Genus 241-1502-002 November, 2011 BORIRESSSETIOOT Internal Version for BBS Used Only, AHM’s Market Leadership: Innovating to Stay No.1 “Wining about heart not just fogs. goto be inthe ight pace, Lane E. Armstrong. Seven consecutive winner af the Tour de France. ‘Year end in Indonesis wes usualy 2 period for celebration for Indonesia's largest motoreyce rmanufocturer, ste Honda Motor (AM). The fesve seasons of Cstnas and Leben Would ber ‘much sales, daring stocks of unit inventors io proftable margins, and postive eatements fm Investment snahsts. However, end of 2008 was unlke previous year ends. AHM hed lanched the ‘ew Sete In mid 2006, Vari, but vere stupging to maintain As sles that had to do something {rpcocedented nis 35 years story ~ prong cashback for Rs customer. In 8b to main MS ‘market dominance, I had forgave profit. ‘Several investment banks noted that is margin per unit proabity of previous yar’ average high (QOR:.0 to 18 milion) almost reached IDRIOO thousand. Being a major conibutor ofboth prot fand revenue tos co-paren Astra Intemational, isting such each back promo could generate hagatve impact on the cups overall francal performance. An extract of a CredkSuste analyst repor highlighted this ivestars cncor, ‘Asta Itematonas 2006 resuts were 9% below aur expectation and 169% balow the consensus, ragged by severe canpeton in fs motorajck sector. While we coud understand the ratinale behind Asta Honds Motor’ strategy to defend its market share, the impact on earings Was Sionian. The posthe nes. mas thet the Rpi.Onn cast E3ck (which al the prof) 18 being reduced recent.” (Wen, 20072) Predictably sales rose almost exponential, propeling AKM above its average SO% marketshare However, as soon 35 the promo wos sloped in Janary 2007, ts marketshare plummeted back to real" demand offs produc, fo around 439, The queston here f "what happened fo AH"? Is ths the signal ofthe end of sation dominance? What caused such drastic fal fom the top? How should AHM top management react to remedy the stunton? These questions wit be decussed ‘below, after we uncover the Indanesan meteroyee indus. Indonesian Motorcycle Industry Overview Tndonasi's motoreyle market was very huge. Despite strong 15% CAGR growth over the post decade and reaching sales of almost &m units n 2009 kil fered great growth potential de to low penetration rates. The market was dominsted by the cub and scooter segments, with the Scooter rmaret share ing to 29% In 2009 from ust en 2008, ‘AWM (Wonda) and Yamaha fed the dusty with combined market shares of over 90%. The ‘vali of cett and low ites rates remained essental for sucess ae 75% of motores Tndonesia were sld on ered (Webb, 2010)ening oy to Using the cuctent motor population of 35m units a a reference the country was now the third begest motorcycle maret In Asa(Dehnd Inia and Cra) and the highest in South East Al, Back 2000, Indonesa ronkad second, behind Thallan, wth Sm unt ‘The strong sales gronth over the past five years had resulted in matoreyce nation penetration rate to jump to 66:1 (one motorcyele for every 66 people om 145: just five Yeas ago. Some major urban markets had even seen a higher penevatin rate with Jakarta at 2:1 West Sava was reportedly ata simlar level and Bal t 41 With a growing economy and mile dass, Indonesia was well poled to continue to be ASEAN ‘major motorcycle market. Despite rapld penetration of rant over the past decade, many analysts believed thatthe motoreyle market stil ed atleast ancher 10 years of gronth fem the caren sk people for every motoreye pre to approaching market saturation cf 21. Subsequently ths Cole translate to& market pote af 8am units over 2010 to 2020 (Krsnawan, 2010). Despite some cca, the Indonesian automative maket enjoyed a fail consistent secular growth, marked by 2 rapid rise In penetration rte and sttong gronth in sale, Various divers ~ namely Improving income levels stable consumer cenfence end avstabiyof franca ~had sl boded wel for the private automotive market and is stitlon penetration rate despite avleble, pubic \eanspotation. As GDP per eapta saw a rapid gronth to US42,210 in 2009 (Iam US, 250 2004) and ov intrest rates supported thancing aval, more Indonesians were now opting for private vehicles (predominantly motoreydes) as the means of transportation. Indonesia's economy could be Seen to remain structural tact witha sustained supportive macrazcanamie environment witha low Interest rate paty and contised growth in came. ‘AHM's Product Transformation and Innovation Journey PT Astra Honda Motor (AM) vas established In 1971 at a motorcycle sle agent for Honda Original setup 25 PT Federal Motor (F¥), Ie started business launching the Honda 3C2 model, & 0cc motoryce. ith growing economic development, the demand for matreyl ose From @ sal Production run of 1,500 in 1971, quickly grew to reach 800,000 n 1997. Following the Asan ‘naeil ers of 1988 to 2000, sles dropped to 200,000, but quihyresounded In 2001 to reach 900,000 