Enfield, Jawa and Escorts - with their

large motorcycles could not compete and were soon relegated to being niche players.


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Market Structurev, vi

The two-wheeler industry was led by scooters till the early 1990s – motorcycles crossed scooters only

in 1998-99. In the 1990s, motorcycles were perceived as better styled, more powerful and economical

than scooters. As a result, motorcycles came to dominate the two-wheeler industry (Exhibit 2).

The motorcycle market was characterized by high double-digit growth and a multitude of new product

launches, with players competing fiercely on almost every plank – pricing, style, power, fuel

efficiency, pedigree, etc. The market was dominated by the 75-125cc segment (economy segment)

with first-time buyers being the bulk of the customers and price points starting at Rs. 30,000.a The

economy segment contributed to 79% of sales in 2006-07 (See Exhibit 2). Competition in this

segment was based on value for money. In addition to price and fuel efficiency, customers were

highly sensitive to EMIs,b which depended on prevailing interest rates. Tighter lending standards at

the dealer end since mid-2006 contributed to slowing down of the segment, with growth falling to

single digits.

There was a significant shift towards the 125-250cc segment (executive segment), which grew at a far

greater pace than the market. By 2006-07, the executive segment accounted for more than 20% of

total motorcycle sales. Two factors drove growth in this segment: firstly, greater disposable income,

and hence a desire to make lifestyle statements, and secondly, greater brand management by firms to

preserve operating margins. This segment was not as price-sensitive as the economy segment, and

buying decisions tended to be influenced by styling, design, power and branding.

Industry Playersvii

The market was highly concentrated with three players – Hero Honda, Bajaj Auto and TVS Motors –

accounting for nearly 93% of sales in 2006-07 (Exhibit 3). Moreover, the market shares of the three

players remained relatively stable since 2001-02.

Hero Honda, a joint venture between Honda Motors and the Hero group, was an early entrant in the

motor-cycle market, and was soon the market leader. Honda technology was extensively used in

product development as well as manufacturing. This helped Hero Honda establish a reputation for

quality products and strong brand loyalty, particularly in rural areas. Starting with their “Fill it, Shut

it, Forget it” campaign in the 1980s, Hero Honda associated their lineup with fuel economies and

value for money. The company supported its product lineup by expanding its dealer network,

particularly in the rural areas, and setting up a subsidiary to provide easy credit to buyers. Hero Honda

dominated the economy segment with 67% market share in 2007 (Exhibit 4). However, they were

weak in the executive segment with a market share of only 12% (Exhibit 5).

Bajaj Auto was a major player in scooters, selling scooters since 1945 and manufacturing them since

1959. Bajaj entered motorcycles in collaboration with Kawasaki, but focused on motorcycles only

when scooters started declining in the 1990s. Caliber, launched in 1998 was Bajaj‟s first success in

motorcycles, and Pulsar, launched in 2001, the first blockbuster. Bajaj historically concentrated on

the 150cc+ segment (Pulsar, Avenger, etc.), and led the executive segment with nearly 60% market

share in 2007. Bajaj made large investments in R&D resulting in strong new product development

capabilities and innovative features like Digital Twin Sparkplug Ignition (DTS-i).

a The exchange rate during 2002-07 was around Rs. 45/USD.

b EMI stands for Equal Money Installments, and is the monthly amount payable to the bank or financial

institution financing the purchase. Financial institutions regularly advertize their loans on basis of EMIs.


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TVS Motors was the third major player in motorcycles, with 13% share in 2007. TVS entered two-

wheelers with India‟s first locally designed moped in 1980. TVS, in a joint venture with Suzuki

Motors, launched India‟s first 100cc motorcycle in 1984. However, TVS could not take advantage of

their early entry with Hero Honda dominating the motorcycle market in the 1990s. TVS saw success

with the launch of the 110-cc Victor in August 2001, resulting in their motorcycle market share

zooming upto 19% in 2002-03. TVS continued to focus on fuel economies and emission controls and

followed up with the launches of Centra and Star (both 100cc) in 2004. The success of Victor,

however, could not be replicated, and Hero Honda continued to be strong in the economy segment.

In addition to the TVS launches, Bajaj had launched Caliber-115 in 2003 and CT-100 in 2004 – both

in the economy segment. The new launches from Bajaj and TVS had the effect of attacking Hero

Honda‟s base.viii

Hero Honda resorted to a price warix by intensifying the Hero 1001

c scheme, and

introducing various dealer subvention programs. Hero Honda had the strongest financialsd of the three

players (Exhibit 7). The price war had a major effect on the industry dynamics. The boundaries

between the economy and executive segments started getting blurred, and a new segment was forming

at the 125cc mark, which was being positioned as the best of both worlds.x This segment was to

deliver on fuel economy as well as style. The two smaller players – Bajaj and TVS - decided to focus

on the 125cc segment when it became unsustainable for them to continue the price war. TVS planned

to launch Flame, and Bajaj lined up to reply with XCD-125 in late 2007.

