Download - Hero Honda

2210 Thompson-Strickland-Gamble:Hero Honda Motors (India) Case © The McGraw-Hill

Crafting and Executing Ltd.: Is It Honda that Made Companies, 2004

Strategy: Concepts and It a Hero?

Cases, 14th Edition

case

Hero Honda Motors (India) Ltd.:Is It Honda that Made It a Hero?

Kannan Ramaswamy Rahul SankheThunderbird—The American Graduate Thunderbird—The American GraduateSchool of International Management School of International Management

year, HHM had continued to grow, delivering superbHero Honda Rides Splendor to Become World’s No. 1performance in India’s two-wheeler marketplace.India has finally got a world leader in manufacturingThe company had come from nowhere to whiz pastwith “no problem.” Hero Honda Motors Ltd.(HHM) hasBajaj Auto Ltd., the traditional leader of the pack inattained the distinction of being the largest two-wheelertwo-wheelers. Mr. Munjal had not only earned thecompany in the world in volume terms.With a newcrowning title of heading the largest two-wheelerfactory on the anvil,it is gearing itself for Operation Onecompany in the world, but also the personal glory ofBillion,targeting $1 billion revenues in 2002–03.“Next

year, we will enter the (dollar) billionaire’s club (in having presided over one of the most successful jointrevenues). After Operation Million for volumes in ventures in the country. Having built a storied2001–02, our slogan for the next year is Operation One legacy, he could rest easy. Or could he?Billion,” said Mr.Pawan Munjal, Director & CEO, HHM. The spectacular track record of the company wasThe distinction of being the largest two-wheeler

being threatened by predatory moves made by itscompany in the world came in calendar 2001,with sales

Japanese partner, Honda Motor Company. The f irstrocketing past the one million mark in the first ninedark clouds appeared on the horizon in August 1999.months of the current fiscal year. This performance wasHonda Motor Company Ltd. (HMC), HHM’s jointin conjunction with Splendor, launched in 1995,

Tventure partner, announced that it would be setting upbecoming the world’s largest-selling bike.a 100% subsidiary, Honda Motorcycle & Scooter In-—Business Standard, January 2002dia (HMSI) to initially make scooters and later, mo-

hings could not have possibly looked any bet- torcycles as well. HHM’s stock plummeted by 30%ter for Mr. Brijmohan Lal Munjal, the Chair- on the day of the announcement. It was apparent thatman and Managing Director of Hero Honda the investors were no longer optimistic about the

Motors (HHM). Quarter after quarter, and year over company’s ability to continue its sterling perfor-mance record, especially in the face of competitionfrom Honda. Was this a portent of things to come?Adding another dimension to an arena alreadyfraught with significant complexity, reports from themarketplace clearly showed increasing intensity of ri-

Copyright © 2003 Thunderbird, The American Graduate School of Inter- valry. Not only were domestic rivals getting betternational Management. All rights reserved. This case was prepared by Pro-

equipped to challenge HHM for supremacy, therefessor Kannan Ramaswamy and Mr. Rahul Sankhe (MBA Class of 2002,

were foreign interlopers as well who seemed deter-ISB) for the purpose of classroom discussion only, and not to indicate ei-ther effective or ineffective management. Mr. Anuj Rastogi, Mr. Ravi Ya- mined on giving HHM a run for its money. It wasdavalli, and Ms. Divya Ramachandran, from the MBA Class of 2002 at

definitely not a time to rest on past laurels.the Indian School of Business, prepared the first draft of this case.

C-396

11Thompson-Strickland-Gamble:Hero Honda Motors (India) Case © The McGraw-Hill



Cases, 14th Edition

Case 22 Hero Honda Motors (India) Ltd.: Is It Honda that Made It a Hero ? C-397

THE TWO-WHEELER to sell.” The motorcycle segment was no different;

INDUSTRY IN INDIA with only three manufacturers—Royal Enfield, IdealJawa, and Escorts—there was hardly any significantcompetition for the customer. While this segmentHistory and Background was dominated by Enf ield’s 350cc Bullet, the onlymotorcycle with a four-stroke engine at the time,India had the largest population of two-wheelersJawa and Escorts also had a fair share of the middle(around 41.6m vehicles) in the world. They ac-1

and lower end of the market.counted for almost 70% of the country’s automobileThe winds of change began to take hold in themarket in volume terms. India was the second largest

