India's scooter king employs advanced muscle in a bid to reclaim leadership in the land of two-wheelers.

It's monsoon season in India, and an afternoon rain has slicked the terrace outside of Rajiv Bajaj's office in Akurdi, 100 miles southeast of Mumbai. At age 39 Rajiv is the managing director of Bajaj Auto [Get Quote], long India's first name on two (or three) wheels.

In 2001, a year after he unofficially took the reins of the family-run manufacturer, Rajiv watched Bajaj lose its market lead in the country's basic form of transport for the first time in 45 years.

So you'll excuse a mordant sense of humor. "If I tell you that no one has fallen off this balcony," he says, "You can tell me, 'Not yet.'"

• Slideshow: India's Biggest Companies
• Slideshow: The World's Biggest Companies
• Slideshow: Top Ten Hottest Jobs In India

These days young Bajaj is unlikely to take a spill. The company, sitting on $1.3 billion in cash, has regained momentum in its battle with its main competitor, Hero Honda. Last year Bajaj made $238 million on sales of $1.9 billion, ensuring a spot on Forbes Asia's Fab 50 companies list. (Hero Honda scored considerably lower, though still respectably, by our measure.)

Rajiv is credited with the turnaround, transforming Bajaj from a stodgy scooter manufacturer to a tech-happy motorcycle maker in a country where two-wheelers account for 80% of all vehicles.

Rajiv officially took over the company in 2005 when his father, Rahul, stepped down after 35 years at the helm. But informally he's been in charge since 2000, when, after rising in the ranks for a decade, he was made president and walked straight into a crisis.

Gas prices, though state-controlled, had been on the rise, and Hero Honda had launched a four-stroke motorcycle that was more fuel-efficient than Bajaj's scooters--and more manly as well.

Motorcycles took over the market, and Hero Honda's dominance was so great that such bikes, regardless of brand, were known as "Hondas." Scooter sales shrank by 38%, and Bajaj, which was concentrated in that output, saw its operating profits plunge 48% and its stock price drop by a third. "We needed to do something quickly," Rajiv says. "The ground was slipping so fast."

Till then the climb had been slow and steady. Rajiv's grand-father, Kamalnayan Bajaj, founded Bajaj in 1945. In the 1950s the company imported a smattering of scooters and three-wheelers from Italy's Piaggio, which makes the Vespa.

In 1960 Bajaj listed on the Bombay Stock Exchange and began manufacturing Piaggio products. By 1966, with a protective screen of import limits, Bajaj had become the largest Indian producer of two-wheelers. Starting in 1970 (and continuing through the 1980s) waiting lists for Bajaj vehicles averaged ten years.

In 1984 the government allowed foreigners in a bit, as investors and technology partners. Bajaj began importing parts but little innovative genius from Japan's Kawasaki, while Hero Group partnered with Japan's Honda, forming Hero Honda. (India's TVS [Get Quote], meantime, joined forces with Suzuki)

Bajaj grew steadily through the early 1990s, buoyed by its dominance in sales of three-wheelers, which are used as goods carriers and taxis in a country with limited public transportation.

So when the market began to shift, Bajaj was slow to react--until Rajiv emerged. Rahul and Rajiv do not seem to be a case of "like father, like son." Rahul has relished a public role, extending to service in Parliament.

At a conference with Bill Gates last December, he was reported to have challenged the world's richest man on technology's role in India and offered that Microsoft's products could be cheaper and better. Rajiv, by contrast, shies away from meetings and publicity (only reluctantly cooperating with Forbes Asia).

He'll spend hours in an R&D lab. "Rahul spent most of his life in a protected market where he was king," says an analyst who covers the company. "He was not willing to accept that scooters had become obsolete. Rajiv came of age in a completely different atmosphere and accepted the realities of the market."

He brought on a Japanese expert in productivity and, for personal guidance, turned to a homeopathic doctor who lives in the Himalayas and, Rajiv says, has "hair down to his feet."

"Everyone was blaming our problems on the outside world," Rajiv says. "But we discovered that the problem was inside, not outside." Since 1986 Bajaj had been producing a small number of two-stroke motorcycles priced 20% below Hero Honda's cheapest model. But because of the bike's poor quality and despite Kawasaki's help, its warranty costs were five times Hero Honda's.

Then there was Bajaj's image, which its motorcycles did little to improve. The company's familiar slogan, "Hamara [Our] Bajaj," didn't resonate with the young, tech-savvy urban men the company wanted to target. Hero Honda's basic four-stroke bike had a better ring to it.

Rajiv needed to do something drastic. The market was dominated by Honda's 100cc bike, which sold for $900. Rather than launch a bike that would compete directly with Hero Honda, Rajiv broke the market into three segments.