Technological Evolution of the Industry

Since the 1980s, there were numerous technological developments in the industry, propelled by new

statutory regulations and market requirements. Tighter emission norms, introduced in 1991, forced the

move from two-stroke engines to four-stroke engines across the market.e While four-stroke engines

generated comparatively less power, they generated much lower emissions.

With fuel economies in the economy segment and power and styling in the executive segment

emerging as the key buying factors, firms chose to focus their innovation efforts on engine

technology. The emphasis was on modifying various aspects of the engine to generate better fuel

economy and/or greater power. Since ignition systems help in emission controls as well as

combustion efficiency, and hence power and fuel economy, this was a major area under the spotlight.

The ignition mechanism in a two-wheeler engine consists of three major parts – fuel injection,

ignition and combustion, and exhaust. Fuel injection mechanisms control the flow of fuel and fuel-air

mixture to the engine, while ignition mechanisms (spark plugs, etc.) ensure combustion of fuel

completely and in a synchronized manner. Advances in either part help in fuel economies and power.

Innovation and Technology Strategies of the Major Players

Hero Honda

Hero Honda depended on Honda Motors for design and innovation. Honda entered motorcycles in the

1950s, when they developed an engine that transformed bicycles into mopeds.xi The four-stroke 50cc

c The Hero 1001 scheme was effectively a price discount of Rs. 1,001.

d While Hero Honda was primarily a motorcycle company, Bajaj and TVS had strong positions in three-wheelers

(auto-rickshaws) and mopeds/scooterettes respectively which they could manage for greater margins. e Emission regulations were passed for petrol vehicles in 1991 and diesel vehicles in 1992. Norms have been

progressively tightened, e.g., permissible level of carbon monoxide emissions was decreased from 12-30 g/km of CO in 1991 to 4.5 g/km in 1996, 2.0 g/km in 2000 and 1.5g/km in 2005.


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Supercub, introduced in 1958 was a tremendous success, making Honda the leader of motorcycle

sales in Japan. Honda entered the US in 1959. While Honda‟s first success in the US was the

Supercub, Honda moved quickly into higher mainstream segments with its “You meet the nicest

people on a Honda” theme. By 1964, nearly half of all motorcycles sold in the US were made by

Honda, and Honda emerged as the leader in every segment. Honda‟s motorcycles were all based on

four-stroke engines. Although Honda developed two-stroke engines in 1970s to improve racetrack

performance in smaller bikes, four-stroke engines remained the mainstay of Honda motorcycles.

Hero was primarily a leading bicycle manufacturer before entering two-wheelers in 1980 with a

moped - Hero Puch. Hero‟s success in bicycles was widely attributed to superior supply chain and

vendor management capabilities. Hero Puch remained Hero‟s only two-wheeler product until the

formation of Hero Honda, and was not a market success.

Hero Honda was formed as an equity joint venture between Hero Group and Honda Motors in January

1984 to address the Indian motorcycle market. The two partners each had 26% equity, with the

general public owning the rest. Hero Honda slowly built up the requisite infrastructure and expertise

to work effectively with Honda and leveraged Honda‟s global R&D for its design and technology.

Hero Honda‟s R&D was online with Honda‟s global facilities. This allowed Honda to transfer design

data and best manufacturing practices instantly to Hero Honda.xii

As a result, Hero Honda was the first to market with several technological innovations, starting with

the first 4-stroke bike CD-100 in 1985. Later, Hero Honda launched the first Indian four-stroke bike

to feature a five-speed gearbox - CBZ in 1999, and pioneered electronic fuel ignition (EFI) when it

released Glamour FI in 2006. EFI replaced the traditional carburetor with an Electronic Control Unit

(ECU), which monitored the operating conditions, and dynamically changed the fuel flow for greater

fuel economy. EFI was previously available only in cars, and was adapted by Honda for bikes.

Hero Honda‟s own internal R&D focused on value engineering, and was directed towards localization

and integration. Hero Group was able to transfer its historical competencies in supply chain and

vendor management to Hero Honda. As a result, Hero Honda developed a large array of vendors and

helped them build products as per Honda specifications and acceptance criteria. Hero Honda‟s R&D

also focused on understanding evolving needs and expectations of Indian users, which allowed Hero

to give feedback to Honda very early in the design process.xiii

Bajaj Autoxiv

Bajaj Auto had a very different innovation strategy. Bajaj had historically dominated scooters, a fact

that remained constant even with the entry of LML Piaggio and Kinetic Honda post deregulation in

the mid-80s. Even till the mid-90s, the mainstay of Bajaj was the long running Chetak, which was

based on a 25-year old Vespa model. Bajaj focused on adaptive changes to Chetak, e.g., developing a

150cc engine which was more suitable to Indian conditions. Bajaj‟s reputation for „value for money‟

and reliability, built over the years, led to continued domination in the scooter market.

