Will Bajaj and KTM merge?
Added on Monday, February 15th, 2010 by Carole Nash Editor | No Comments
Will Bajaj and KTM merge?
Could Bajaj Auto of India mount a takeover of KTM motorcycles, based in Austria? Alastair Walker analyses the facts behind the rumours that surround the two manufacturers.
Reports in the Indian financial press recently indicated that Bajaj Auto was likely to increase its holdings in KTM to 51%, or even 90%. A rapid denial was issued by KTM just a few days after the story broke last week, but the intriguing possibility that a European bike-maker and an Indian motorcycle company may merge is still there.
At present, Bajaj Auto has a 30% shareholding in KTM, which according to its latest financial figures is making a profit once again, having slipped into the red in 2008. The 2009 figures showed that although KTM had sold 16% fewer bikes, drastic cost-cutting had returned a profit of 3.6million euros. Motorcycle sales fell by around 15% in 2009 – that harsh fact is more salient than any cost saving programme, because KTM, like all European based manufacturers is struggling to sell product to an ageing consumer base and an economic downturn which is likely to persists for another three or four years.
That profit made by KTM in 2009 is tiny in the greater scheme of things and KTM obviously needs cash – quickly. A rights issue was announced on February 4th 2010, which will see another 2.5 million shares offered to the public and large investment banks. KTM, like many other companies needs to restructure its debt, and the creation of more shares is part of that process. Interestingly, although a board meeting is scheduled for 26th Feb to approve the rights issue, both Rajiv Bajaj and Stefan Pierer, who are CEOs of their respective companies, bought substantial shares in KTM Power Sports in early February.
Bajaj, like all Indian manufacturers is rolling in cash and the reason for that is simple; there is no recession in India. People are buying lots of motorcycles – Bajaj sold 71,000 Pulsar 135 models in January alone across India and their sales rose by 112% last month.
The motorcycle market in India is huge; some 7.4 million new motorcycles and scooters were bought in 2009, with a huge economic boom fuelling demand for transport. Motorcycle and scooter sales rose by 80% in the last six months of 2009 across India and local business press reports predict that the market will reach around 11 million units in 2013. Indian manufacturers are also looking to sell their products in other Asian countries as they expand their production. The Indian market is led by Hero Honda, but Bajaj have made formal partnership deals with both KTM and Kawasaki recently, as they try to catch Hero Honda.
The deal with Kawasaki is to import the Ninja 250 to the Indian market, probably in kit form, as that will get around the high import tariffs that the Indian government uses to keep out foreign competition, and therefore protect local production. The Ninja will be a luxury purchase in India, bought by middle and upper class riders who can afford it, likewise the KTM Stunt 125 which Bajaj will make under licence at Pune, will also be a `high-end’ machine. But the Brembo brakes, Marchesini wheels and WP suspension seen on the KTM concept 125 at Milan, will almost certainly be replaced with cheaper components for the Bajaj version.
A MERGER IS LIKELY, EVENTUALLY
If you look at the upside for Bajaj in keeping just a 30% stake in KTM, you wonder why they would want to take over KTM completely. As minority partners, Bajaj still get access to Europe’s commuter market via the KTM dealership network, and logistics support on bikes and spares from KTM. They get to sell high quality KTM machines across India and the chance to see an EU design team working on new model development – a complex and highly bureaucratic process. Bajaj also have a financial services arm, so they can offer a loan, plus insurance on KTM bikes to wealthier riders in India. Good quality, dependable credit customers are hard to find in the world of motorcycling, winning that revenue is important for Bajaj.
By not taking a controlling stake in KTM, Bajaj have some ace cards ; there is no downside in EU pensions liabilities, high wages, redundancy payouts, or meeting expensive EU health and safety rules in the assembly of motorcycles. But Bajaj also know that in global terms they are still nowhere near the level of the Japanese companies, or even Harley-Davidson, who have a precious thing called brand heritage – people pay lots of money to own the badge basically. For Bajaj to expand it needs KTM’s global network, its gilt-edged off-road reputation, and the price premium that an association with KTM brings.
In the short term Bajaj can keep KTM at a slight distance, and gamble that if KTM gets into trouble again the Austrian government will save the factory for political reasons. But in the long run Bajaj must find a way of capitalising on the sudden Indian sales boom, and then investing the profits in becoming a truly global player. It cannot take over Kawasaki, or ailing Yamaha, but minnows like KTM, Ducati and even Triumph are all vulnerable as Indian and Chinese bike-makers expand over the next five years.
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