Changes in Hero MotoCorp after the Joint Venture

Submitted By: - Submitted To:-

Shalaka Somani Dr. Ajai Prakash

M.B.A (Finance)

INDEX

Serial No. Topics Page No.

1 Introduction 3

2 Hero Honda Joint Venture 4

3 Termination of Joint Venture 7

4 Relationship between Hero and Honda after the split

8

5 Steps undertaken to improve organizational effectiveness by Hero Group

9

6 Key pace transformation 11

7 The company performance 12

8 Conclusion 15

9 Reference 16

Introduction

The origins of Hero date back to 1944, when four brothers of the Munjal family started a

bicycle spare parts business in Amritsar, Punjab, and North India. In 1956, Hero Cycles

Ltd was established in Ludhiana, Punjab. In the first year, the output was 639 bicycles.

They started exporting bicycles in 1963. The Munjals also incorporated several bicycle

component manufacturing units, which included Rockman Cycle Industries for

manufacturing bicycle hubs and chains, and Highway Cycles for making freewheels. By

1975, Hero had become the largest manufacturer of bicycles in India.

A joint venture between the Hero Group and Honda Motor Company was established in

1984 as the Hero Honda Motors Limited at Dharuhera, India. This joint venture did not

only create the world's single largest two wheeler company but also one of the most

successful joint ventures worldwide. In December 2010, the board of directors of the

Hero Honda Group decided to terminate the joint venture between Hero Group of India

and Honda of Japan in a phased manner. The Hero Group would buy out the 26% stake

of the Honda in JV Hero Honda. After the split the name of the company was changed

from Hero Honda Motors Limited to Hero MotoCorp Limited on 29 July 2011.

Hero Motocorp Ltd. is an Indian motorcycle and scooter manufacturer based

in New Delhi, India. The company is the largest two wheeler manufacturer in the world.

In India, it has a market share of about 46% share in 2-wheeler category. The 2006

Forbes 200 Most Respected companies list has Hero Honda Motors ranked at #108. On

31 March 2013, the market capitalization of the company was INR 308 billion (USD 5.66

billion)

Hero Honda Joint Venture

"Hero" is the brand name used by the Munjal brothers for their flagship company, Hero

Cycles Ltd. In 1956, Hero Cycles Ltd was established in Ludhiana, Punjab. In the first

year, the output was 639 bicycles. They started exporting bicycles in 1963. The Munjals

also incorporated several bicycle component manufacturing units, which included

Rockman Cycle Industries for manufacturing bicycle hubs and chains, and Highway

Cycles for making freewheels. By 1975, Hero had become the largest manufacturer of

bicycles in India.

In the early 1990s, Japan-based Honda was looking at entering the Indian two wheeler

market (both scooters and motorcycles) through joint ventures. Honda had been the

largest manufacturer of motorcycles in the world since 1959. In terms of automobile

manufacturing, it was the sixth largest in the world.

Hero's bicycle business, mopeds, and wide distribution network attracted Honda. Both

the companies started negotiating in 1983 and a joint venture between the Hero Group

and Honda Motor Company was established in 1984 as the Hero Honda Motors Limited

at Dharuhera, India. Munjal family and Honda group both owned 26% stake in the

Company. The joint venture agreement was for a period of ten years. As per the deal,

Honda agreed to provide the technical know-how, set up manufacturing facilities, and

carry out Research and Development activities. Hero Honda had to pay a royalty of 4%

on the ex-factory price of each vehicle for these services. Hero also paid a lump sum

fee of US$ 500,000. In the venture, both the partners held 26% of the equity, 26% was

sold to the public, and the remaining was held by financial institutions.

During the 1980s, the company introduced motorcycles that were popular in India for

their fuel economy and low cost. A popular advertising campaign based on the slogan

'Fill it – Shut it – Forget it' that emphasized the motorcycle's fuel efficiency helped the

company grow at a double-digit pace since inception. In 2001, the company became

the largest two-wheeler manufacturing company in India and globally. It maintains

global industry leadership till date. The technology in the bikes of Hero Honda for almost

26 years (1984–2010) has come from the Japanese counterpart Honda.

1956—Formation of Hero Cycles in Ludhiana(majestic auto limited)

1975—Hero Cycles becomes largest bicycle manufacturer in India.

1983—Joint Collaboration Agreement with Honda Motor Co. Ltd. Japan signed

Shareholders Agreement signed

1984—Hero Honda Motors Ltd. incorporated

1985—Hero Honda motorcycle CD 100 launched.

1989—Hero Honda motorcycle Sleek launched.

1991—Hero Honda motorcycle CD 100 SS launched.

