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Hero honda joint venture and split

  1. 1. 1 HERO HONDA INTRODUCTION Hero MotoCorp is the World's single largest two–wheeler motorcycle company. Honda Motor Company of Japan and the Hero Group entered a joint venture to setup Hero Honda Motors Limited in 1984. The joint venture between India's Hero Group and Honda Motor Company, Japan has not only created the world's single largest two wheeler company but also one of the most successful joint ventures worldwide. During the 80s, Hero Honda became the first company in India to prove that it was possible to drive a vehicle without polluting the roads. The company introduced new generation motorcycles that set industry benchmarks for fuel thrift and low emission. A legendary 'Fill it – Shut it – Forget it' campaign captured the imagination of commuters across India, and Hero Honda sold millions of bikes purely on the commitment of increased mileage. Over 20 million Hero Honda two wheelers tread Indian roads today. These are almost as many as the number of people in Finland, Ireland and Sweden put together. Hero Honda has consistently grown at double digits since inception; and today, every second motorcycle sold in the country is a Hero Honda. Every 30 seconds, someone in India buys Hero Honda's top –selling motorcycle – Splendor. This festive season, the company sold half a million two wheelers in a single month? a feat unparalleled in global automotive history. Hero Honda became the first company in the country to introduce four–stroke motorcycles and set the standards for fuel efficiency, pollution control and quality. It has an excellent distribution and service network spread throughout the country. Hero Honda bikes currently roll out from its three globally benchmarked manufacturing facilities. Two of these are based at Dharuhera and Gurgaon in Haryana and the third state of the art manufacturing facility was inaugurated at Haridwar, Uttrakhand in April this year. These plants together are capable of producing out 4.4 million units per year.
  2. 2. 2 Having reached an unassailable pole position in the Indian two wheeler market, Hero Honda is constantly working towards consolidating its position in the market place. The company believes that changing demographic profile of India, increasing urbanization and the empowerment of rural India will add millions of new families to the economic mainstream. This would provide the growth ballast that would sustain Hero Honda in the years to come. As Brijmohan Lall Munjal, the Chairman, Hero Honda Motors succinctly points out, 'We pioneered India's motorcycle industry, and it's our responsibility now to take the industry to the next level. We'll do all it takes to reach there.'' Product range of the company includes:  CD Dawn  CD Deluxe  Pleasure  Splendor +  Splendor NXG  Passion PRO  Passion Plus  Super Splendor  Glamour  Glamour PGM FI  Achiever  CBZ Extreme  Hunk  Karizma Milestones: 1983  Joint Collaboration Agreement with Honda Motor Co. Ltd. Japan signed  Shareholders Agreement signed
  3. 3. 3 1984  Hero Honda Motors Ltd. Incorporated 1985  First motorcycle 'CD 100' rolled out 1987  100,000th motorcycle produced 1989  New motorcycle model – 'Sleek' introduced 1991  New motorcycle model – 'CD 100 SS' introduced  500,000th motorcycle produced 1992  Raman Munjal Vidya Mandir inaugurated – A School in the memory of founder Managing Director, Mr. Raman Kant Munjal 1994  New motorcycle model – 'Splendor' introduced  1,000,000th motorcycle produced 1997  New motorcycle model – 'Street' introduced  Hero Honda's 2nd manufacturing plant at Gurgaon inaugurated 1998  2,000,000th motorcycle produced
