Rajiv Bajaj, joint managing director of Bajaj Auto (BAL), picks up the intercom, listens enthusiastically, and smiles. Seconds later, even before he puts the phone back into its cradle, he can't resist breaking the good news. "It was my head of R&D. His team has successfully mounted the Pulsar engine on the Eliminator," he says, still beaming. Rajiv was being invited to ride the new bike.

This development meant the price of the Eliminator could be slashed 33 per cent from Rs 90,000 to Rs 60,000. BAL's manufacturing had, yet again, delivered a cost-effective solution. The company could fortify its leadership in the premium segment of the market where its Pulsar is already the market leader.

Such manufacturing triumphs are commonplace at BAL these days, and Rajiv Bajaj, 38, loves to relish every moment of it. After all, he has longed for even the smallest bit of good news for nearly a decade, after joining BAL in 1989.

Though BAL lorded over India's two-wheeler industry for over three decades, its fortunes slipped faster than the speed at which the market shifted in favour of motorcycles. BAL, primarily a scooter manufacturer, struggled to keep pace right through the 1990s. Its motorcycle manufacturing cost was high, the quality too low. Its initial models failed to enthuse the consumer. The company faced an existential question.

That is, until Rajiv Bajaj - then general manager (products) - fought with his own senior management to sanction a brand new plant at Chakan, near Pune. He wanted to prove that quality manufacturing is possible in India. The first product of that endeavour, Pulsar, has become a Rs-1,200-crore brand since its launch in November 2001. With export revenues of Rs 550 crore, BAL is India's largest exporter of two-wheelers today. And in 2003-04, it made the maximum net profit among two-wheeler companies in India - Rs 738.39 crore as compared to Hero Honda's Rs 728.32 crore (though its revenues were Rs 1,000 crore lower than Hero Honda's). Excerpts from an exclusive interview with Rajiv Bajaj on BAL's manufacturing triumph:

• Motorcycle manufacturing was alien to Bajaj Auto. You were not seen as a serious player when you entered the market. What was your strategy?
  
  Our strategy was very clear. We had a big problem in Hero Honda in this market. Hero Honda virtually swamps everybody here. Even when I was studying, I remember professors saying that when you compete with Honda, it does not take away sales from you. It takes away profits from you. I found this was very true. So we decided at that time that if we have to fight this battle with Honda, especially Hero Honda, then we must secure our profitability.
  
  We did two-three things at that time. First, not to take on Honda directly in the executive segment. We created a segment below Honda that was Boxer; then one above it which was Pulsar. Boxer being the entry segment didn't make much money but Pulsar became a very profitable product. The second was focus on three-wheelers because that was very profitable; so we introduced the CNG and four-stroke products. And the third was exports because we found that we must stop Hero Honda. We knew Honda itself is coming with motorcycles. They were unlikely to give a very good high-end motorcycle to Hero Honda. Three-wheelers -- they don't do; and hopefully will not do. And in exports, Honda has its own markets so Hero Honda's exports will always be very limited.
  
  
• What were the problems in manufacturing at Bajaj?
  Kawasaki had already given us a good bike, and we had already botched it up. So even if we had managed to get Kawasaki to put together half a dozen new good products, we would have, in all probability, botched it up all over again.
  
  We understood that a two-wheeler is a two-wheeler is not correct. Just because we made a 1960s' product well doesn't mean that we'll carry over the same skills in product design and engineering. This was an intellectual problem. This was a knowledge problem. At the senior level, we did not have the knowledge to guide. That was a very humbling experience. That's when a lot of senior-level people were changed. Because they wouldn't accept that the problem was with them; the problem was always "with the worker" or "the machinery" or "the staff". The second problem was, and which also took a long time, was that our vendors who were a reflection of us had always supplied components for scooters or three-wheelers. They had no idea of how to supply components for motorcycles, which were deceptively more sophisticated. We spent a lot of time sharing the knowledge that we had, and getting experts who could help them with processes.
  
  
• You overhauled the whole supplier base.
  The entire supplier chain. We had, at that time, 855 suppliers. We are less than 200 now. About 150 out of these 200 are new. In those days, we bought a front fork for Rs 2,400. Today, we buy a much superior front fork for Rs 1,400 from our own supplier that we created with an Italian manufacturer. It's better quality and Rs 1,000 less per motorcycle.
  