1994 – Hero Honda motorcycle Splendor launched.

1997—Hero Honda motorcycle Street launched.

1999 – Hero Honda motorcycle CBZ launched.

2001 – Hero Honda motorcycle Passion and Hero Honda Joy launched.

2002—Hero Honda motorcycle Dawn and Hero Honda motorcycle Ambition

launched.

2003—Hero Honda motorcycle CD Dawn, Hero Honda motorcycle Splendor plus,

Hero Honda motorcycle Passion Plus and Hero Honda motorcycle

Karizma launched.

2004—Hero Honda motorcycle Ambition 135 and Hero Honda motorcycle CBZ Star

launched.

2005—Hero Motocorp Super Splendor, Hero Honda motorcycle CD Deluxe, Hero

Honda motorcycle Glamour, Hero Honda motorcycle Achiever and Hero Honda

Scooter Pleasure.

2007—New Models of Hero Honda motorcycle Splendor NXG, New Models of Hero

Honda motorcycle CD Deluxe, New Models of Hero Honda motorcycle Passion Plus

and Hero launched.

2008—New Models of Hero Honda motorcycles Pleasure, CBZ Xtreme, Glamour,

Glamour FI and Hero Honda motorcycle Passion Pro launched.

2009—New Models of Karizma: Karizma – ZMR and limited edition of Hero Honda

motorcycle Hunk launched

2010—new Models of Hero Honda motorcycle Splendor Pro and New Hero Honda

motorcycle Hunk and New Hero Honda Motorcycle Super Splendor launched.

Mission

―It is our mission to strive for synergy between technology, systems and human

resources, to provide products and services that meet the quality, performance and

price aspirations of its customers. While doing so maintain the highest standards of

ethics and societal responsibilities.‖

Vision

The vision was driven by commitment to customer, quality and excellence, and while

doing so maintaining the highest standards of ethical and societal responsibilities.

Termination of Joint Venture

In December 2010, the board of directors of the Hero Honda Group had decided to

terminate the joint venture between Hero Group of India and Honda of Japan in a

phased manner. The Hero Group would buy out the 26% stake of the Honda in JV Hero

Honda.

There were really four constraints on Hero Honda which it had shared with Honda in

2008. The first was the issue of exports. For 11 years starting 2001, Hero Honda has

been the world‘s largest, with volumes growing from 1 million to 6.2 million in 2011-12.

The agreement was subsequently, modified to allow exports of limited products to a few

countries, namely Sri Lanka, Bangladesh, Nepal, and Columbia.

However, in 2008, when the issue of exporting the Indian JV‘s products to other

countries came up, Honda said that Hero Honda will have to compete on its own since

it could not influence its subsidiaries abroad to import the JV‘s products. Honda‘s

subsidiaries are run very independently and decide which countries they want to source

their products from. This was a bitter pill to swallow for Hero Honda.

The second contentious issue was that of board representation. Of the four Honda

representatives on the board, one executive director was the head of Honda in India, to

whom HSMI reported, and the other located in Bangkok, represented Honda‘s two-

wheeler business in Asia. The other two were nominated by Honda. As directors on the

board of Hero Honda all of them had access to its plans and strategies, while Hero

Honda had access to none of Honda‘s plans. This, Hero Honda had felt amounted to a

conflict of interests.

The third major irritant for Honda was the refusal of Hero Honda (mainly managed by

the Munjal family) to merge the company's spare parts business with Honda's new fully

owned subsidiary Honda Motorcycle and Scooter India (HMSI).

The fourth issue was related to Hero Honda wanting to do its own independent R&D

and manufacturing its own products. When it asked Honda to be allowed to do so,

subject to approval from the head office in Japan, Honda‘s response was ‗R&D is like

its heart and it can‘t give its heart to anyone.

Relationship between Hero and Honda after the Termination

After Honda and Hero parted, Honda could have said since the deal was over, it will not

share any new technology with Hero, though Hero could continue to use the existing

technology. However, Honda realized that Hero could not compete without a continuous

flow of new products and technology during the 24 to 42 months it takes to bring out a

new product from scratch. It agreed to provide Hero the products that were being

developed for the joint venture at the time of the split. These products were not to be

shared with their own subsidiary.

Honda sold its shares at Rs 740, when the market price was about Rs 1480. This is

how the long term 26-year relationship has panned out. Honda‘s gesture reflected its

appreciation for the fact that it was this joint venture that built the Honda brand in India

over 26 years of a win-win relationship. This sort of appreciation one will not receive

from an Anglo-Saxon partner. For example, a US company will, one fine day, say let us

shake hands, it is over. You keep on using whatever technology I have shared, but from

now on, do you own R&D.