  4. 4. 4 1999  New motorcycle model – 'CBZ' introduced  Environment Management System of Dharuhera Plant certified with ISO– 14001 by DNV Holland  Raman Munjal Memorial Hospital inaugurated – A Hospital in the memory of founder Managing Director, Mr. Raman Kant Munjal 2000  4,000,000th motorcycle produced  Environment Management System of Gurgaon Plant certified ISO–14001 by DNV Holland  Splendor declared 'World No. 1' – largest selling single two–wheeler model  'Hero Honda Passport Programme' – CRM Programme launched 2001  New motorcycle model – 'Passion' introduced  One million production in one single year  New motorcycle model – 'Joy' introduced  5,000,000th motorcycle produced 2002  Becomes the first Indian Company to cross the cumulative 7 million sales mark  Splendor has emerged as the World's largest selling model for the third calendar year in a row (2000, 2001, 2002)  New motorcycle model – 'CD Dawn' introduced, New motorcycle model – 'Splendor +' introduced, New motorcycle model – 'Passion Plus' introduced, New motorcycle model – 'Karizma' introduced 2004  New motorcycle model – 'Ambition 135' introduced  Hero Honda became the World No. 1 Company for the third consecutive year.  Crossed sales of over 2 million units in a single year, a global record
  5. 5. 5  Splendor – World's largest selling motorcycle crossed the 5 million mark  New motorcycle model – 'CBZ' introduced  Joint Technical Agreement renewed  Total sales crossed a record of 10 million motorcycles 2005  Hero Honda is the World No. 1 for the 4th year in a row  New motorcycle model – 'Super Splendor' introduced, New motorcycle model – 'CD Deluxe' introduced New motorcycle model – 'Glamour' introduced, New motorcycle model – 'Achiever' introduced  First Scooter model from Hero Honda – 'Pleasure' introduced 2006  Hero Honda is the World No. 1 for the 5th year in a row  15 million production milestone achieved 2007  Hero Honda is the World No. 1 for the 6th year in a row  New 'Splendor NXG' launched  New 'CD Deluxe' launched  New 'Passion Plus' launched  New motorcycle model 'Hunk' launched  20 million production milestone achieved 2008  Hero Honda Haridwar Plant inauguration  New 'Pleasure' launched  Splendor NXG launched with power start feature  New motorcycle model 'Passion Pro' launched  New 'CBZ Xtreme' launched  25 million production milestone achieved  CD Deluxe launched with power start feature  New 'Glamour' launched
  6. 6. 6  New 'Glamour Fi' launched 2009  Hero Honda GoodLife Program launched Hunk' (Limited Edition) launched  Splendor completed 11 million production landmark  New motorcycle model 'Karizma – ZMR' launched  Silver jubilee celebrations 2010  New model Splendor Pro launched  Launch of new Super Splendor and New Hunk 2011  New licensing arrangement signed between Hero and Honda  Launch of new refreshed versions of Glamour, Glamour FI, CBZ Xtreme, Karizma  Crosses the landmark figure of 5 million cumulative sales in a single year  July 29, 2011 – Hero Honda Motors changed its name to Hero MotoCorp following the exit of its erstwhile Japanese promoter, Honda, from the company 2012  Migration of all products to Brand Hero  Launch of Impulse, Maestro and Ignitor 2013  Neemrana Plant Foundation Stone laid  50 Million cumulative 2 wheelers production Achievements/ recognition:– 2013  Green Pioneer Award – 2013  Business Leader of the Year' Award by Hon'ble President of India, Shri.