  
• The people changes you made were from the level of vice-presidents and above.
  Yes. Almost everybody. I couldn't sack my father. But mostly, everybody else.
  
  
• How much support did you get from him, somebody who had been managing the company for so long?
  I think he was very brave about it. It's easy for him and me to talk about this now because we have done a lot of work. But at that time he didn't know what to do. He knew it was the right thing to do but he didn't know whether it was the most important thing to do. But the results that came more or less convinced him.
  
  
• How difficult was it for him to let go?
  The difficulty was not that he didn't let go. The difficulty was that people were not convinced that we needed to do things differently. We tried to overcome this with the Chakan plant and Pulsar. That proved the point.
  
  
• What was the first new product out of Chakan?
  It was the Pulsar.
  
  
• Chakan was really the manufacturing turnaround for Bajaj Auto?
  The Pulsar was developed by a totally different team, which is now our R&D team. We used to have product engineering. There also, there was an old mindset. I wanted to develop products... and make them in a different way.
  
  
• How was the Pulsar developed and manufactured differently?
  Let's say a two-wheeler has 2,000 components. A component is nothing but a material which undergoes a process. The average component will have at least 10 processes. Each process goes through a machine, and each machine has at least 10 elements to it. There are motors, fixtures, tools, oil, etc. So when you think of it there are 200,000 processes to get a vehicle right. So in manufacturing -- what's called the Failure Mode Effect Analysis -- there are 200,000 opportunities to make a mistake. In smart manufacturing systems, whenever you look at a new product you have to look at 200,000 points where things can go wrong. What can be done to prevent it from going wrong, and if it does go wrong what can be done to detect it and not passed on down the line. This is a tricky process and very expensive.
  
  
• How do you quantify the benefits?
  Bajaj Auto's peak capacity was in 1993. We produced 9 lakh vehicles with 23,000 people. Today we are down to 11,500, and a VRS is still to happen which will reduce more people. We are on our way to producing 3 million vehicles with less than 10,000 people. So productivity gains are of that scale. Less than half the people and three times the output, and it's still not the end of the road.
  
  
• Your targeted production capacity is 3 million...
  The capacity is 3 million. In a year or two we will realise the 3-million capacity fully. That's almost 10 times productivity gains. Unfortunately, we already have the 10,000 people. Out of the benefits, I suspect, about a third to 40 per cent comes from outsourcing. So, the rest is from shop-floor productivity. At least 50 per cent has come from shop-floor productivity. Product design has played a very small part. So the potential was so large that it was very easy to get benefits. The important thing that happened at that time was not so much the benefit itself but the very fact that a new initiative was there in the company, out of the ordinary, that turned people on. And secondly, all the improvement was done by people from within the company. That was very motivating for the company.
  
  The motorcycle division here (Akurdi, on the outskirts of Pune) here was shut down. Which is being razed to the ground today, and R&D is coming up. So we released probably hundreds of crores worth of space, a few hundred crores of equipment.
  
  We did this for about four to five years. We realised that we were getting very efficient at making products that people didn't want. So we said that's fantastic, the manufacturing engineers have done a very good job. But who wants to buy that stuff?
  
  Then came the second phase (of) manufacturing as related to product. We went into a series of new products around 1995, and started focusing on motorcycles. And we were aghast because the only reasonably sophisticated product we were making was the Kawasaki four-stroke motorcycle. And the warranty cost of our motorcycle was five to six times that of Hero Honda. It was bad quality... bad quality of manufacturing. There was great cynicism whether something was wrong with Kawasaki or with Bajaj. Kawasaki couldn't have gone wrong in that. We were sure that the same motorcycle made by Kawasaki in Japan would not have had these problems. There was probably something wrong with us.
  
  
• All this was at Chakan. What does the Akurdi plant do?
  We are sucking our thumbs. This is basically a scooter plant, which means it doesn't do anything these days. We used to make a lot of scooters at one time. The new generation scooters will come here one by one. We have just introduced the new generation Chetak four-stroke here. Let's see whether this plant is willing to change.
  