mid-’80s when the Indian government started per-manufacturer of two-wheelers in the world. Exhibit 1mitting foreign companies to enter the Indian marketprovides comparative financial and operating statis-through minority joint ventures. Under these relaxedtics for the major two-wheeler manufacturers inregulations, the two-wheeler market witnessed a ver-India.itable boom with four Indo-Japanese joint ventures;The birth of the Indian two-wheeler industry cannamely, Hero Honda, TVS Suzuki, Bajaj Kawasaki,be traced to the small beginnings that it made in theand Kinetic Honda all lining up to target the Indianearly 1950s when Automobile Products of Indiaconsumer market for motorcycles. The simultaneous(API) started manufacturing scooters in the country.entry of four players into this underserved marketAlthough API initially dominated the scooter markethelped boost motorcycle revenues to stratosphericwith its Lambrettas, Bajaj Auto Ltd., a company thatheights. For the first time, the market dynamicslater became a legend in the global scooter industry,changed in favor of the Japanese players in both two-overtook it fairly quickly. Although a number of gov-stroke and four-stroke vehicles, and the Indian man-ernment and private enterprises also entered theufacturers who had held sway for such an extendedscooter segment, almost all of them had disappearedperiod of time were suddenly cornered. The entry offrom the market by the turn of the century. Bajajthese new foreign companies transformed the veryAuto Ltd. stood the test of time perhaps due to itsessence of competition from the supply side to theinitial association with Piaggio of Italy (manufac-demand side. Confronted with a larger array ofturer of Vespa) that provided the technological know-choices, the consumers were regaining their influ-how for the venture.ence over the products that they bought. In keepingThe license raj that existed prior to economicup with these higher customer expectations, the in-liberalization (1940s–1980s) in India did not allowdustry accelerated the launch of new models, andforeign companies to enter the market, making it anevery company was trying to outdo the other inideal breeding ground for local players. Local play-terms of styling, price, and fuel efficiency. The tech-ers were subject to a very stringent capacity licens-nological expertise that the foreign companiesing process, and imports were tightly controlled.brought to the marketplace helped increase the over-This regulatory maze created a seller’s market, withall quality and reliability of the products quite sig-customers often forced to wait 12 years just to buy anificantly. The old-guard companies soon foundscooter from companies such as Bajaj. In 1980 Bajajthemselves under pressure to improve their offeringshad a waiting list that was equal to about thirteenand bring their products on par with their globaltimes its annual output, and by 1990 this list hadcounterparts.doubled. Clearly, there was no incentive to imple-

ment proactive strategies to woo the customer. In aThe Indian Consumer1980 interview with a local magazine, Mr. Rahul Ba-

jaj, the CEO of Bajaj Auto, observed, “My market-Two-wheelers had become the standard mode ofing department? I don’t require it. I have a dispatchtransportation in many of India’s large urban centers.department. I don’t have to go from house to houseIncreasing urbanization, saturation of cities, and thelack of adequate roads helped to propel demand forTwo-wheelers include all motorized vehicles using a two-wheel1

two-wheelers. The two-wheeler was typically a prizedchassis (e.g., motorcycles, scooters, and mopeds).




Cases, 14th Edition

C-398 Cases in Crafting and Executing Strategy

exhibit 1 Comparative Financial and Operating Statistics for the MajorTwo-Wheeler Manufacturers in India

THE LEGEND OF HEROpossession in the average Indian household. It was

HONDAnormally used to transport both people and goods,substituting for a car that was prohibitively expensive.While a two-wheeler normally cost around Rs. 40,000 The Hero Group[1 U.S. $ 49 Rupees (Rs.)], an entry-level car waspriced around Rs. 300,000. Two-wheelers had long The Munjals, owners of the Hero Group and pro-road lives, and were often used for even 15 years, moters of HHM, had made a modest beginning aspassed down from one generation to the next. How- suppliers of bicycle components in the early ’40s.ever, in global terms the market was far from mature. Currently, the group’s bicycle company, Hero Cy-Industry watchers reported that India had a penetra- cles, manufactured over 16,000 bicycles a day andtion rate of 10% as of the late 1990s (107 two-wheel- had sold over 86 million bicycles in aggregate as ofers for every 1,000 adults), far below the penetration 2002. It had been acknowledged as the world’srates of other developing countries. It was clear that largest bicycle manufacturer in 1986 when it over-the manufacturers had a lot of ground to cover. took the U.S. manufacturer, Huffy. Despite the lack

There were indeed visible signs that the compa- of significant process automation, the company hadnies were gearing up to address this growing market. been able to achieve among the highest levels of em-While the production and sales of motorcycles grew ployee productivity and efficiency on a global basis.substantially (CAGR of 22% between 1996 and Although a publicly traded company, the family was2001), the performance of the other two segments of extensively involved in day-to-day management oftwo-wheelers was poor. Scooter production grew by operations, as well as setting strategic direction.only 0.5%, while the production of mopeds fell by Much of the company’s strategy was anchored to29% during 2001–02. the fundamental principle of providing products of