Bajaj entered motorcycles in 1985, having signed a technical collaboration agreement with Kawasaki

of Japan to produce 100-cc two-stroke motorcycles. Kawasaki was part of a large conglomerate,

which had presence in ship-building, railways, rolling stock, automobiles, steelmaking, aircrafts, and

construction. Kawasaki entered the motorcycle industry in the 1950s, and historically competed in

higher-end segments. 250cc+ bikes accounted for more than 60% of total Kawasaki sales in 1980, and

continued to make up more than 55% through the 1980s and 1990s.xv


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Unlike Hero Honda, the Bajaj-Kawasaki alliance was not a joint venture, and involved no equity

participation from Kawasaki. The first product was the KB 100 launched in 1986, which performed

poorly in the market. The “KB” design was found to be ill-suited to Indian conditions. A modified

version was soon launched in the market, which had a better sales performance.

Bajaj soon realized that Hero Honda had succeeded in moving the market to four-stroke vehicles.

Bajaj‟s first four-stroke bike was launched in 1991 – the Kawasaki Bajaj 4S Champion. This was a

100cc bike, and took Hero Honda‟s existing CD-100‟s value proposition head-on, with a fuel

economy of 87 kmpl (against CD-100‟s 80kmpl). Bajaj‟s advantage was short lived as Hero Honda

again changed the shape of the market with Splendor. The Splendor was a „modernized‟ design, but

with the same engine as the CD-100, making style a major selling factor, in addition to fuel economy.

The Bajaj Kawasaki partnership continued to design and launch new motorcycles throughout the

second half of the 1990s – the 100cc Boxer, the 111cc Caliber, etc., but made only a minor dent in

Hero Honda‟s domination. In 1999, Bajaj launched a greenfield manufacturing facility, incorporating

principles from the Toyota production system. The team setting up the new facility also launched a

fresh product development effort in competition with the Kawasaki-Bajaj collaboration. While the

collaboration team was working on the 175cc Kawasaki Bajaj Eliminator, the internal Bajaj team

concurrently developed the 150cc and 180cc Pulsar.

Pulsar was developed in collaboration with Tokyo R&D, a design studio specializing in automotive

R&D. The team also created and commercialized Digital Twin-Spark Ignition (DTS-i) technology,

which incorporated two spark plugs in the combustion chamber. This generates two points of

combustion in the engine, and allows quicker and more efficient combustion, and hence better power,

fuel efficiency and lower emissions. Bajaj claimed to be the first in the world to incorporate twin-

spark ignition into small bore engines (i.e., less than 600cc), applied for a patent from the Indian

Patent Office at Mumbai in 2002, and was granted patent rights in 2005, apparently without

opposition at any stage. Exhibit 8 gives a brief overview of the Indian patent system.

Eliminator was launched in January 2001, priced at around Rs. 90,000. The bike proved too expensive

for the Indian market, and failed to make a dent. Pulsar was launched in November 2001, with the

150cc version priced at around Rs. 52,000, and the 180cc version at Rs. 58,000, and received rave

reviews from auto magazines. One reviewer compared Pulsar to offerings from Hero Honda, TVS,

Kinetic and Yamaha, noting, “The Pulsar would be the winner in this shoot-out even if it were priced

higher, much higher than the competition, she is that good. Thank your lucky stars then that the

Pulsar is cheaper, much cheaper than her rivals, spelling affordable biking for you and I.xvi

”

Bajaj soon launched the 175cc Avenger, which was the Kawasaki Bajaj Eliminator fitted with the

cheaper, more powerful and more fuel efficient Bajaj DTS-i engine. The dual success of Pulsar and

Avenger made the executive segment a stronghold of Bajaj. Bajaj continued its collaboration with

Kawasaki, with Bajaj having developed competencies complementary to Kawasaki‟s. Kawasaki was

strong in higher-end bikes (>250 cc), and Bajaj developed the capability to design and manufacture

lower-end bikes cheaply. Bajaj acquired a stake in Kawasaki‟s operations in the Philippines and

Thailand, and manufactured Bajaj vehicles for local consumption. Bajaj later moved into other