  
• Is there a labour issue?
  More managers than the labour. It's entirely the mindset. There was a big argument about why we should set up another plant at Chakan when we already had two plants (Akurdi and Aurangabad). The argument was that Chakan would be a new plant, new land, new building, new utilities, infrastructure. It was additional cost.
  
  But I was convinced because each time I tried to push a radical idea, I always got the answer directly or indirectly -- that it's OK in Japan. It doesn't happen in India. So I was desperate to prove that it happens in India. I wanted a plant where we start the right way from day one. That's how Chakan started five years back.
  
  
• How long would it have taken to reach the quality levels in your older plants?
  The quality levels that Chakan achieved in six months' time were achieved by the Aurangabad plant after about 12 years.
  
  
• And Akurdi?
  This one is still not there. Out of the 800 people at Chakan, 750 or 770 were fresh out of MTI -- they just had a clean slate, an open mind and were committed to do well -- and about 30 of our experienced people who I put there with these young management trainees. Here (Akurdi), we have people with a hell of a lot of experience but we've not been able to do this. There is no doubt that this is a mindset issue.
  
  
• How useful is the common platform strategy in manufacturing bikes?
  Today, for instance, our Eliminator engine is largely imported. The price of the bike is Rs 90,000. The Pulsar engine is actually better than the Eliminator engine. So we have just mounted a Pulsar engine on the Eliminator. The minute we do that, besides superior performance, the price of the bike will come down to Rs 60,000.
  
  
• How much of the common platform is made up of common parts?
  At least 50-60 per cent of parts should be common. The platform is not only important from the product-development point but also from that of the component development so that component volumes are large enough.
  
  
• How did you make a bike that wouldn't let Honda take away profits?
  Even before we worked on Chakan and Pulsar, we sat and worked on the Boxer. The biggest problem at that time was the quality. Even in 1995 we could have dropped the price of the bike but we knew it would be suicidal because the quality was bad. If we had started putting 60,000 of a bad product on the roads, in six months the factory would have shut down. For that, whether it was getting suppliers in India or abroad, we corrected the quality issue and made ourselves worthy of producing a bike.
  
  Once we were convinced that quality was good, we had to make people understand that Bajaj Auto also makes good bikes. The best way to do that was to put bikes on the road. And the fastest way to do that was to have the best price. So we launched a new brand called Boxer
  
  
• What was the best price of a bike then?
  Hero Honda was selling its bike for an average of Rs 40,000. Boxer was a good Rs 7,000 to Rs 8,000 lower. The day we put that price, we were losing money because our cost structure was still not in place. But by then we had made a systematic estimate. We knew what we could change in design. These changes contributed about Rs 1,000 a bike. The second was imported components. For instance, localising the carburetor itself saved us a huge amount. The third area of savings was within the plant. The fourth was the savings through quality. For instance, when I said the warranty cost was five to six times that of Hero Honda's, it was Rs 600 per bike. Today it's only Rs 50. But in 1997 we had already got it down to Rs 200. This was very satisfying because one of the things we were always taught as part of good manufacturing was simply that good quality costs less.
  
  
• What was the cost reduction target on Boxer?
  The target was Rs 4,000 a bike. When we talked about it, nobody believed. In this very room, everybody said Bajaj Auto is the lowest cost producer in the world and our suppliers are the lowest cost ones. So, what are you talking about? I had seen this mentality a lot, with respect to scooters -- that people used to save 50 paise a scooter, and be thrilled because it meant Rs 4 lakh a year in savings. So they were not willing to understand Rs 4,000. I have had very senior people sit in this very room and say: "on a million motorcycles, that's Rs 400 crore". And I have had to tell them that that's the only money we're going to make. If we don't save, then we're not going to make any money. At last count, we had already saved Rs 5,500 a bike.
  
  
• Is Boxer the lowest cost bike in the world?
  The way it is headed, yes. We have already planned another Rs-2,000 cost cut. And who knows... in another 18 months, I think there would be no reason to say that somebody else is more cost competitive.
  
