Royal Enfield: Demand vs Quality

What is Royal Enfield?

Royal Enfield is an Indian automative company which is producing classic motorcycles for a long time.

Success from 2000:

After Lal became the CEO of the company, the company which was on the brink of bankrupcy was saved and started to see some increase in sales. The motorcycles where modified rightly to remain relevant to the contemporary audience. The move to Unit Construction Engine from cast iron, change of gear lever position to what is seen in most other motorcycles are some of the major changes which the potential customers felt inviting to buy.

Come 2010, the sales started to pick up and started growing consistently at about 40% rate.

Quality issues:

Most of the earlier generation quality issues are greatly reduced with the UCE engine, but the motorcycles were not on par with the other manufacturers in terms of general quality. People who bought RE motorcycles had to spend a lot of money for the up keep. Lot of recurring costs in the form of parts replacement. The longevity of the spare parts was poor and the cost of the parts are on the higher side. This made owning a Royal Enfield motorcycle a really costly affair apart from the upfront money spent in purchasing the motrocycle.

Royal Enfield caters to a niche group of riders and usually they are alright with spending the extra money. Being in a niche segment of motorcycle (read classic), other manufacturers were not even attempting to compete. The lack of competition enabled RE to continue making the motrocycles with the same quality issues.

Lack of competition:

For a long time, it seemed none of the manufactures were even thinking above 250CC motorcycles. Slowly this started to change and the market started to getting used to higher CC motorcyles. With this came a few lame attempts from some manufacturers to compete against RE.

Bajaj Dominor 400:

Bajaj made a fairly good, well priced power cruiser named Dominor 400. It had a 373.3cc heart derived from that of the duke 390. Bajaj pited Dominor against RE in its ad compaigns which were not seen in good light by the market, eventually Bajaj altered the later ad content to be appropriate. Dominor saw some success, but the number of sales was very less and uncomparable to RE.

"Don't hold back" is much better a tag line.

Jawa:

Mahindra bought and attempted to resurrect the old classic hit Jawa motorcycles. While the motorcycles gathered good reviews all round, the company was plagued with logistic issues which created delays in the delivery. Along with the lack of service centers, this issue resulted in Jawa failing in the marker albiet being a capable product.

Benelli Imperiale 400:

Benelli came up with its own classic motorcycle named Imperiale 400. The bike had its own positives and was seen as a capable classic steed. But Benelli's lack of after sales support (very few service centers) and the notoriety of its other motorcycles' high cost of maintenance made this bike a failure in the market.

Ethical business model:

The lack of competition and the relentless buyers in the classic segment made RE to stick to their game. There was a time when RE launched Himalayan with a slew of issues. This resulted in initial sales drop. RE later addressed the quality issues and the later iterations of Himalayan were fairly issue free. RE also launched the 650 twins (interceptor and continental GT) which gathered wonderful reviews and also were made well.

This goes to show that, when required RE can deliver on quality. This makes one wonder if RE was holding back on quality on its motorcycles to attract higher cash flow in after sales and service. If that was the case, it could have yielded the company well monetarily, particularly since the products are niche and not many competitors are out there to push RE to improve quality.

But is this an ethical model of business? Does one require competition and is that the only push to improve quality? I will not judge and leave the readers to make their own conclusions.

Signs of Improvement:

Lately things have started to improve. With the launch of meteor 350, RE has made a marked improvement in the engine department when it comes to refinement. The level of refinement is commendable from what the experts say. The motorcycle is now more capable in all arenas of use that the thunderbird was catering earlier. This could be a sign that the company is willing to change for better.

Honda has brought H'ness CB350 to the game, although only at the Honda Bigwing dealerships. This limits the reach of CB350 drastically. It is understandable why Honda wants to play this safe, but to be able to compete against RE, it would require alot. The motorcycle on the hand is good and is feature rich compared to Meteor. But with Meteor RE has upped the game. Regardless of where this rivalry goes, its good to see that RE is improving quality and the competition is growing.

Early Retirement (Indian version)

What is early retirement?

In a country like India, where there are very scarce amount of people eligible to pay taxes (or rather honestly pay taxes), early retirement is almost unheard of. Let alone early retirement, the conventional form of retirement is rather not well established. Majority of the Indian household still feel that they will depend on their children on the elderly years. This is not the best way to plan retirement. There is a lack of skill or knowledge or more importantly temperament when it comes to investment, that retiring from working for money with the returns from investment taking care of the expenses is not easy to percieve. May be the fortunate few who where able to reap the benefits from the real estate boom could afford to think about retirement.

Typical Indian household savings are 77% into real estate and 15% into gold, and a measly 5% into financial instruments like Fixed Deposits, Stocks, Bonds , etc,. There are 2 important problems with this asset allocation:

• Real estate which constitutes 77% of an average household investment isn't liquid.
• Historically, stock market returns are better than any other investment that an Indian household makes.

On the first point; it is not easy to sell real estate at a time that the owner would like to. It takes a few months to may be even a year depending on the demand at the location and the price at which the seller wants to sells. Furthermore real estate in India and also Gold for that matter are bought with a chunk of black money contributing to the buying. This means people who earn income after TDS (Tax Deducted at Source) might not find it easy to digest the fact that he/she has to make a cash transaction to a huge amount to buy a house or a piece of land. How comforting is the thoght that your hard earned after tax income goes into the pocket of a land lord as black money?

On the second point, historically stock market (market index) has given higher returns than real estate and also makes substantial gains over inflation. With the average Indian household effectively ignoring the stock market returns, they are pitted against a high value, low liquid, highly corrupted, debt intensive real estate to commit their investment.

To buy a house or a land, one has to commit a huge sum of money either saved or through financing. On the other hand one can buy a stock for even 500 rupees. If instead of waiting to save a huge sum to buy a land or using debt to buy a land and effectively spending the rest of the earning life repaying the debt, it would be effective to invest the savings in stock market untill one builds a large sum which can then be used for buying house (if it is required) or can be used to retire early since the stock marker is liquid and one can expend out of it.

On the numbers and the strategy to retire early, we will see in the next post...