Cases, 14th Edition


Honda Motor Companysuperior value at reasonable prices to the consumer.This basic belief was reflected in the company’s ap- of Japanproach to product innovation, quality, and reliability.Over time, the group had nurtured an excellent net- Honda Motor Company had surprisingly similar ori-work of dealers to serve India’s expansive markets. gins like its counterpart in India. Founded in 1946This network was not just focused on the high-density as the Honda Technical Institute by Mr. Soichirourban centers, but also encompassed rural outlying re- Honda, the company produced its first bicycle en-gions that typically did not attract the attention of gine a year later. There had been no looking backlarge manufacturers. The company truly believed in from that time on as the company grew to dominateits mission of bringing transportation to the masses. the global automotive market, with over 100 plants

Over the years, the Hero Group had entered in 33 countries selling 11 million product units as ofmultiple business areas, largely related to the trans- 2002. The engine was the centerpiece of Honda’sportation industry. The group evolved into a fairly global expansion. It had parlayed this expertise intointegrated set of operations that spanned multiple ar- a wide range of products such as lawnmowers, gen-eas of raw material processing, such as steel rolling, erators, scooters, motorcycles, and cars.to the manufacture of subassemblies and compo- Honda called its global strategy “glocalization”nents. Many of these ventures were owned and con- to signify its approach of building plants locally totrolled by members of the Munjal family or operated meet local demand. Within this web of localized op-by very close friends and associates. Thus, the com- erations, the company had been able to leverage syn-pany had seemingly established control over all ergies in R&D and manufacturing by regionalizingfacets of production and marketing. Exhibit 2 shows its operations, consolidating local strategy at the re-the portfolio of Hero Group businesses. gional level. It had worked quite well. The reach of




Cases, 14th Edition


exhibit 2 Portfolio of Hero Group Businesses

wholly owned subsidiaries was augmented through the electric generator market. HMC identified a shortastute management of select joint ventures, although list of Indian companies that it felt would make goodnot a preferred mode of entry for the company. In partners. Topping the list in the two-wheeler categorymany cases, the company was motivated to enter into was Bajaj Auto, a company that traced its reputationjoint ventures either because of regulatory con- to the storied history of Piaggio of Italy and the chic-straints or because of a desire to access local market yet-egalitarian brand of transportation it offeredknowledge that was not easily available. through its series of Vespas. When that first choice

did not work out for HMC, it moved on to its secondchoice, the Firodia group, an automotive productsForging a Partnership with conglomerate based in the prosperous western Indian

Honda Motor Company state of Maharashtra. Kinetic Engineering Ltd.(KEL), the group’s flagship company, manufactured

Given the impending liberalization of India’s mar- the first mopeds in India. Hugely popular in the latekets, HMC had come looking for suitors. Initial plans ’70s and early ’80s, KEL had a 44% share of thecalled for entry both into the two-wheeler market and Indian moped market and about 15% of the entire




Cases, 14th Edition


two-wheeler market. It seemed to hold much promise a lump-sum fee of $500,000 and a 4% royalty on theat the time, and thus attracted the attention of HMC. net ex-factory sale price of the product. Both part-KEL and HMC entered into a 50/50 joint venture, ners held 26% of the equity with another 26% soldKinetic Honda Motors Ltd., with the express objec- to the public and the rest held by financial institu-tive of launching a line of scooters in India. It was tions. HHM became a public company listed on thewidely reported that KEL was offered a choice be- Bombay Stock Exchange (BSE). 2

tween scooters and motorcycles and chose scooters A 13-member board was formed to oversee thebased on prevailing trends that favored scooters. governance of the company. Honda had four key ap-Honda was already close to signing on another part- pointees including the Joint Managing Director, aner for its other venture in power products, and hence particularly powerful position in Indian companies.its bid for a motorcycle JV was all that was left The Hero group was represented by four familyin play. members and appointed the chairman of the com-

HMC came to the Hero group as the last choice pany. Honda brought in its staff of technical expertsfor its motorcycle venture. The market for motorcy- to run the engineering and quality support functions.cles was not booming in any sense of the term in the Hero brought in local talent to manage all otherearly ’80s. Many Indian consumers still believed that functions including marketing, finance, and HR. Amotorcycles were more accident prone and less safe seven-member top management team drawn almostfor Indian roads. The market had been largely carved exclusively from local ranks took charge of the dailyamong three Indian f irms with various levels of old operations of the venture. Both partners agreed to re-imported technology. It was against this backdrop view the terms and relevance of the agreement inthat the Hero group sought to throw its hat into the 1994 when the current joint venture arrangementring as a means of consolidating its position in the would lapse. Time was short, and it was clear thattwo-wheeler market. Since it had a flourishing bicy- HHM would have to act very quickly to build acle business and a fairly strong moped business as foothold in the motorcycle business.well, the Munjals felt that entering into a joint ven-