Honda‘s parting gestures told Hero that it appreciated them and it would have liked to

continue its relationship with them, except that they had ambitions to go global and

build our own products. And the fact that through its directors, Honda had access to all

their strategies, even though they assured Hero that strategic information was not

shared.

Steps Undertaken to Improve Organizational

Effectiveness by Hero Group

Team building activities like summer outing were also conducted by Hero

Company to create good relationship among employees and managers.

The Sales Management process involved formulating strategies and objectives

and less time resolving conflicts within and outside their organization and putting

out fires such as filling in for an absent sales person; Sales manager spends time

on considering issues as market-share goals, target markets and growth

objectives that help in improving sales performance.

The management also tries to identify, understand and channelize the motivation

which sales people possess, as a sales manager acts as a catalyst providing

both the stimulation and proper rewards for sales people to feel motivated. After

knowing what to do on the sales process and people, the review of sales force

organization takes place.

Regarding Motivation of Employees Mr. Munjal paid much attention to

experimental work and did not accept attempts to control his corporation via the

traditional caste system. Mr. Munjal understood that encouraging his workers

personal development, their wish for self-actualization will bring him success in

business. He instilled in employees to drive to learn, without fear of failure,

having build the road to success

The opportunities given to respondents in participating on workshops, seminars

and conference related to sales proved to be quiet effective.

Hero also undertakes sponsoring of events as one of its marketing strategies to

improve effectiveness of its organization; standees, tarpaulins and give away

were distributed to promote Hero products. It also conducts open house or

showroom displays most especially when new features/models were being

introduced. As the sales department in an organization as the onus is upon the

sales people to offer the right customer at an opportune time. By providing

adequate training to the sales staff, Hero ensures that no time was wasted in trial

and error methods which individuals might adopt if left to themselves and

adequate advice is not offered to them; so through this effective sales personnel

company is trying to gain customer‘s attention.

Sufficient training was provided by the management to improve competency of

sales people at all levels and they were given opportunities to attend the

seminars and conferences which enhanced their knowledge on products; they

were provided with information on one‘s own products as well as those of

competitors. Thus, a training program is conducted by Hero‘s management to

inform the staff about the products or services that the organization provides.

The parting agreement with Honda was that Hero has the right to retain the Hero

Honda name on their products as well as at their distribution outlets, till March

2014. However, they thought that it was in their interest to work immediately on

strengthening the new brand. So effective August 15, 2011, the branding and

name changed in all the dealership and showrooms. This is being complemented

by very strong advertising. The next step is to change the brand name on the

product. From March-end, 2012, we have started changing the branding on

products to Hero, which will be completed in six months.

The branding campaign would have to be completely changed because people

wouldn‘t be able to associate with the Hero Group so readily.

And this is the reason they have asked JWT to help them. Their plans include

using a branding strategy for motorcycles even though they are present in the

bicycles segment as well. The most important thing they need is ―reinforcement

of the brand‖ and smooth transition from being ―Hero Honda‖ to just ―Hero‖.

Hero has a transition period of three-and-a-half years and we intend to use it well

and be ready at the end of it. Over the last one year, the number of engineers in

their R&D has increased from 175 to about 280. Second, they have hired

advisors and consultants who are modifying the existing products. Third, they are

working with some design houses in Japan and other parts of the world for new

product development. Fourth, the engine is the heart of their products and they

have tied up with world leader Erik Buell who designs high-end bikes going up

from 250 cc to modify existing engines and develop new platforms. They are

targeting FY14 to have our own products from our R&D. There are newer

entrants coming in like Harley Davidson and this is why Erik Buell makes sense

for them as it is very futuristic and it is promising them their first product in 2014.

Cost with Honda gone, will save on material costs. Hero feels that at best, they

can save only 3 per cent, which works out to Rs 1250. But in trying to get this

saving they may compromise on three things that they are known for - quality,

durability, and after sales. Just to save Rs 10, if they replace a component in

their brand, that will impact on their reputation.

Rebranding in the overseas markets would have happened only when they start

their exports. They felt we have to manage the environment in their own country,

and then see how to manage outside. Doing business is to manage the

environment. For exports they had shortlisted markets, and started appointing or

recruiting distributors. The next step was to arrive at an arrangement with the

distributors, and to decide whether to ship completely built units (CBUs), or set

up an assembly plant. Before they commenced their operations overseas,

branding will also have to be done. There may be some rub-off from Hero

Cycles, which they export to about 75 countries, but they are two separate

products. Right now they are 98 per cent focused on the domestic market. The

only advantage of being late in the game is that they can avoid the mistakes of

others and they wanted to make sure that even if they are late by another six

months, at least they do not make any mistakes.