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developing markets, acquiring facilities in Colombia, Indonesia and Brazil. The R&D on the lower-

end bikes continued, with Bajaj developing new features such as ExhausTEC.f

TVS Motors

TVS Motorsg entered the two-wheeler industry through mopeds. The flagship moped TVS50 was

developed and launched in 1980 by Sundaram Clayton, a TVS group company. Numerous models and

variants launched over the years helped TVS dominate the moped segment. TVS-Suzuki was formed

as a joint venture between Sundaram Clayton and Suzuki Motors in 1982 to develop and launch

motorcycles. The company went public in 1984, with Suzuki owning 33.7% of equity, TVS and its

associates 16.7%, and general public the rest.xvii

TVS‟s stake increased to nearly 50% in 1986 when

the moped division was transferred from Sundaram Clayton to TVS-Suzuki.

Suzuki Motors was the third-largest motorcycle manufacturer in the world after Honda and

Yamaha.xviii

Suzuki started as a machine supplier to the Japanese textile industry and diversified into

automobiles after the Second World War. Power Free – a motorized bicycle launched in 1952 was

Suzuki‟s first two-wheeler. The company was producing 6000 motorcycles annually by 1954. Suzuki

was the technological leader in two-stroke engines by 1961, and entered the US in 1963. Suzuki‟s

superior two-stroke engines established Suzuki‟s reputation for racetrack performance in smaller

motorcycles. The first four-stroke models were launched only in 1976.

The TVS-Suzuki joint venture launched the first-ever 100cc motorcycle in India in 1984. While this

was markedly superior to existing products, Hero Honda soon launched four-stroke motorcycles with

Honda‟s technology, which delivered superior fuel efficiency. TVS‟s in-house R&D efforts became

focused on tweaking Suzuki‟s existing two-stroke engines to generate greater mileage. Suzuki‟s four-

stroke engines were designed for the GS-series, and focused on power and racetrack performance in

large bikes (750cc+). This technology could not be easily modified for smaller bikes.

Lacking a four-stroke model, TVS continued to be at a distinct disadvantage in the market. TVS-

Suzuki launched its four-stroke model only in 1997 by which time Hero Honda had a stranglehold on

the market. Difficulties in accessing Suzuki‟s technology and the cost of indigenising the technology,

among other issues, contributed to the split of the TVS-Suzuki joint venture in 2000.

TVS started to develop independent in-house product development capabilities even before the split

with Suzuki. TVS launched Scooty in 1994, which quickly became the leading scooterette, and

various motorcycle models throughout the late 1990s. The four-stroke motorcycle Victor, launched in

2001 was also an in-house effort, and gained TVS significant market share in motorcycles.xix

While TVS continued to develop and launch new products, none of them could emulate the success of

Victor. The surfeit of models in the economy segment from TVS and Bajaj led to the leader - Hero

Honda launching a price war. As a result, TVS decided to focus on the newly emerging 125cc

segment, with Bajaj reaching the same conclusion independently around the same time.

To this end, TVS licensed engine technology from AVL – an Austrian engine technology house, to be

used in the new bike that was to be launched in 2007 – the 125cc Flame. The engine used Controlled

f ExhausTEC stands for Exhaust Torque Expansion Chamber. The technology uses a small chamber connected to the exhaust pipe to modify back-pressure and other characteristics of the engine. Bajaj claimed significant improvement due to ExhausTEC in low/mid-range torque in a four-stroke engine. g The JV between Suzuki and TVS was initially called Ind-Suzuki and then changed to TVS Suzuki in 1986. The

company was renamed as TVS Motors after Suzuki’s exit in 2001.


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Combustion – Variable Timing Intelligent (CC-VTi) technology, for which the US patent office had

granted a patent to AVL (No. 6520146) in February 2003. CC-VTi used twin spark plugs, and

controlled the richness of air-fuel mixture according to the rider‟s speed. An on-board chip ensured a

rich air-fuel ratio at the spark plug at all times, and the twin spark plugs had the effect of nearly

doubling the rate of burn. This led to more complete combustion of fuel, generating less emissions,

higher power and better fuel economies. TVS claimed that the engine generated 10% more power and

10% greater fuel economy than regular engines.

To protect their technology, TVS filed a patent on 23rd

August, 2007 in the Indian Patent Office at

Chennai. The patent application named AVL as TVS‟ technology partner and referenced AVL‟s US

patent as well as TVS‟s R&D effort for 3 years.

On 30th August 2007, TVS unveiled the 125-cc Flame, based on CC-VTi. TVS had already started a

new manufacturing facility with a capacity of 400,000 units in 2007 to capitalize on the expected

success of the new bike.xx

Further fuelling TVS‟s expectations, Flame received rave previews, with

one analyst calling the bike “A motorcycle that could… sweep competition and potential customers

off their feet…the new 125cc motorcycle looked really good from the word go.xxi

”

However, on September 1st Bajaj threatened to file a suit against TVS for infringement of its patent on

the DTS-i technology in the Flame.