Rubber Hits the Roadture with a company that enjoyed a worldwide repu-tation would help them achieve their goal ofdominating the two-wheeler market in India. It was The manufacturing plant which was established inindeed a golden opportunity for Mr. Brijmohan Lal Dharuhera in the state of Haryana started manufac-Munjal to achieve the distinction of “beating Bajaj,” turing the CD-100 model motorcycle in 1985. Thea seldom-vocalized desire that he had harbored. CD-100 was powered by India’s f irst four-stroke en-

gine, the unique selling point that put Hero Honda in

The Deal Is Done the driver’s seat in the marketplace. Soon, the CD-100 set the standards for fuel eff iciency, pollution

The negotiations between HMC and the Hero group control, and quality. Perhaps the most appealinghad by all accounts gone quite smoothly. Although characteristic of the CD-100 was its fuel eff iciencythere had been some lingering resentment that HMC (approximately 80 km/litre), an attribute highly val-had come to Hero as a last resort, Mr. Brijmohan Lal ued by the Indian consumer. As the CD-100 was theMunjal had tried to maintain the enthusiasm only one with a four-stroke engine at the time, it be-amongst the members of the Munjal family, empha- came a runaway success. Interestingly, it was Mr.sizing the benefits of the alliance they were about to Munjal who persuaded HMC to launch the 100ccenter. The negotiations culminated in an agreement vehicle instead of the 70cc version that HMC hadthat was signed in June 1984 creating a joint venture originally planned to offer. Given his long experi-firm called Hero Honda Motors Ltd. ence with the manufacture of bicycles and mopeds,

Honda agreed to provide technical know-how to he really understood the intricacies of the IndianHHM and assist in setting up manufacturing facili- marketplace very well. “Our bicycle and mopedties. This included providing the design specifica- manufacturing background gave us insights into thetions and responsibility for future R&D effortsrelating to the product lines that the company would Bombay Stock Exchange is one of the two biggest stock ex-2

offer. For these services, HHM agreed to pay Honda changes in India. http://www.bseindia.com




Cases, 14th Edition


exhibit 3 Some Offerings from thecustomer psyche that the running cost of the vehiclehad to be low,” he recalled in a press interview fo- Hero Honda Stablecusing on the rationale behind the CD-100. The or-ganization had since spearheaded many “firsts” forthe auto sector in India, being the first two-wheelermanufacturer to implement an ERP across the func-tions, and the f irst to implement initiatives such assix-sigma.

Under the stewardship of Mr. Munjal, HHM hadgrown consistently, earning the title of the world’slargest motorcycle manufacturer after havingchurned out 1.3 million vehicles in 2001. Its motor-cycle volumes nearly quadrupled during the period1997–2001, a feat unparalleled in the Indian two-wheeler industry. While the motorcycle market grewat an average 21.74% per annum between 1997 and2001, Hero Honda averaged a growth rate of 35.46%a year. In 2001–02, it again doubled volumes from0.76 million in 1999–2000 to 1.3 million. However,there were several signif icant bumps on the roadalong the way.

The CD-100 had captivated the Indian consumerwhen it was first launched, but the uniqueness soonwore off. Exhibit 3 illustrates some of the product of-ferings from HHM. Competitors such as TVS-Suzukiand Bajaj-Kawasaki were introducing feature-richmodels that were vying for the attention of cus-tomers. Many of these vehicles boasted comparablefuel efficiency and some were priced much lowerthan the CD-100. However, Mr. Munjal was boxed inby the relationship with HMC. His dependence onHonda for all product innovation inputs hobbledHHM’s ability to respond to emerging changes in themarket. Honda had decided to consolidate all itsR&D activities worldwide in three countries, and In-dia was not one of them. Therefore, Hero Honda wasforced to wait its turn before getting any changes vet-ted by Honda’s R&D. New product designs did notmaterialize as fast as the market demands dictated. Itwas quite difficult to sustain customer interest whenall HHM could do was to release newer models thatwere only variations of the CD-100 platform. Thiswas particularly costly for the company, since it didnot have any new products, when competitors werereleasing new products to ride the boom in demand kets. It had built an expansive network of dealersfrom 1993 to 1996, when industry sales grew at a cu- who were extremely loyal to the company. Much ofmulative average rate of 31% per year. this network was culled from Hero Group’s bicycle

HHM managed to dampen some of the negative operations. The company instituted modern pro-impact of these years through astute marketing and grams and incentives to motivate its dealer network.by leveraging its knowledge of customers and mar- The best dealers were chosen to visit the Japanese




Cases, 14th Edition


operations of Honda each year. They formed an ex- ing the supplier network was deemed crucial. Bytended family and HHM was perceived as being very 1996, over 95% of the motorcycle was manufacturedsupportive of its dealers. As of 2000, the company from locally procured parts, a rate of localization thathad close to 400 dealers across the country. It was even Honda at times thought would be difficult tothis well-penetrated dealer network that allowed the achieve. However, the Munjals realized that it wasfirm to actively market its products in rural India, a not only in the interests of the Indian government tosignificant departure from other firms that concen- indigenize but also in their own interests, since theytrated solely on the urban market. The challenge of would otherwise be held hostage to the rupee-yen ex-rural marketing would have been quite difficult with- change rate which had historically been unfavorableout intimate knowledge of the dramatic differences, to Indian firms relying on imported components. Thenot only between the urban and rural consumer, but Munjal family had set up a range of f irms to supplyalso the various shades of gray that differentiated components, not just to HHM, but also to other buy-rural consumers in one region from another. ers. These operations ranged from the manufacture of