  7. 7. 7 Pranab Mukherjee, at the AlMA Managing India Awards 2013 on April 11, 2013 (Conferred on Mr. Pawan Munjal)  Business Leader of the Year' Award in the Auto (Two Wheelers) category by Deputy Chairman of the Planning Commission Mr. Montek Singh Ahluwalia, at the NDTV Business Leadership Awards 2013 (Conferred on Mr. Pawan Munjal)  CFO of the year Award (Conferred on Mr. Ravi Sud) 2012  Business Leader in Automobiles (two–wheelers) at the NDTV Profit Business Leadership Awards 2012 (Conferred upon Mr. Pawan Munjal)  Best value for Money Bike Maker and Best Advertising in Two Wheelers Category at the Auto India Best Brand Awards 2012  Digital Advertiser of the year at the Indian Digital Media Awards (IDMA) 2012  Three awards (Launch Event of the year, Rural Engagement Progamme and Live Patron Award for Marketing Excellence) at the WOW Awards organised by EventFAQsAdvertiser of the year 2012 by Indian Digital Media Awards 2012  Innovation in Loyalty Marketing Award (Initiative: Hero GoodLife Utsav) by Colloquy Loyalty Awards  TPM Excellence Award 2012 by JIPM (Japan Institute of Plant Maintenance) 2011  Two–wheeler Manufacturer of the Year award by Bike India magazine  Adjudged the 'Bike Manufacturer of the Year' at the Economic Times ZigWheels Car and Bike Awards 2010  Rated as Top Indian Company in Automobile – Two Wheelers sector by Dun & Bradstreet – Rolta Corporate Awards 2009  Most Preferred Brand of Two–Wheelers' award at the CNBC Awaaz Consumer Awards.  Adjudged at top of the two–wheeler category in the Brand Equity Most
  8. 8. 8 Trusted Brands 2010 Survey  Ranked No. 3 Most Trusted Brand across categories amongst Young Adult Males  Company of the Year awarded by Economic Times Awards for Corporate Excellence 2008–09  CNBC TV18 Overdrive Awards 2010 'Hall of Fame' to Splendor  NDTV Profit Car & Bike Awards 2010 – Two–wheeler Manufacturer of the Year, CnB Viewers' Choice Two–wheeler of the Year (Karizma ZMR) and Bike Maker of the Year by ET–ZigWheels Car & Bike of the Year Awards 2009' 2009  'Two–wheeler Manufacturer of the Year' by NDTV Profit Car & Bike Awards 2009 and Passion Pro adjudged as CNB Viewers' Choice two–wheeler  Top Indian Company under the 'Automobile – Two–wheelers' sector bythe Dun & Bradstreet–Rolta Corporate Awards  Won Gold in the Reader's Digest Trusted Brand 2009 in the 'Motorcycles' category  NDTV Profit Business Leadership Awards 2009 – two–wheeler category 2008  NDTV Profit Business Leadership Award 2008  TopGear Design Awards 2008  NDTV Profit Car India & Bike India Awards  IndiaTimes Mindscape and Savile Row ( A Forbes Group Venture ) Loyalty Awards  Asian Retail Congress Award for Retail Excellence (Strategies and Solutions of business innovation and transformation)  NDTV Profit Car India & Bike India Awards  Overdrive Magazine  TNS Voice of the Customer Awards 2007
  9. 9. 9 The NDTV Profit Car India & Bike India Awards 2007 2006  Corporate Social Responsibility Award  Top Indian company in the Automobile – Two Wheeler sector by Dun & Bradstreet – American Express Corporate Awards 2006  Hero Honda Splendor rated as India's most preferred two–wheeler brand at the Awaaz Consumer Awards 2006  NDTV Profit Car India & Bike India Awards 2006 2005  Awaaz Consumer Awards 2005 Bike Maker of the Year Award by Overdrive Magazine 2004  Winner of the Review 200 – Asia's Leading Companies Award (3rd Rank amongst the top 10 Indian companies)  ICSI National Award for Excellence in Corporate Governance 2004 by The Institute of Company Secretaries of India. 2003  Winner of the Review 200  Most Respected Company in Automobile Sector by Business World  Bike Maker of the Year by Overdrive Magazine. 2002  Bike Maker of the Year by Overdrive Magazine  Winner of the Review 200 Company of the Year of ET Awards for Corporate Excellence. 2001  Bike Maker of the Year by Overdrive Magazine  Winner of Three Leaves Award for showing Corporate Environment
  10. 10. 10 Responsibility in the Automobile Sector by Centre for Science & Environment  Business School Award for Corporate Performance to Hero Honda Motors Ltd.  And many more.. HERO HONDA JOINT VENTURE Hero Honda Motors Ltd. (Hero Honda), a joint venture between Hero Cycles of India and Honda of Japan, came into existence in 1984 as a motorcycle and scooter manufacturer in India. In 2001, Hero Honda became the largest two wheeler manufacturing company in India with over a million units produced as well as the 'World's number one' company in terms of the unit volume sales for the calendar year. The technology for manufacturing the bikes was provided by Honda whereas Hero was strong in its distribution and service network spread across the country. In August 1999, Honda Motor Company announced the setting up of Honda Motorcycle and Scooter India (HMSI) for making scooters and later motorcycles as well. After this, the stock of Hero Honda fell by 30%. Subsequently, HMSI started producing motorcycles, competing directly with Hero Honda. Hero felt that its ambition to go international was being hampered by the joint venture. Both the companies decided to end the joint venture and signed their parting agreement on December 16, 2010. With the split, the erstwhile partners became competitors. Both the companies have several opportunities ahead of them and are likely to face challenges to gain and consolidate their position in the Indian two wheeler market.
