Japanese Bike Makers Hit the Wall in China

Industry icons like Yamaha can't find much traction with China's consumers, who prefer cheap, sometimes pirated, local brands. Time to look to the Indian market

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When it comes to China's explosively fast-growing passenger-car market, foreign brands rule. General Motors (GM), Ford (F), Volkswagen (VLK-Y), and Japanese auto makers such as Toyota (TM) and Nissan (NSANY) are all enjoying blistering growth and big market share gains on the mainland. Yet for China's massive motorcycle market, the biggest in the world, it is an entirely different story.

The Chinese buy some 16 million-plus bikes a year. And China's legion of bike manufacturers rule the market. That's largely because ferocious price-cutting has made life miserable for globally dominant players such as Honda Motor (HMC), Yamaha (YAMHF), and Suzuki.

You'd think this trio would clean up in China. After all, Honda, Yamaha, and Suzuki boast a strong lineup of street motorcycles, cruising bikes, and scooters, and controlled a little more than 50% of the total world production of 38.9 million units in 2005. And China's demand for all types of motorcycles is voracious. In major urban centers and rural areas on the mainland, motorcycles are a key way people get to work, and just get around.


  Japanese manufacturers have sizable local production networks, and high-end luxury bike producers such as BMW's motorcycle division and Harley-Davidson (HDI) continue to see big potential for their brands in China (see BusinessWeek.com, 3/29/06, "Hog Heaven in Beijing").

However, unlike the auto sector, where China brands are still developing, mainland motorcycles enjoy a huge and loyal following. Chinese players such as Guangzhou Motors, Zongshen Motorcycle, Shanghai Feiling Motorcycle, and scores of smaller bike makers control more than two-thirds of the domestic market. In the mass market segment for midsize street bikes Chinese rivals can undercut Japanese rivals, in some cases, by about 30% on price.

"The number one problem for Japanese motorcycle makers in China is that there are too many local makers who churn out cheap bikes, setting quality aside, and they sell well," says Noriyuki Matsushima, an analyst at Nikko Citi Securities in Tokyo.


  Another problem: blatant rip-offs of Japanese motorcycle designs by local manufacturers. At the start of the decade, about five out every six bikes with the Yamaha brand in China were actually fakes pumped out by unscrupulous Chinese manufacturers, according to Masayuki Hosokawa, the company's chief representative in Beijing.

The situation has improved, but some pirated Yamaha bikes are showing up in foreign markets outside of China, he said (see BusinessWeek.com, 2/7/05, "Yamaha Attempts to Brake Fakes"). Meanwhile, just competing on price with Chinese manufacturers in midrange motorcycles in the $600 to $1,000 price range remains a huge challenge, despite investments and manufacturing and marketing agreements on the mainland by both Honda and Yamaha.


  Since 1992, Honda, the world's biggest motorcycle maker globally, has been producing 100 cc to 125 cc motorcycles and scooters via a joint venture called Wuyang-Honda with Guangzhou Motors. The partners started producing at a new $50 million plant in the southern Chinese city of Guangzhou in February. Yet last year Honda, which enjoys a worldwide market share of about 30% in terms of units produced, only had a 6% piece of the Chinese market.

Yamaha has managed slightly less than 2% of the Chinese market, despite a global market share that is about 10%. The company has produced bikes locally with Jianshe Industries, and set up a jointly managed marketing company two years ago in Shanghai. Even so, it is still getting undercut heavily by rivals. Its YBR125 street bike—Yamaha's best-selling Chinese model, that costs between $830 and $1,000 and is sourced 90% locally—still costs about 30% more than comparable Chinese brands, laments Yamaha spokesman Takashi Mibu.

While both companies say they are in China for the long haul, they have started to divert some of their mainland production into other markets and are looking elsewhere for emerging market growth, namely India. And Yamaha exported 8,000 units of its 4-stroke motorcycle YBR125 to Europe from China in 2004. That number increased to a whopping 25,000 units in 2005. The model has been exported to Russia and Africa as well.


  Last December Yamaha opened up a motorcycle subsidiary in Surajpur outside New Delhi for sales and after-sales service, specializing in Yamaha brand motorcycles. And on June 26, Honda and India partner Hero group announced the sales launch of the Glamour F1, a 125cc bike with a Honda-designed fuel injection system. Honda and Hero produce about 3.4 million units at two plants in India, and plans are underway to build a third factory and expand production to 4.4 million units by 2007.

With the India motorcycle market expected to grow 17% to 8.5 million units in 2006, Japan's globally dominant bike manufacturers have reason to feel bullish. They have far greater pricing power there, and India has a far better track record when it comes to protecting intellectual property rights.

Prospects are also far better in other fast-growing locales such as Thailand, Indonesia, and Vietnam. Even though China dwarfs these rival markets in terms of scale, when it comes to a business environment for profitable growth, they're the future.