The dealers were strongly supported through shock absorbers and wheel rims, to aluminum cast-major advertising campaigns. HHM retained the best ings and plastic products. Munjal family interests ranadvertising agencies to execute its campaigns. Its seven of its crucial supplier firms. HMC had also“fill it, shut it, forget it” campaign promoting the helped establish some of these ventures, and HHMmaintenance-free nature of its motorcycles was a had a controlling shareholding in Munjal Showa, formajor hit with the Indian public. These campaigns shock absorbers, and Sunbeam Castings and Munjalalso leveraged the Honda name to maximum advan- Castings, both of which supplied castings.tage. Capitalizing on Honda’s reputation for the Honda did not seem to be concerned about thequality of its engines, HHM ran advertisements that rate at which foreign sources were replaced withproclaimed, “It is the Honda that makes it a Hero.” Indian suppliers. However, HHM shareholders hadExhibit 4 provides an illustration from this advertis- expressed some concerns. The preferred providering campaign. network of suppliers was filled with either Hero

Hero Honda was among the first manufacturers family companies or firms that were run by promot-to understand the impact of product differentiation ers who were closely aligned with Munjal family in-and market segmentation on sales revenues. While terests, and this posed a potential conflict of interest.the differentiated positioning brought price premi- Since HHM was a publicly traded company, it wasums, the customer got a much more fuel-efficient felt that the profitability impact of outsourcing to al-and reliable product in exchange. The mantra of fuel lied firms would affect shareholder returns. The flipeconomy formed the core of all HHM’s product side of this sourcing approach was the reliability oflaunches. On a single platform (CD-100 series), it the network and its ability to respond quickly to en-devised three models catering to different market vironmental change. There was very little inventorysegments. The CD-100 bike was an excellent pick in process or waste due to supply chain bottlenecks,for the rural and semi-urban customer for whom cost which resulted in better margins. Of course, this alsowas critical consideration. The CD-100 SS was a ba- ensured that many among the Munjal family weresic model for the urban market. Splendor catered to gainfully engaged.the middle-class, office-going segment. Since allthese products came from a single platform, product Renegotiating the Venturedevelopment costs were spread over higher volumes,

in 1994and after-sales service quality was maintained,thereby reducing costs and increasing margins.

The influence of the Hero group was quite visi- As 1994 rolled around, the sentiments amongst theble in the way the supply chain was organized at Munjal family were mixed but largely negative.HHM. The company had built an extensive network Some felt that while Hero had ploughed a lot intoof primary and secondary suppliers for components making HHM a success, HMC had not contributedand subassemblies. Since the Indian government had as much. There was a lack of new product innovationstipulated that the joint venture must indigenize pro- and much uncertainty surrounded the negotiations atduction within a fairly short period of time, develop- that time. Even routine design changes were taking




Cases, 14th Edition


exhibit 4 Advertisement of Hero Honda

too long, and HMC’s R&D engineers did not appear manufacturing automobiles and power equipment.cooperative on this count at all. The impending ne- Mr. Munjal would have liked very much to havegotiations paralyzed HHM, and it had to sit on the been part of the automobile venture, but did not al-sidelines while its competitors roared past. Archrival low this disappointment to color the relationship.Bajaj had introduced a new four-stroke engine for its Perhaps in protecting its own destiny, Hero hadmotorcycle line and usurped the lead that HHM had been evaluating alternative product lines and marketcarefully nurtured. In the meantime, HMC had nego- approaches right from 1986. It entered into a col-tiated new ventures with other Indian partners for laboration agreement with Steyr Daimler Puch, an




Cases, 14th Edition


exhibit 5 Hero Honda Stock Performance Chart, Feb., 2000–April, 2002

70

65

60

55

50

45

40

Stock Price 35

30

25

20

15

10

5

002 /0 0 0 4/ 00 08 /0 0 01 /0 1 0 4 /0 1 0 8 /01 0 1/ 02 04 /0 2

Year

Source: indiainfoline.com.