Patent Wars

Bajaj contended that TVS copied the three essential features of Bajaj‟s patent-protected invention -

the small-bore engine of 45-70 mm, lean burn air-fuel mixture, and twin spark plug. Bajaj demanded

that TVS change its engine technology or configuration to ensure patent non-infringement.

TVS responded to Bajaj‟s claims of patent infringement on 2nd

September with a two-pronged

argument. Firstly, TVS disputed the patentability of Bajaj‟s DTS-i technology. TVS claimed that the

technology was well-known and hence, adaptation to small-bore engines was neither novel nor non-

obvious. TVS referred to the search report issued by the WIPO patent examiner (Exhibit 9), which it

claimed supported TVS‟s contention. TVS went on to file a patent revocation petition at the

Intellectual Property Appellate Board (IPAB).

While the use of twin-spark plugs in itself was not novel - Alfa-Romeo and Harley-Davidson were

using the technology since 1913 and 1929 respectively, very few small-bore engines used twin-spark

plugs historically. The efficiencies generated weren‟t considered significant enough. Advances in

engine material and construction coupled with greater understanding of air-fuel mixtures and controls

led to the twin-spark plug concept being revisited. A number of patents were granted in the 1980s and

1990s (e.g., US Patent No. 4519364 to Honda and 5320075 to Chrysler) for executing multiple valve

and twin-spark concepts. Patents were granted for mechanisms to control air-fuel mixtures as well

(e.g., US Patent No. 4494504 to Honda). While these patents do not mention size explicitly, it was

understood that these engines were to be used in cars, and were larger than 600cc.

Secondly, TVS claimed that their CC-VTi technology was substantially different from Bajaj‟s DTS-i

technology, and hence there was no patent infringement. While DTS-i uses two valves (one inlet and

one exhaust), CC-VTi uses three valves (two inlet and one exhaust). TVS argued that this difference

alone demonstrated the difference between the two technologies. The two inlet valves in CC-VTi

were claimed to allow better control of fuel flow and air-fuel mixture, and hence improve engine


9

performance. TVS filed a defamation suit against Bajaj in the Madras High Court, asking Bajaj to

refrain from making any public statements against TVS.

Bajaj rejected TVS‟s arguments and claimed that the third valve in the CC-VTi technology was

superfluous.


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Exhibit 1: Motorcycle Sales in Select Countries till 2001 ('000s)

Country 1983 1990 1995 1996 1997 1998 1999 2000 2001

Brazil 157 123 201 276 405 460 442 574 692

China n/a n/a 7,800 8,837 9,716 7,976 10,142 12,203 12,130

France 423 333 304 336 364 362 388 371 364

Germany 392 171 406 449 454 418 398 363 339

India 759 1,854 2,558 2,920 3,008 3,263 3,646 3,868 4,107

Japan 2,418 1,619 1,213 1,220 1,188 1,063 837 780 751

United States 735 303 309 330 356 432 546 710 850

Adapted from The Global Motorcycle Industry – 2003, prepared by Eric Cherng for Stanford

Technology Ventures Program, 2005.

Exhibit 2: Sales of Two-Wheelers in India

2001-02 2002-03 2003-04 2004-05 2005-06 2006-07

Scooters

A1 (75cc) 1,87,442 2,38,318 2,05,867 1,32,813 50,107 25,464

A2 (75-125cc) 1,84,969 3,01,931 4,30,302 5,84,222 6,94,952 8,12,329

A3 (125-250cc) 4,57,344 2,89,943 2,50,124 2,05,393 1,63,992 1,02,824

Total 8,29,755 8,30,192 8,86,293 9,22,428 9,09,051 9,40,617

Motor-Cycles

B1 (75cc) 62,799 52,559 32,098 19,195 841 -

B2 (75-125cc) 24,15,039 32,03,347 36,58,628 41,74,520 48,05,581 51,67,623

B3 (125-250cc) 1,98,234 4,21,254 4,52,711 7,42,983 9,75,488 13,49,193

B4 (250cc+) 21,519 26,608 27,009 28,055 28,662 30,379

Total 26,97,591 37,03,768 41,70,446 49,64,753 58,10,572 65,47,195

Moped 3,84,335 3,32,588 3,09,509 3,22,584 3,32,741 3,55,870

Source: Society of Indian Automobile Manufacturers ( http://www.siamindia.com).