THE KEY PACE OF TRANFORMATION

Hero achieved such milestones-by putting key elements of the process chain in

close proximity to each other, to respond rapidly to market needs and trends,

widening the product range to cover more market segments, deepening its

presence to cover smaller markets and increasing the number of dealerships,

among other things and doing all this quickly.

Vice-President of Sales and Marketing at Hero said:-

―It has been a multi prolonged approach but the key has been the pace of change (after

break-up) be it in terms of marketing strategy, expanding scooter capacity, new

model-line up, fresh line of communication, expanding network into the interiors

of the country or even strengthening technical centre in India, which is more agile

than before‖

The Hero Research & Development Unit of India was relocated inside the factory so

that the group could work closely with the marketing and sourcing teamto develop future

productportfolio strategy. Hero regard this a significant strategic step.

Company Performance

The company has sold over 47 million 2-wheelers since its inception in 1984 till March

2013. It sold 6.07 million 2-wheelers in 2012, out of which 5.5 million were motorcycles.

Hero Motocorp sells more two wheelers than the second, third and fourth placed two-

wheeler companies put together. Its most popular bike Hero Honda Splendor sells more

than one million units per year.

In 2013, Hero MotoCorp registered best ever calendar year performance of more than

6.1 million unit sales. By selling 6.25 lakh units in the month of October, it became the

first-ever manufacturer to cross landmark 6 lakh unit sales in a month. In the last quarter

of the year or say in the festive season, the company sold more than 1.6 million units,

while in non festive time in April–May 2013; it managed to sell out quite good numbers

of units- 1.1 million

The equity shares of Hero Motocorp are listed on the Bombay Stock Exchange, where it

is a constituent of the BSE SENSEX index, and the National Stock Exchange of

India, where it is a constituent of the S&P CNX Nifty.

As on 31 December 2013, the promoters Munjal Family held around 40% equity shares

in Hero Motocorp. Over 61,000 individual shareholders hold approx. 7.44% of its

shares. Foreign Institutional Investors hold approx. 30% shares in the company.

Shareholders (as on 31-Dec-2013) Shareholding]

Promoter Group 39.92%

Foreign Institutional Investors (FII) 30.63%

Foreign Corporate Bodies 12.29%

Individual shareholders 06.44%

Insurance companies 05.38%

Mutual Funds / UTI 02.56%

Bodies Corporate 01.60%

Financial Institutions / Banks 00.53%

Others 00.60%

Total 100.0%

Awards and Recognition

The Brand Trust Report published by Trust Research Advisory has ranked Hero

Honda in the 7th position among the most trusted brands in India.

It received the 'Best value for Money Bike Maker' and 'Best Advertising' in Two

Wheelers Category at the Auto India Best Brand Awards 2012.

Conclusion

The companies which once sounded incomplete without each other are now rivals. This is the impact of Split of Joint Ventures. After the companies gained individual identities as ―Hero MotoCorp‖ and ―Honda motorcycles and scooters limited‖ they claimed many things as-Hero MotoCorp would now be able to export but the question arises that will the company, individually, able to create an international image without Honda‘s technology. Despite of the fact that Hero Moto Corp will now work with world‗s largest privately owned engine developer, AVL Engineering, to share its technology for manufacturing Hero vehicles. Honda dreams of acquiring major share in India‘s two wheeler market but will it be able to do so without the powerful brand name of ―Hero‖. The facts say that sale figures of Hero MotoCorp alone count more than the sales figures of second, third and fourth companies in the line. After a 15% growth in FY12 with record sales of 6.2 million units, it seemed Hero MotoCorp had managed the transition post the break-up with Honda well. But the slowdown in the market and rising competition has come as a surprise with sales declining 3% in the first six months of the current fiscal year. In September 2012, Hero posted a 26% decline in sales, its steepest fall in over a decade. The month also saw Hero's flagship brand Splendor. The main challenge for both companies is to cope up with the ever changing environment and to grow independently.

Reference

http://www.cfo-connect.com/title_detail.asp?art_id=1055&cat_id=10

http://en.wikipedia.org/wiki/Hero_MotoCorp#Termination_of_Honda_joint_venture

http://www.slideshare.net/BabasabPatil/a-project-report-on-customer-satisfaction-level-

for-two-wheeler-vehicle?related=1

http://rdesigns.hpage.co.in/herohonda-history_99323890.html

http://www.slideshare.net/davidfranclinok/customer-sactation