Austrian subsidiary of Daimler A.G., to manufacture more timely fashion. Subsequent to the 1995 con-motorcycles in the 50cc–65cc range. This business tract renewal, Honda licensed HHM to manufacturewas organized under the Hero Motors banner and tar- Street, a model that was based on Honda’s recentgeted both Indian and foreign markets. Hero Motors global hit called the Dream, which had sold over 25was successful in exporting completely knocked- million worldwide. In addition to the reduced royal-down (CKD) kits for assembly in Spain, Iran, Mauri- ties and fast-track transfer of technology, HMCtius, Vietnam, Bangladesh, and Egypt. Bolstered by agreed to increase the extent of components and sub-these initial successes, Hero Motors even entered into assemblies purchased from Hero’s supplier network.discussions with BMW of Germany to manufacture With the emergence of significant competition650cc bikes. Although these talks eventually fizzled from similarly positioned offerings from Bajaj andout, they could hardly have inspired any trust or con- TVS-Suzuki, Hero Honda had become more aggres-fidence at Honda headquarters. sive in terms of its marketing with new product

It was 1995 by the time the joint venture agree- launches and market segmentation. The companyment was renegotiated and extended until 2004. had announced new product launches (two everyHHM was able to negotiate far more attractive terms year) to continue this effort. This phenomenal rate offrom HMC with respect to royalties. They were able new product introductions was, of course, solely de-to persuade HMC to accept a paltry Rs. 200 per ve- pendent on HMC’s continuing its R&D support,hicle in 1995. Licenses to manufacture future mod- since HHM had not explored setting up R&D facili-els were dealt with on a case-by-case basis using a ties in India. HHM had also undertaken significantmix of lump sum payments and royalties. By 1999, expansion of its distribution network.the proportion of royalty payments to sales revenues The going was good for HHM, and the financialhad declined considerably from a high of 4% at results followed. The company had reported flawlessfounding to about 0.5%. Honda displayed new will- quarter-on-quarter growth for 18 consecutive quar-ingness to share its R&D and product suites in a ters between 1997 and 2001. Hero Honda’s quarterly




Cases, 14th Edition


exhibit 6sales during the period grew 303.28% and its netprofit jumped from Rs. 16.28 crore to Rs. 98.343

crore. HHM hardly required any incremental work- Subsegment Major Players

ing capital over the seven-year period following theMotorcycles Hero Honda, Bajaj Auto, Yamaha

renegotiation. In fact, its working capital was lower Motors Escorts, TVS Suzuki, Eicherin 2001 than in 1994 by Rs. 1160m, despite sales Scooters Bajaj Auto, LML, Kinetic Motor Co.,having grown by approximately 7X during this pe- Maharastra Scooters, TVS Suzukiriod. Return on average capital employed (ROACE) Mopeds TVS Suzuki, Kinetic Engineering,at 65% was among the highest in the country. Hero Majestic Auto, Bajaj Auto

Honda was among the few Indian companies that en-joyed the distinction of generating a positive eco-nomic spread for an extended period of time.

Bajaj AutoBetween 1995 and 2001, the economic spread (dif-ference between WACC and ROIC) expanded from

Bajaj Auto Limited was one of India’s largest two-16.5% to 65.4%. This performance had not been lostand three-wheeler (three-wheelers, also known ason the investors who helped the share rise among theauto-rickshaws, are unique to the South Asian re-ranks of established blue chips. Exhibit 5 (pagegion) manufacturer. The Bajaj group came into exis-C-405) charts the performance of HHM shares.tence in 1945 and got a start by importing scootersHowever, just as things appeared to be set for aand three-wheelers from Italy for sale in India. Insmooth sailing, storm clouds appeared.1960, it struck a technical know-how agreement withPiaggio of Italy, and the company became a publicSTORM CLOUDS AND corporation the same year. Scooter production com-

SILVER LININGS menced in 1961 and three-wheeler production wasfollowed in 1962. The Piaggio collaboration expiredin 1991. Since then, the company’s scooters and

Competition began to intensify in the late ’90s as three-wheelers were sold under the brand name ofmany of the foreign joint ventures in the Indian mo- Bajaj. As of 2001, Bajaj had become a market leadertorcycle industry reached maturity. Players such as in scooters with annual production in excess of 1.34Kawasaki and Yamaha were helping their local com- million units. It offered products in all segmentspanies mount a credible assault on Hero Honda. such as mopeds, scooters, motorcycles, and three-Closer to home, HHM partner HMC was forced to wheelers.dissolve Kinetic Honda Ltd., the venture it set up Subsequent to the opening up of the two-with Kinetic Engineering to manufacture scooters. wheeler sector to foreign technology and equity par-This left a void in HMC’s product suite in India and ticipation in the mid ’80s, Bajaj Auto entered into ait was poised to enter the scooter market on its own. technical collaboration agreement with Kawasaki ofBoth of these developments were cause for signif i- Japan. It started production of Kawasaki 100cc mo-cant alarm. torcycles in 1986. Bajaj became a key manufacturing

base for Kawasaki and accounted for 60% of the lat-The Competition Revs Up ter’s global sales. The company had chalked out a

strategy for co-existence with Kawasaki, whereinThe competitors for HHM were Kawasaki-Bajaj, Bajaj would concentrate on developing products inTVS-Suzuki, and Yamaha Motors, a familiar bevy of the price range of Rs 30,000–60,000 and Kawasakipowerhouses from Japan. Exhibit 6 shows the key would offer a wider choice of products priced fromcompetitors by two-wheeler category in the Indian Rs 35,000 up to Rs 250,000. Though the companymarketplace. Refer to Exhibit 7 for recent sales and planned to introduce some high-tech motorcyclesproduction f igures for these players in the two- from the Kawasaki range, it was fighting an uphillwheeler market. battle trying to shed its image of a “screwdriver”

company (assembler as opposed to manufacturer) bydeveloping its own range of motorcycles.1 Crore 10 million3




