Yamaha’s Dirt Cheap Bike Just the Beginning of its Changes

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Yamaha (NASDAQOTH:YAMCY) has begun work on the world’s cheapest motorcycle in India. The bikes will be priced at $500 US dollars. There has not been any launch date set as of yet. Yamaha’s new facility, Motor Research and Development India Pvt. Ltd (YMRI) established in Surajpur in Uttar Pradesh in February this year is working to its full capacity in order to manufacture the bike to be launched first in India.

Yamaha, which has been focusing on sports bikes in recent years, has stated that the bike will also be available in other countries with low cost manufacturing like China, Latin America, India as well as Africa. The 100cc bike is a significant step down the price ladder over current offerings as Yamaha begins to get serious about taking market share from Honda (NYSE:HMC). It will be manufactured in India for distribution worldwide, according to Chief Executive of India Yamaha Motor, Hiroyuki Suzuki.

The new $500 bike from Yamaha will set a price competition start amongst the two-wheeler giants. The company is trying to expand its footing in the market by offering the low cost bikes to the commuters in India. While some analyst holds that it is a marketing strategy, others see it as a step forward for low cost goods.

While China has certainly been on the radar for volume sales of cheap electric 2 wheelers, Senior Yamaha Research and Development Manager, Toshikazu Kobayashi, holds the view that Yamaha is developing the cheap bike aimed squarely at Indian and overseas customers. Yamaha had a choice of where to put this facility and with Sino/Chinese relations turning very cold in the past year, putting it in India and re-tuning its product line for non-Chinese markets makes a lot of sense.

Japanese producers have been taking market share from domestics like Bajaj and Hero Moto over the past five years with the top three Japanese manufactures now holding 25% of the market, up from 15% just 5 years ago. Honda leads with the lion’s share (19%) and that is Yamaha’s target with this bike. Yamaha and Suzuki split the remaining ~6% of Indian sales. At present Yamaha, produces 400,000 Indian units annually and targeting one million units by the end of 2014. With the much cheaper Yen domestic production can now focus on being price competitive in Southeast Asia as well as the U.S. and Mexico.

Along with bikes, Yamaha is also planning to launch a scooter in India. The company is planning to establish a second R&D center in its Chennai facility by 2015. The company is putting $279 million into the new facility. The plant will have a capacity of 11.8 million units by 2018. Simply put, with these two changes, Yamaha is planning to make India a global hub for development of low cost bikes for exportation around the world.

The $500 bike could be a winner since 65% of the two-wheeled market is owned by sub-$900 vehicles. Honda, however, a leader at selling cheap bikes in markets like China and Vietnam, does not have any such bike in India, further underscoring Honda’s strong brand image as a carryover from its automobile sales.

Furthermore, Kobayashi has too intensifying competition in developing markets. The cheapest motorcycle available from Yamaha in China is priced at $700, which Honda undercuts by nearly $100. In India, its 110 cc Yamaha Crux is priced at Rs38,000 ($706 US).

Setting up in India is a major cost savings in so many ways. The weak Rupee (NYSEMKT: ICN), like the weak Vietnamese Dong keeps the currency arbitrage over the weakened Yen (NYSEMKT: FXY)to a minimum. As we get closer to India’s elections in 2014 the age of the weakened Rupee due to government vote-buying will subside and the Yen will likely depreciate further, making this move even stronger for Yamaha in the long run. Strong domestic sales in a relatively stronger Rupee while still manufacturing in what is a relatively weak currency on the global market should maximize Yamaha’s investment return.

Moreover, India is simply a lot cheaper, safe and closer to intended growth markets than Japan or any of the ASEAN countries. I like this move by Yamaha especially in light of the liberalization of fuel prices around Asia which will shift the balance of transportation growth away from automobiles and back towards two-wheelers as diesel and petrol prices will necessarily rise relative to the market price of oil.

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