The Rule of Three will edge out either Bajaj Auto or TVS Motor in 2-wheelers

Three’s a crowd, runs a popular adage. In business, more than three is what makes a crowd. Or so said B-school professors Jagdish Sheth and Rajendra Sisodia in their book The Rule of Three: Surviving and Thriving in Competitive Markets.

Simply stated, Sheth, who is Charles H. Kellstadt Professor of Marketing at Emory’s Goizueta Business School, posits that in any competitive market which has no major entry or exit barriers, there can be only three major (non-specialist) competitive players. The rest have to be small-time specialists or niche players.

The Indian two-wheeler market is now coming to the point where the Rule of Three will soon start applying. It is very clear who the top two will be in the foreseeable future - Hero Motocorp, the market leader with a 41.3 percent market share in 2013-14, and Honda Motor, with 24 percent. (See market share data in this Financial Express graph here )

Jostling for the third slot are Bajaj Auto (14.2 percent) and TVS Motor (11.8 percent). In the first quarter of this year (April-June 2014), they exchanged places and the gap between them got narrower: TVS got 12.7 percent and Bajaj Auto 11.7 percent market share. Both Hero and Honda gained shares in the quarter, with 41.8 percent and 25.1 percent. The Rule of Three is about to start squeezing out the fourth.

Writing in the Ivey Business Journal , Sheth and Sisodia note that “in competitive, mature markets, there is only room for three full-line generalists, along with several (in some markets, numerous) product or market specialists. Together, the three “inner circle” competitors typically control, in varying proportions, between 70 percent and 90 percent of the market. To be viable as volume-driven players, companies must have a critical-mass market share of at least 10 percent.”

In the Indian two-wheeler market, Hero, Honda and TVS Motors are full-line producers, making both motorbikes and scooters. Bajaj Auto makes mobikes and three-wheelers, which are a completely different market. In effect, Bajaj Auto makes only one product in two-wheelers - with power as its brand value.

Between them, Hero and Honda take up nearly 67 percent of the market, while both TVS and Bajaj are close to the minimum 10 percent mark each. Smaller players like Vespa, Yamaha and Suzuki are edging up in the specialist space of the market - accounting for around eight percent of the remaining market.

In 2013-14, Hero sold 6.1 million two-wheelers, Honda 3.6 million, Bajaj 2.1 million and TVS 1.75 million. In the first quarter, Hero sold 2.2 million, Honda 1.32 million, TVS 6.66 lakh, and Bajaj 6.16 lakh two-wheelers.

Given Honda’s ambition to become No 1 in India , and given Hero’s equal determination to remain No 1, it is a fair bet that their market rivalry will expand both their market shares at the cost of No 3 and No 4. This means either Bajaj Auto or TVS Motor will, at some point, start losing steam.

Not surprisingly, a similar battle is hotting up for the No 3 and No 4 slots. As No 4, TVS was happy to move temporarily to No 3 in the first quarter. It is conscious of the need to stay in the race. In an interview to Business Standard , TVS Motor Chairman and Managing Director Venu Srinivasan admitted that he was aiming “to be among the top three in the next three years.”

Unlike TVS, which makes both scooters and bikes and is thus a “generalist” by Sheth and Sisodia’s definition, Bajaj Auto believes its future is in being a differentiated, specialist motorbike maker. This week Rajiv Bajaj, the Managing Director, launched a powerful commuter bike, the Discover 150, in the hope of gaining market share.

Speaking on the occasion, he confirmed his preference for remaining a specialist and stay focused on motorcycles. Bajaj told BusinessLine: “Being a specialist gives us the chance to be the best in the world. During a downturn, it makes sense to make a better bike and not a scooter.”

This ties in with what Sheth and Sisodia had to say about generalists and specialists. Bajaj said: “It is important to be a specialist rather than a generalist. The idea is to do better business with better motorcycles. Our job is to create categories in motorcycles.”

This brings us straight to the question: if the Rule of Three holds, which one, between Bajaj Auto and TVS Motor, will be No 3? Which one will be edged out? Since Rajiv Bajaj says he wants to be a specialist, it means he will spread geographically across the world and not look only at domestic market share. He can’t expand domestic market share beyond a point if he stays a specialist. He is also likely to focus on margins and product pluses.

TVS is a generalist, making bikes, scooters and scooterettes, but financially it is less profitable than Bajaj Auto.

It is thus a toss-up on who will remain No 3 to conform to the Rule of Three. One has the generalist tag, and the other is a specialist with financial muscle.

We will know the answer in the next two to three years.