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Exhibit 3: Market Shares in Motor-Cycles Market

Companies 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07

Hero Honda Motors 48.80 44.96 48.76 51.51 49.79 48.18

Bajaj Auto 24.45 23.35 23.34 27.09 30.08 31.72

TVS Motors 15.57 19.19 16.37 12.91 12.95 12.88

Yamaha Motors 7.43 6.93 5.56 4.29 3.54 3.21

HMSI (Honda) - - - 1.31 1.69 2.50

LML Ltd 1.51 3.23 3.86 1.43 1.00 -

Royal Enfield 0.80 0.72 0.65 0.57 0.49 0.46

Kinetic Engg 1.44 1.49 1.25 0.81 0.43 0.08

Suzuki Motorcycle - 0.03 0.97

Majestic Auto - 0.14 0.21 0.09 - -

Source: Society of Indian Automobile Manufacturers (http://www.siamindia.com).

Exhibit 4: Sales in Economy Segment (75-125cc)

2001-02 2002-03 2003-04 2004-05 2005-06 2006-07

Bajaj 5,84,070 6,42,885 6,57,929 9,34,403 10,49,119 12,64,006

Hero Honda 12,84,023 15,61,889 19,60,264 24,37,043 28,15,682 30,41,143

TVS 3,62,424 6,76,131 6,23,209 5,35,329 6,72,660 6,95,153

Yamaha 1,08,315 1,43,644 1,95,210 1,61,452 1,85,146 1,58,858

Others 1,84,522 3,22,442 4,17,226 2,69,757 2,68,118 1,64,990

Total 24,15,039 32,03,347 36,58,628 41,76,532 48,05,579 51,65,292


Exhibit 5: Sales in Executive Segment (125-250cc)

2001-02 2002-03 2003-04 2004-05 2005-06 2006-07

Bajaj 16,026 1,70,060 2,83,280 3,91,324 6,97,817 8,14,854

Hero Honda 32,466 1,03,190 73,385 1,20,342 77,388 1,06,076

TVS 57,612 34,806 59,489 1,05,378 77,916 1,49,021

Yamaha 92,130 1,13,198 36,557 51,533 20,334 51,771

Others - - - 72,394 1,00,033 2,27,531

Total 1,98,234 4,21,254 4,52,711 7,40,971 9,73,488 13,49,253


http://www.siamindia.com/

http://www.siamindia.com/


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Exhibit 6: Construction of a standard single-cylinder spark plug based four-stroke enginexxii

Basic Process of Operation:

Step 1 – Intake: Combustion mixtures are entered into the combustion chamber

Step 2 – Compression: The mixtures are placed under pressure

Step 3 – Combustion: The mixture is burnt and the hot mixture is expanded, pressing on and moving

parts of the engine and performing useful work

Step 4 – Exhaust: The cooled combustion products are exhausted into the atmosphere

Basic Terms:

Bore: Inner diameter of the engine

Stroke: Stroke is the action of the piston travelling across the combustion cylinder. Stroke also refers

to the distance the piston travels.

Engine Capacity: Volume swept by all pistons of an engine in a single movement, generally measured

in cc. Engines with greater capacity are usually more powerful and provide greater torque at lower

rpm.

Spark Plug: Petrol engines are typically ignited by a precisely timed spark. The spark plug produces

an electrical spark to ignite the fuel-air mixture. The flame then travels through the combustion

chamber to ignite the entire volume of fuel-air injected into the engine.

Fuel Injection: Fuel Injection is a system for mixing fuel with air, and is now the primary fuel

delivery system in petrol engines having replaced carburettors. FI atomizes the fuel by forcibly

pumping it through a small nozzle under high pressure, and typically control the amount of fuel

injected to match the engine's dynamic needs across a wide range of operating conditions such as

engine load, ambient air temperature, engine temperature, fuel octane level, and atmospheric pressure.