  
• If you were to go into a cost-reduction drive on a Pulsar tomorrow, will these learnings get implemented faster?
  Definitely. We have now made this motorcycle K-60 (with Kawasaki), which we launch next month. We are now the leaders in the premium segment and the entry level. In the executive level we were nowhere. So we have put this bike there. With all the experience of Boxer and Pulsar, we have designed and made this bike at the same cost structure as the 100cc bike executive class bike. All that learning has gone into this bike so that from the start we can provide fantastic styling and performance, but at a cost structure that will really move the market.
  
  
• What are the margins like for you? Give us a range between the Boxer and the Pulsar.
  Obviously, we don't want the competition to know those figures. What's happened is that when we introduced the Boxer in 1997-98, it was the first time that somebody had introduced a modern four-stroke motorcycle at that price. The reason we got through was only because the competition believed that that price was not viable. At that time, we were number four. If any of the big three -- Honda, Yamaha and Suzuki -- had thought that potentially what Bajaj Auto is doing is fortifying or preparing for the future, we would have been dead ducks. It is the scepticism, cynicism or perhaps the sheer ignorance or overconfidence of competition which gave us time. And before they knew it, Boxer was a 60,000-a-month brand. And then you can't dethrone it.
  
  
• How's Pulsar doing now?
  Pulsar averages about 3 lakh units a year. At an average price of Rs 40,000, it's an over Rs-1,000 crore brand.
  
  

• "When you compete with Honda, it does not take away sales from you It takes away profits... “

  How did you gear up R&D to compete with a Honda or a Yamaha?
  Before defining the answer, it's more important to define the problem. The question is: what is R&D? It's nothing but an engineer who wants to try something. We always tell ourselves that some of the best motorcycles were made by BMW and Honda long before the computers were invented. It's really the spirit of the engineer which is important for R&D.
  
  The problem with Bajaj was that we were so successful with autorickshaws that all that mattered was production. Manufacturing was the overall priority at a time when there was a 10-year waiting list. But there wasn't any focus in the organisation to build a company where people with an open mind would try new things. That's what we have done.
  
  When I walked into the Kawasaki R&D for the first time, I thought I would see a lot of old grey-haired people with thick glasses. The average age there is 26 or 27. The engineer does not require experience. You need people with imagination. Our R&D today is 113 people. The average age there is under 30.
  
  
• How does this translate into the product?
  Before Pulsar, people used to tell us you are a scooter, three-wheeler company -- you can't make bikes. Even if you make bikes, you can only make 100cc bikes with the help of Kawasaki. That too with issues of quality. Then you need hundreds of Japanese to come and set it right. That was one side of the argument.
  
  Now we were telling our people that there are 15 guys who have never made a bike but are going to come together to do that. They are going to do that on their own, and not with Kawasaki. They are going to do a 200cc bike when we couldn't make a 100cc one. They are going to make the fastest motorcycle when we couldn't make a mass motorcycle. And they are going to make a huge amount of profit when we were making a loss. This seemed like nonsense. But they proved it wrong.
  
  The number of mistakes we have made in the Pulsar engine before we got it right is really the learning. One of the endurance tests we have is to take the engine full throttle. Now, full throttle on a bike is rare on the road. Our target was: full throttle for 100 hours continuously. The first time, it failed within 10 minutes. Today, the Pulsar engine goes 300 hours full throttle.
  
  
• When do you see Bajaj Auto as a multinational bike manufacturer as compared to a bike manufacturer who is exporting?
  Today, it's well understood that the only definition of a global manufacturer is the manufacturer that competes in a global marketplace. It doesn't matter where he buys from. It doesn't matter where you manufacture or where your head office is.
  
  As part of our global strategy, the first three areas we that will focus on represent about 30 million of the 33 million global market of two-wheelers.
  
  
• Is it possible to be a global player in motorcycles and still manufacture them only in India? You will be the first one to do that.
  Sure, that's how it is today. I don't need to manufacture everywhere. I'm 100 per cent sure about that. Look at the Nokia phones. People who have already invested in 50 factories around the world, it's difficult for them to withdraw. That's why sometimes it's a disadvantage for them because they are close to the market and yet cheaper production is coming out of India. Today, Honda has started exporting to Italy from India. Eventually, what will happen to the Honda factory in Europe? For a long time to come, it's going to be an advantage for us. The quality and capability of automotive component making in India is fantastic. So component base has a lot to do with this.
  
