Royal Enfield, an English motorcycle is the world's oldest surviving motorcycle brand. More than 100-year-old brand has been in India since 1949. In late 1990 the kingdom of Royal Enfield was suffering a loss of Rs. 20 crore and was on the verge of shut down.
Despite the odds, after the collaboration with Eicher Motors, Royal Enfield has still been in production. The way the brand's fortunes changed is an amazing example of brand management, brilliant product planning, excellent marketing techniques along with great management strategies.
The stock had multiplied 1000 times by 2018. So what led to this kind of return?
History of Eicher Motors and Enfield Motorcycles
In post-independence, Eicher was involved in the import and sale of tractors in India. In the later periods, Eicher did start the production and sale of tractors and trucks within India. However, Eicher was never able to become the market leader in any of the segments it operated.
It was in 1995 when Eicher decided to acquire Enfield Motorcycles which had a rich heritage but weak financials, the future, and fortune of Eicher completely changed.
Enfield Motorcycles began selling motorcycles in the Indian market in 1949 as a strategic step towards worldwide growth. The Royal Enfield bikes were deemed an appropriate choice for the Indian army's border patrol, and as a response, the Indian government placed an order for 800 350-cc Royal Enfield motorcycles.
But Enfield Motorcycles could not sustain itself on its own in India. As a result, Royal Enfield began working with the Eicher Group in 1990 and merged with it in 1994.
Royal Enfield has always had a loyal following, but it was not profitable for Eicher. Royal Enfield was a losing venture, and Eicher’s management considered closing down and liquidating the motorbike division a few years after acquiring it.
The Great Turnaround for Eicher Motors
The entry of the third-generation heir, Siddhartha Lal to the Eicher company had a huge positive impact on the future business of the company. Siddhartha Lal was only 26 years old when he became CEO of Royal Enfield in 2000. He deserves credit for both developing a great bike and creating a huge profit for stockholders.
The Eicher group comprised around 15 enterprises, including motorcycles, trucks, tractors, footwear, components, and clothing but none of them were market leaders. Siddhartha Lal made a comparative review of all the businesses under the Eicher brand and made a tough decision. In 2006, he chose to liquidate 13 businesses and devote all of his resources and attention to Royal Enfield motorcycles and trucks, two businesses in which he thought the firm had a genuine chance of becoming market leaders. He focused on being the market leader in 2 businesses rather than being a mediocre player in 15 different businesses.
Sales of the bike and trucks had remained stagnant and the Royal Enfield motorcycles used to run on outdated tech and broke down often, which prevented Enfield from becoming the market leader.
In 2010 Eicher worked on all its weak areas and introduced the Royal Enfield Classic. The classic motorcycle was a turning point for the company. It kept the appearance and feel of previous generations of motorcycles while incorporating modern technology, engine, and better gearbox. By the end of 2010, the company had sold 50,000 bikes.
Eicher Motors split off its truck division into a separate company. They created VECV Ltd (Volvo Eicher Commercial Vehicles), a joint venture with Volvo. Volvo provided manufacturing experience, while Eicher provided distribution experience. In the fiscal year 2018, VECV contributed around 250 crores in profits.
By 2018, Eicher Motors was soaring high with great returns for its shareholders. In 2018, revenues increased to 9000 crores, while profits more than tripled to 2000 crores. It is one of the best turnaround business case studies of the decade.
What happened to Eicher Motors post-2018?
Since 2018 the growth of the company has not been great. In 18-19, they sold just 8.22 lakh motorcycles which is a very small improvement from the previous year's sales. In 19-20, they sold 6.9 lakh motorcycles which were a shocking de-growth for the first time in many years.
New product releases may not always imply increased growth. Both revenues and profits took a hit.
After the successful launch of the Royal Enfield Classic in 2010, they launched Continental GT, a racer bike. After the initial excitement surrounding the launch, sales started declining. It then launched the Himalayan, an adventure motorcycle. It failed to meet sales estimates due to quality concerns.
Eicher also launched a Personal Utility Vehicle called Multix. However, after the initial excitement wore off and due to poor performance, they decided to discontinue the operations. The initial cost of the set up was 50 Crores but it resulted in a loss of 312 crores.
When compared to total revenues, the company's export numbers are low. The most significant barrier is the lack of quality. Despite recent advances in engine technology, Enfield's are still prone to breakdowns. Quality concerns will upset the global customers, and this might lead to a negative impact on the company.
Shareholders voted against the pay hike of Siddhartha Lal
In FY21, Lal's compensation of 21.13 crore is 340 times the median employee salary. It increased at a compounded annual growth rate of 28% during the last three years, but the company's operating profit and net profit fell by 14% and 8%, respectively, over the same period.
Future of Eicher Motors
Eicher is a financial giant. It is debt-free and has enough cash to survive any short-term financial storms. It has impressive figures on its balance sheet and income statement. The majority of its financial ratios serve as a model for other manufacturers. The management is excellent, with Siddhartha Lal always striving to do his best for the firm.
If Eicher figures out a way to accelerate its growth, shareholders could see their wealth increase by multiple times. Eicher is preparing a new full-fledged plan for better sales in global markets. They are also preparing to introduce a whole new range of bikes built particularly to compete with Harley Davidson and Triumph.
Ending Note
The story of Eicher explains to us how the business can perform when it concentrates on its area of expertise and how important is the management’s role for the success of the business. It also helps us understand that introduction of new products does not mean higher growth.
The shareholders are also not letting the companies pass the resolution easily. The first incidence of pay to the MD being voted down by shareholders occurred in 2014 when Tata Motors’ salary proposal to its managing director was rejected by shareholders. Since then, the shareholders are also very careful before voting for the resolutions.
Eicher Motors has a great future if it concentrates on the betterment of the product and more global sales.
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