13

Exhibit 7: Abbreviated Financials of Hero Honda, Bajaj Auto and TVS Motorsxxiii

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Incom

e216

277

310

370

484

641

783

1,1

61

1,5

60

2,2

77

3,3

92

4,7

24

5,3

95

7,1

06

8,9

45

10,4

22

11,9

66

PA

T16

16

16

15

19

26

50

77

121

192

247

463

581

728

810

971

858

RO

CE

27.5

620.9

818.1

814.9

918.6

324.3

631.1

630.6

737.2

444.4

742.1

963.1

965.4

363.1

853.9

949.9

836.0

8

Div

idend

34

44

56

79

28

44

66

350

405

451

456

455

397

R&

D E

xpense

Capital account

00

00

01

21

06

01

27

311

8

Curr

ent

account

00

00

11

23

34

56

79

13

15

18

Tota

l R

&D

00

00

12

34

310

57

917

16

25

26

Royaltie

s P

aid

68

33

45

610

12

18

25

52

69

90

157

212

254

Fore

x s

pendin

g r

oyalty/

technic

al know

how

53

31

16

78

821

39

42

85

90

159

215

257

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Incom

e1,2

21

1,2

80

1,3

26

1,6

84

2,2

92

2,9

33

3,4

54

3,5

04

3,9

22

4,2

40

3,9

73

4,5

75

5,0

43

5,9

17

7,1

17

9,2

26

11,3

88

PA

T55

43

52

146

310

417

440

463

553

635

250

518

535

738

729

1,1

23

1,2

37

RO

CE

12.5

68.6

27.7

25.0

931.6

428.7

724.2

820.4

919.0

918.0

57.4

810.3

713.4

417.3

914.1

618.3

317.8

6

Div

idend

19

19

19

30

62

80

88

105

106

133

89

142

160

285

288

462

474

R&

D E

xpense

Capital account

21

36

69

32

83

29

410

27

27

26

47

Curr

ent

account

40

69

12

14

19

22

24

32

32

34

32

38

40

50

68

Tota

l R

&D

61

915

18

23

22

24

31

34

61

37

42

65

67

77

115

Royaltie

s P

aid

11

11

12

23

711

17

20

20

27

32

30

10

Fore

x s

pendin

g r

oyalty/

technic

al know

how

12

12

13

58

11

19

34

18

19

25

34

30

21

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Incom

e142

170

189

275

412

623

836

1,0

40

1,3

28

1,5

58

1,8

41

2,2

34

3,1

42

3,3

11

3,4

11

3,8

18

4,5

51

PA

T-2

34

13

34

35

54

69

82

86

63

54

129

138

139

123

66

RO

CE

-7.7

99.8

610.8

842.9

956.6

340.7

840.1

129.0

723.7

619.5

812.5

511.2

626.6

23.0

613.6

312.6

15.5

5

Div

idend

34

44

56

79

28

44

66

350

405

451

456

455

397

R&

D E

xpense

Capital account

00

00

13

68

73

65

12

16

21

13

37

Curr

ent

account

01

11

23

48

10

12

10

25

46

60

51

55

48

Tota

l R

&D

01

11

26

10

15

17

15

16

30

59

76

72

68

85

Royaltie

s P

aid

02

36

55

810

12

13

17

16

30

00

0

Fore

x s

pendin

g r

oyalty/

technic

al know

how

00

16

55

810

12

19

17

16

30

00

0

Ex

hib

it 7

b:

Ba

jaj

Au

to A

bb

revia

ted

Fin

an

cia

ls (

Rs.

Cr.

)

Ex

hib

it 7

a:

He

ro H

on

da

Mo

tors

Ab

bre

via

ted

Fin

an

cia

ls (

Rs.

Cr.

)

Ex

hib

it 7

c:

TV

S M

oto

rs A

bb

revia

ted

Fin

an

cia

ls (

Rs.

Cr.

)


14

Exhibit 8: Note on the Patent System in India

India is a signatory to the Patent Co-operation Treaty (PCT) under the WTO. The Patent Act, 1970

was amended in 1995 to facilitate compliance with WTO norms. There was a grace period of 10 years

under the WTO norms, and the new law came into force in 2005.

An invention has to fulfill three criteria for a patent to be granted. The first criterion is utility, i.e., the

invention needs to be useful in some manner. Secondly, the product or process needs to be novel and

significantly different from any existing products and processes. The invention cannot have been in

use by any other party in India or published anywhere else in the world prior to filing.

The final criterion for patentability is non-obviousness in light of prior art. Stated differently, the

invention must not be obvious to a person skilled in the relevant subject matter. The invention can,

however, improve over a prior patent, or combine prior inventions in a novel way. For example,

adding an eraser to one end of a pencil is patentable so long as it hasn‟t yet been patented by anyone

and the Patent Office judges it non-obvious. Nevertheless, this does not override the original patent. A

party seeking to manufacture such a pencil still needs to license the technology from the owner of the

original pencil patent.

Once the patent is filed, the application is examined at the Patent Office by an examiner. The system

allows for pre-grant as well as post-grant appeal of patents. The patent information is made public

after 18 months of filing, and any party is free to file an appeal for opposition of grant. One can

oppose the patent post-grant as well within one year of granting of patent at the Intellectual Property

Appellate Board (IPAB), and anytime at the High Court level. Once granted, the patent confers upon

the assignee the right to prevent other from making, using, selling or importing the product without

the assignee‟s consent for 20 years from the date of patent filing.