Cases, 14th Edition


exhibit 7 Comparative Sales and Production Figures for Two-WheelerManufacturers, (April 2001 to February 2002)

Production Sales




Cases, 14th Edition


As per the terms of the joint venture agreement, ture and market scooters. Unfortunately, the terms ofthere was to be a 30-month licensing arrangement, the agreement specified that KHL could not enterduring which time the joint venture would continue the motorcycle business. KHL seemed to be doingto pay royalties to Suzuki. After this period, TVS was an excellent job in cornering the market and wasfree to sell the four licensed vehicles (Samurai, Max within striking distance of a leadership spot in the100, Max 100R, and Fiero) as TVS vehicles. As it race for market share. When the two-wheeler busi-turned out, TVS had localized production ahead of ness began to boom in the early 1990s, Hondaschedule and voted to terminate the agreement be- wanted to take charge, an idea that was welcomed byfore the 30-month period could lapse. the Indian partner. KEL felt that such a move might

motivate Honda to bring in new products more

Escorts-Yamaha (EYML) quickly to India. Strangely, Honda began to lose in-terest in the venture and decided to turn off the

EYML was a joint venture between Escorts Ltd., the spigot, putting the brakes on R&D spending, whichflagship company of the Escorts Group, and the was a paltry 0.31% of sales when Indian competitorsglobal giant, Yamaha Motors Co. Ltd of Japan. Ever were spending 1.5%. It also decelerated its advertis-since signing the first technical assistance agreement ing spending significantly when the competition wasbetween the two companies in 1985, Yamaha Motor blitzing the consumer with new campaigns. All theseCompany Limited (YMC) and Escorts Limited had actions hurt the sustainability of the company, andbuilt a cooperative relationship dedicated to the soon the personal relationship started to sour andmanufacture and sales of Yamaha-brand motorcy- culminated in a KEL buyout of Honda’s interests.cles. In November 1995, the two companies estab- This effectively released Honda to pursue its ownlished the joint venture company, Escorts Yamaha agenda in the scooters segment.Motors Limited, based on a 50-50 capital invest-

Other Challengersment. In June 2000, that investment ratio waschanged to 74% for YMC and 26% for Escorts Lim-ited, and YMC assumed managerial control of the In addition to domestic competition, another com-company with the name being changed to Yamaha petitive threat took shape in the form of cheap Chi-Motors Escorts Limited (YMEL). It then undertook nese imports when import restrictions were lifted innumerous measures to build the company’s motorcy- 2001. A relatively unknown company named Montocle manufacturing and marketing operations. In June Motors in Alwar (Rajasthan ) was the first to import4

2001, an agreement was reached between YMC and Semi-Knocked-Down (SKD) kits from one of theEscorts Ltd. under which YMC acquired the remain- top motorcycle manufacturers in China. A 72cc mo-ing 26% of the stock held by Escorts. The stated torbike from China cost the customer Rs. 27,000 onaims of this move to make YMEL a 100% YMC sub- road, a 125cc would cost Rs. 33,000, and a 250ccsidiary were to increase the overall speed of man- motorbike would cost Rs. 36,000. The Indian modelsagerial and business decisions, to improve product seemed frightfully expensive in comparison. In earlydevelopment capabilities and production efficiency, 2002, a moped cost around Rs. 22,000, a 100cc mo-while also strengthening the marketing organization. torbike cost around Rs. 45,000, and a 125cc motor-

cycle cost around Rs. 50,000. The domestic

Kinetic Honda Ltd. two-wheeler industry was bound to feel the pinch,especially in the mid and lower price segments of the

Kinetic Engineering Ltd. (KEL), one of the leading motorcycle, scooter, and moped segments.manufacturers and exporters of two-wheelers for

The Other Shoe Dropsover 20 years, came into existence in 1970. It manu-factured scooters, motorcycles, and mopeds thatwere all well known for their fuel economy and qual- HMC, having extricated itself from the KHL ven-ity. KEL was the beneficiary of Honda’s advances ture, announced plans to set up a new company,when the Japanese company first came to India Honda Motor Scooters India Ltd., for the sole pur-shopping for partners. They set up a 50-50 joint ven-ture called Kinetic Honda Ltd. (KHL) to manufac- Rajasthan is one of the states in West India.4