  
• What is Bajaj Auto's global gameplan?
  We are operating in the Indian market of 5 million vehicles, which is in a global market of 30 million vehicles. Today we have technology, quality and capability which are relevant to the entire 30 million. By pure arithmetic I can say that if in a 5-million market we can sell 1.5 million. In a 30-million market we should sell 9 million. Obviously, the world is not so simple. But the potential for Bajaj Auto is at least 5 times what it is today. Whether it is able to harness the potential is up to us. The opportunity is there.
  
  
• What does it take to break into the big league globally?
  We can divide the overseas market into four types of market by the nature of the business. The first is the markets of West Asia and Africa. If you start from Bangladesh and keep going west -- that's our first market. Last year our exports were Rs 550 crore. Obviously, we've done very well in the last three years. That's why a lot of people think that we are doing a lot of work in these markets.
  
  But exports were originally borne out of the need to support our domestic volumes. Now, to increase exports we have to go to those markets that are similar to our markets so that our products get instant acceptance. We found that Bangladesh, Sri Lanka, Afghanistan, Iran, Egypt were exactly like India. So if we send our products they would sell. All we did was send a few contingents out to touch base with people, study the market and come back. We were very confident of our product. The exports just grew.
  
  Even for the next two-three years my own focus is to keep this focus squarely on this area because this seems to be the future of two-wheelers. Nigeria, for instance, is already a 1-million units market. The Japanese are outpriced in that market. It's too late for them to go into that market. The Chinese are already there but fortunately we have a quality advantage. So Bajaj can really be the Honda of Africa. This is the right time for us to do this. Because in another two years it will be too late.
  
  So this is our first set of markets. The second market is the Latin America and the Brazil market. There the strategy has to be different. First, because their products are different. Then there's a huge Japanese presence there. There's no way a Bajaj Auto can just go and start selling well over there. Our attitude for the next five years is that we are just going to enjoy our presence in the first market. But this is the time we'll spend preparing for the next market.
  
  The third is the Chinese market. We are waiting for that market to sort itself out and become a little more transparent. We're in no hurry. There are issues there like procurement of quality products. I think it's a question of prioritising. We have to pace ourselves. Finally we have to go to the developed countries, for which we need a different kind of product range. Our R&D is already working on those products.
  
  
• How big?
  Pretty big
  
  
• 500cc or so?
  Thereabouts. In about three-five years we should have those ready. But we have to pace ourselves. The Chinese market, for instance, we are just beginning to understand it. We are going to source a couple of components.
  
  
• So your next bike will be a 500-600cc bike?
  Our products today are up to 250cc. There is a gap today between 250- and 500cc. That's the natural gap to fill first.
  
  
• What opportunities do you see in markets like Brazil where Honda is predominant?
  Their 125cc product there is fairly modern. At least, in terms of outward appearance. Their engines are not the latest. But we can see very obvious gaps in their portfolio, which always happens when you have one player with over 80 per cent of the market. We can get in very nicely in those gaps.
  
  
• How will you tackle the largely step-thru market of the Asean countries?
  I don't believe in step-thrus. That's part of our product theme. There are a lot of step-thrus in the Asean countries. And people feel that the only way to compete there is through step-thrus. I think that's a mistake.
  
  We have a concept, which we are developing for the Asean market. The problem is that the motorcycle is much more expensive (there). I have to appeal to a step-thru customer without offering a step-thru. That is the challenge. We are working on it. We will have a very good technology to overcome this, but it takes about two to three years to make a good quality new product.
  
  
• Where else do you see yourself at an advantage?
  Strategically, we are in a very good position. Today, our competition is really the Japanese because the European or the US competitors are either wiped out or are outpriced. Among the Japanese, Honda is pre-occupied with cars now, which is 90 per cent of their business because the global position of four-wheelers is such that they have to focus enormously on that, especially with Toyota becoming so big. Yamaha is looking very unsteady. Suzuki is also caught up with the small car but they are trying to come back. So I see a scenario where the competition also has other priorities. The other are the Chinese who are very good at cost but not so good at quality and technology. I like to always say that we have the opportunity to deliver the Japanese quality at the Chinese price. Such an opportunity doesn't come often. Ten years from now the Chinese would have taken it over. This is a good opportunity and a very good time to push forward.