He wanted Bajaj to flank Hero Honda's product with cheaper "entry level" bikes ($800 and up to 110cc) and more expensive ones ($1,200 and up to 150cc and higher). For the premium segment, Rajiv bet that consumers would trade up, paying up to $400 more for better technology and sex appeal.

As engineers set to work, Rajiv cut the supplier ranks from 855 to 200, cut head count by 12,000 employees (through layoffs and attrition) and closed a plant that had been producing half of the company's scooters.

He spent $68 million to build a new plant in Chakan, 15 miles from the company headquarters. Chakan became the company's "manufacturing lab," with educated, young workers and spacious shop floors. To avoid stockpiling, the Chakan plant used nearby suppliers that could deliver parts within four hours, in response to e-mail requests.

In 2001 Bajaj used Chakan to produce its new line, the Pulsar. Out went "Hamara Bajaj," replaced by Pulsar's "Definitely Male" campaign, which shows men in jeans and sunglasses, shirts unbuttoned, sharing the motorcycle seat with scantily clad women.

Bajaj also began emphasizing the company's technology. The Pulsar, it said, had 52% lower emissions than what was on the market and was 20% more fuel efficient. (Hero Honda won't speak to these comparisons.) Bajaj sold 12,000 Pulsar bikes in 2001 and 184,000 the following year.

Today the Pulsar accounts for 20% of Bajaj's overall motorcycle sales and has the highest margins--18% Ebitda, say analysts--of any of the company's two-wheelers.

With its new image, the company followed with the Avenger bike, which uses the slogan "Feel Like God" and targets men age 28 to 30. In 2004 Bajaj made its first direct attack on Hero Honda with the launch of the $900 125cc Discover.

Bajaj dubbed it the "mini-Pulsar" and sold 154,000 Discover bikes during its first year on the market. So, even though Hero Honda now sells more than a million more bikes than Bajaj does, Bajaj has begun to close the gap with about double the sales growth rate over a recent 12 months.

Bajaj's next battleground is the overseas market. It will be a critical and uphill battle. Today Bajaj exports only 13% of its two-wheelers, and its global market share trails behind Honda, Yamaha, Harley-Davidson and Suzuki.

Bajaj wants to be the world's third-largest player. To do that, Bajaj will have to export up to 1.5 million bikes--nearly as many as it sold in India last year--according to Rajiv's brother Sanjiv, who heads the company's export strategy. "If we miss the international opportunity over the next three to five years," says Sanjiv, 36, "someone else will take it."

Someone already has. Although Hero Honda has a small presence outside of India, Honda itself is ubiquitous, claiming 21% of the global market share.

In countries like Indonesia, where almost all customers receive financing on their motorcycles, Bajaj will need to establish relationships with foreign banks that don't already partner with Honda or other competitors. Japanese companies control 95% of the two-wheeler market.

Bajaj's plan for Indonesia sounds familiar. "We want to get into Indonesia and surprise the normal way of doing things by coming in with a high-end product," says Sanjiv. "We're not taking the competition head-on."

The other specter looming over Bajaj is a domestic market shift, similar to the one that surprised the company in the 1990s. Seventy-one percent of Bajaj's revenue now comes from motor-cycles, and with Tata Motors' [Get Quote] claim that it will launch a $2,000 car within two years, Bajaj may face new competition.

S. Ravikumar, vice president of business development, says that Bajaj has several confidential projects in the works and that it has the technology to keep up with any market shift. "Manufacturers of two-wheelers are better suited to grow into [making inexpensive cars] than those coming from the top down," he says. "The technologies are not so far apart. It's not like making a heavy truck and a two-wheeler."

Then there's the three-wheeler market, Bajaj's cash cow. Thanks greatly to it, Bajaj has been debt-free since the late Nineties, even during the rough patch that awaited Rajiv. Bajaj has 80% market share in the three-wheeler market, which accounts for 21% of the company's overall sales.

While Hero Honda has stayed away, last year Tata Motors launched the Ace, a four-wheel minitruck that carries goods. "Our own four-wheeler goods carriers in the Ace category are under development," says Ravikumar.

If Rajiv is worried, he's not working as if it's 1999. In fact, his office time is typically down to four hours a day, after which he spends two to three hours practicing yoga and reading about homeopathy. He recently spent $1.7 million to redesign the company headquarters in a minimalist, Zen-like style.

"We are not playing someone else's song," he says. "All questions will be answered when we answer the question 'Who am I?' Bajaj has rediscovered itself."

By the Numbers
A young demographic is ready to wheel the Golden Quad on a Bajaj.

• 7.1 million: Two-wheelers sold in India last year.
• 267 million: Indians between 20 and 35, the age group that typically buys motorcycles and scooters.
• 41%: Asia-Pacific's share ($12.9 billion) of the global motorcycle market.

Sources: Datamonitor; Euromonitor; Society of Indian Automobile Manufacturers.

• Slideshow: India's Billionaires of Technology