Cases, 14th Edition


pose of manufacturing scooters for the Indian mar- HMSI’s existing capacity. Given the rate of growth8

ket. At that time, it also announced that it intended to of scooters that was in the 4% range, it was difficultenter the motorcycle market in 2004, ominously the to imagine how Honda would be able to use the ca-very year when the HHM joint venture agreement pacity effectively without stepping onto HHM’s turf.would come up for its next revalidation. This an- Mr. Munjal seemed to be reassured about the sit-nouncement shocked the top brass at Hero Group. uation, however. After Mr. Yoshino’s visit, he pro-Mr. Munjal put on a brave face and announced that claimed, “His visit has made a lot of difference to theHonda had made its plans public only after Hero outlook at Hero Honda.” 9

signed off on its plans. This led to further specula-tion as to why Mr. Munjal would give his blessings ARE THERE ROADto a venture that would place the destiny of HHM in

HAZARDS AHEAD?peril.HMSI was indeed a troubling development for

the Munjal family and the shareholders of HHM.Mr. Munjal sifted through the various options he hadHowever, Mr. Munjal was looking for the silver lin-in front of him. While the investors were sated withing in what was apparently a huge storm cloud brew-the flurry of announcements and reassurances foring. He announced that HHM had negotiated threenow, what would the future hold for HHM? Howkey concessions from Honda. First, Honda agreed toshould the company arm itself for the post-2004delay entry into the motorcycles segment until 2004.marketplace? How would the competitors, especiallyIt also agreed to form a four-person committee withthe Japanese companies, respond to the uncertaintiestwo members from HHM to examine any new mo-that faced HHM? What if HMSI, despite all its as-torcycles that it would release post-2004. Lastly, itsurances, saw the potential marketplace in 2004 andoffered an opportunity to HHM to share in the equitydecided to push HHM to the periphery and engineeras a minority holder in HMSI. These assurancesa frontal assault on the motorcycle business? Wouldwere followed by a visit by Mr. Yoshino, the CEO ofHMC go back to its old ways of withholding R&DHonda from Japan, for the launch of Honda’s firstnow that it had plans to make motorcycles in Indiascooter in India. At the launch ceremony, he ad-post-2004? The joint venture had been in existencedressed the simmering problems that were perceivedfor a very long period of time by international stan-by HHM and its investors. He observed, “By 2003dards. Perhaps its time had come. Would HHM havethe two companies will together be selling 25% ofto be dismantled in the same way its competitors inthe world’s projected seven million market for two-India had been? These were troubling questions, butwheelers.” The President and CEO of HMSI, Mr.5

nevertheless very critical ones. Charting the futureTakiguchi painted a similar scenario in his interviewstrategy of HHM would undoubtedly require clearwith a leading news magazine. He said, “The discus-answers to all these questions. These were indeed thesion in 2004 will not be on whether to continue withbest of times and the worst of times for HHM.the joint venture. We w ill sit and discuss about the

products which both the companies—Hero Honda bibliographyand HMSI—should build on.” However, in the same6

breath, he also observed, “Our strategy will be tohttp://www.herohonda.com/web/index.htmoffer motorcycles which keep up with the overallwww.yamaha-motor.co.jpmarket trend in the post-2004 scenario.” It was any-7

http://www.indiainfoline.combody’s guess what that statement truly meant.Honda was already bolstering its dealership net- www.securities.com

work and had plans to set up over 100 dealerships by http://www.expressindia.com/ie/daily/19980823/the end of 2002. It was also spending Rs. 1 billion to 23550444.html

set up a manufacturing plant that would double http://www.businessworldindia.com/archive/7Jan99/corpo3(1420).html

Business Standard , Entrepreneur of the Year issue, 2001.5

Hindu, Businessline , June 19, 2001. moneycentral.com, July 25, 2002.6 8

Ibid. Business Standard , Entrepreneur of the Year issue, 2001.7 9




Cases, 14th Edition


Transcript of interview with Ms. Sulajja Firodia Motwani, Reports on Hero Honda Motors Limited:Joint Managing Director of Kinetic Engineering, Feb- HSBC, March 28, 2002ruary 22, 2002 HSBC, September 21, 2001

Business World , January 28, 2002 Merrill Lynch, June 20, 2001Report on TVS Motor Company Limited—ICICI Securi- CSFB (Hong Kong), July 6, 2000

ties, January 18, 2002 Probity, December 16, 1998Business Line , Sunday, Sept 30, 2001 Dresdner Kleinwort Benson Research, May 8, 1998Business Line (International Edition), Tuesday, June 19, Morgan Stanley, May 31, 1996

2001Reports on Automotive Sector in India

LKP Shares & Securities Limited, February 2002

Scope Marketing, September 2001

Download - Hero Honda

Top Related