The patent law was amended in 2005 to be fully compliant with the TRIPS agreement.xxiv

The patent

granting procedure is noted below. The only significant procedural change in the new law was with


15

respect to pre-grant opposition. While the provision for pre-grant opposition existed prior to 2005 as

well, it was made easier with the new amendments. For example, pre-grant opposition could now be

filed upto 6 months from the date of publication as compared to 3 months in the older law.

The patent system enables assignees to file for patents in all countries which are signatories to the

PCT once a patent is granted by one country. A priority claim is granted along with the patent

application, and the priority claim can be filed in the World Intellectual Property Organization

(WIPO), which provides a centralized application process. WIPO performs many of the formalities of

a patent application in a centralised manner, therefore avoiding the need to repeat the steps in all

countries in which a patent may ultimately be granted. The WIPO coordinates searches performed by

any one of the International Searching Authorities (ISA), publishes the international applications and

coordinates preliminary examination performed by any one of the International Preliminary

Examination Authorities (IPEA). Steps such as naming inventors and applicants, and filing certified

copies of priority documents can also be done centrally, and need not be repeated.

The main advantage of proceeding via the PCT route is that the option of obtaining patents in a wide

range of countries is retained, while the cost of a large number of applications is deferred. However, it

should be noted there are variations in patent laws across countries. Patents are granted individually

by each country, and patent rights do not have cross-border validity.

The new patent system encouraged corporates to use Intellectual Property as an additional tool in their

strategies. The number of Indian patent applications has more than tripled from 2001 to 2007.

As of 2008, the Indian patenting system faced a number of infrastructural issues. The first issue was

that there were only 190 examiners. The low number of examiners led to delays in substantive

examinations and resulted in lead times of at least 3 years. Second, the database of existing Indian

patents was neither fully searchable, nor completely online. This made the search process tedious.

Third, with the patent laws being relatively new, there did not exist enough jurisprudence for to

predict the courts‟ interpretation of patent disputes.


16

Exhibit 9: International Search Report of Bajaj’s DTS-I Patent Application with WIPO


17

References

i Bajaj Auto, Annual Report 2005-06. ii Bajaj Auto, Annual Report 2006-07.

iii Tiwari, Ranawat and Lange, India’s Long March to a Global Auto Major: A Study of Government Influence on

Industry Development in Post-Independence Era, Hamburg, 2009. iv George, Jha and Nagarajan, The Evolution and Structure of the Two-Wheeler Industry in India, Canberra,

2002. v Economic Times Analysis Group, Automobiles – 2 and 3 wheelers, Mumbai, November 2005.

vi Economic Times Analysis Group, Automobiles – 2 and 3 wheelers, Mumbai, July 2006.

vii Ibid.

viii The Hindu Business Line, Hero Honda: Sell, October 2004

(http://www.thehindubusinessline.com/iw/2004/10/17/stories/2004101700140800.htm). ix Reuters, Hero Honda sees further margin pressure, July 2004

(http://www.expressindia.com/news/fullstory.php?newsid=33822). x Moneycontrol.com Bajaj Auto – TVS Patent Tussle: Who will emerge winner? September, 2007

(http://www.moneycontrol.com/india/news/business/bajaj-auto-tvs-patent-tussle-who-will-emerge-winner/14/35/301870). xi Adapted from The Global Motorcycle Industry – 2003, prepared by Eric Cherng for Stanford Technology

Ventures Program, 2005. xii

Hero Honda, Annual Report 2005-06. xiii

Ibid. xiv

Adapted from Anirvan Pant and J. Ramachandran Bajaj Auto Limited: Distinctly Ahead, Indian Institute of Management, Bangalore, 2007. xv

Adapted from The Global Motorcycle Industry – 2003, prepared by Eric Cherng for Stanford Technology Ventures Program, 2005. xvi

Indiabike, Six-Bike Shootout, January 2002 (http://www.indiabike.com/roadtest/sixbikeo/winner.htm). xvii

Moneyconrol.com, Company History of TVS Motor Company, October 2009 (http://www.moneycontrol.com/company-facts/tvsmotorcompany/history/TVS). xviii

Adapted from The Global Motorcycle Industry – 2003, prepared by Eric Cherng for Stanford Technology Ventures Program, 2005. xix

Krishnan RT, TVS-Suzuki Split: Launch for Global Leadership?, Economic and Political Weekly, October 13, 2001, pp. 3885-3886. xx

TVS Motors, Annual Report, 2006-07. xxi

Business Standard Motoring, Fire Starter: TVS’s latest offering in the 125cc segment, September, 2007. xxii

Adapted from various sources on Wikipedia (http://en.wikipedia.org/wiki/Internal_combustion_engine). xxiii

Adapted from Prowess data and Annual Reports. xxiv

Indian Embassy Press Note, The Patents (Amendment) Bill 2005 passed by Indian Parliament, March 2005.

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