and eventually 26 millon by 2003. By 2010, ARMS producton capacky reached a staggering 35 milion units per year (AHH, 2011). & dominant player In growing market, AM contd to ‘raw proftaby. The Asan criss brought about a change In olmershipy one that was prevosly ‘major onned by PT Astra Intemtions, n need a funds to repay the pre’ nant obligations ‘twas then decided to ive the priscpa porner, Honda Motor Company of Japan to take SO% share ofthe frm. So bythe year 2000, ership of AHM was st 50‘30 between Honda Motor 2apan and Astra Iterator ‘A merger also occured as result ofthe crs, Alo in the year 2000, PT Federal Motor (FM) was Integrated with PT Honda Federal (HF). HF was established In 1373 as a esi pats menufacher tat supplied Federal Motor. In 1958, HF wes merged wth sister grup fhm, PT Honda Astra Engine Manufacturing (HAEM), self established in 1984, as 2 Honda motocyse manufac, al a suppl of FH, Hence tire diferent ets were integrated into one, forming AHM, In terms of geagratic scope, by 2006 AHM had established 7 (Seven) major pans in anc around Satara. These plants induded assembling and production ines, a tering centre, 2 cles ‘manufacturing unt, a parts cere and a test course (or potetype corel unis), the roses employing almost 15,00 personnal (2006 fours). As a motorcycle manufactrer, AHM predced ‘vee main groups of motorcycles namely: cu, sports and scooter. These were dsbuted via 2 ‘group of main dealers and thousands of dealers, Sreughout Indonesia. Coming back to the eis ered of 2007, what happend ten In March 2007, ater long being the largest motoreyle giant in Indonesia, ARM had to concede efest mn seling fewer motoreyces than its nearest Japanese rivl, PT Yamaha Motor Kencana. Troma soy Hol Indonesia (KD). Increasingly aggressive in market expansion, and having taken over the number ‘bo spot rom Suz Indonesia, YK was posed fer the number one spoT launched sleek, new rmotarjce models, targeting atthe male lw come segment. Suppated by song francng facies by Its parent company, Yamaha oto Japan, YMKL was abet fer buyers wit itso na ‘epost fnancing feces. Its depos equreant were as Ite es O10 5% ofthe total value ofthe purchased motorjle. This a sgicant gap when compared to AHMe 108 requirement, boc In 2006 ~ 2007 (Wara, 20076). By mid 2007, Yarahe manoged to bypass AH by 3 narrow margin Only capacty constraints prevented I from take further market share, a prolem which fe quelly recite, and pursued the top spot wih asingle minded foes. 1k managed to regain the top spot net teary and late 200, os we as early 2010 (8 Exhibit 5). ‘So how dt AHI manage to turn self around Inthe face of such aggresive competitor? This wae lntgaly due to a total revamp of AMM transformation strtesy. Leading in a Hypercompetitive market ‘Seeing alrm bell beng rung by investment analysts and instutional Investors, ABMS paren, FT ‘Astra Inematonal Tok took drastic decision to transform AHM by developing significant advanced nen models forthe market, In order to update its od and stad Isking product. Inthe ieeasingiy youth market, a new demand of Scooter prodits emerged, leading AKM to develop eight new models for the loel market: Revo in 2007; Bade, Beat and CSL in 2008; Hocoute Revo In 2009 05 wall a Scoopy and POX in 2010 (Keeswarto & Lasang, 20/09), These were ontop of a Tacs (oF wdting model, inthe sme pid ‘Wat happened in the ensuing period, was signifeant profitably performance (Kom a margin per unt perspective ~ soe Exhibit 8). AH took the Balanced strategy of dafencing adequate level of ‘meret share, but nt a the expense of promt. Comparing tots 2007 product pore to that fn 2010, AH had grown the number of scoters ond cub. ‘Also as part ofits transformation precess, tad decides ta transform and note, turing from a transporter toa dream maker. Popularly knw at AKM as tane-vatn, te conept refocused AMS prevus product excellence, to customer cen. Trying to find customers’ neds and adopt them Ino tuts designs of the products, ‘To do so, the management needed to get a buyin by the intemal stalaholdere. Falling Astro ‘groups Wining Tear-ianing Systemnning Concept princbes,AHM redefined tel tage (One Heart to achleve Our Dream (AKM, 2011. Its vision and mission were previously defined 25, ‘+ "Wision: Tobe the number one market civen trendsetter matorycte company in indent in terms of cost satiation trough empowered human capt outed by shared vals, ‘Mission: To provide mobiltywtich exaed cst expectation withthe best valve motors and 1s eed proces, end eripowered human captal or the benef of stakehoers.” (Bus Research, 2011) ‘Sch vison and mission were in need of en upgrade, Wt the product cent, focus, ANNs top "management updated thal sion and mission tobe a: fll, + "eww Vision. To tate 2 lead in Indonesian metoreyele market by making customers dream ‘come true, cresting joy to custores and canrbute to Indonesia sok) + Mew Passion. cresting moby soliton to sack) wth best products ard saves,” (at, 2018 -webste),