  11. 11. 11 The Two-Wheeler Industry in India The two-wheeler industry in India is highly dynamic. Post 90s, automobile has been on the list of high potential industries of India . India is the world's second largest manufacturer of motorcycles, with annual sales exceeding 8.5 million units in 2009. The country stands next to China and Japan in terms of production and sales respectively. The Indian automotive industry consists of five segments: commercial vehicl es; multi- utility vehicl es & pass enger cars; two-wheelers; threewheelers and tractors . The demand for two-wheelers is influenced by a number of factors, such as the following:  Inadequate public transportation system, especially in the semi-urban and rural areas;  Increased availability of cheap consumer financing;  Increasing availability of fuel-efficient and low-maintenance models;  Changes in the demographic profile; Steady growth in per capita income; and  Increasing number of models. Table 1: Growth rate (in per cent) of Automobile Domestic Sales Trends in various segments in the automobile industry Automobile Domestic Sales Trends (Number of Vehicles) Category 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 Passenger Vehicles 1,549,882 1,552,703 1,951,333 2,501,542 2,618,072 2,686,429 Commercial Vehicles 490,494 384,194 532,721 684,905 809,532 793,150
  12. 12. 12 Source: The table above shows us certain key features of automobile sales in India. Sales have steadily grown over the years, except during the recession of 2008. India has seen a lot of growth in business activity over the years, which has directly translated into growing sales in the automobile industry as well. In the recent years, gearless scooters (such as Honda Activa, Hero Honda Pleasure etc.) have gained a lot of popularity in the Indian markets. Earlier, the gearless segment was dominated by mopeds (2-stroke gearless scooters) which although have an excellent pick-up, are not efficient enough. Newer gearless scooters with 4 stroke engines are quite competitive and provide decent competition to motorcycles. Mopeds are a dying breed on the Indian roads. One of the major reasons for this is also stricter emission norms, details of which are displayed in the appendix. From the appendix, we can see the market shares of major two wheeler companies in the financial year of 2011-2012. We can clearly see that the Honda Motorcycle Company is enjoying a distinct leadership position in terms of market share. Hero Motocorp has to deal with “smaller” competitors, such as TVS Motors and Suzuki. Honda has come out strong from the possibly traumatic experience of the breakup with the Hero Group. The dynamic two wheeler industry experienced a major event with the unexpected Hero-Honda break-up. Three Wheelers 364,781 349,727 440,392 526,024 513,251 538,291 Two Wheelers 7,249,278 7,437,619 9,370,951 11,768,910 13,435,769 13,797,748 Grand Total 9,654,435 9,724,243 12,295,397 15,481,381 17,376,624 17,815,618
  13. 13. 13 Roots of the break-up The Hero-Honda partnership faced its first challenge way back in 1994 . It was perceived (although not conclusively proven) that HMC wasn't living up to the expectations it had created, while HHML was doing all the hard work. In 1995, the deal between the two companies was supposed to be re-negotiated. HHML was in a bargaining position, and significantly lowered the royalty percentage to HMC. HMC, on the other hand, had slowly increased its commitment to R&D innovation. Around the year 1999, the Hero group received a major shock – HMC announced the possibility of Honda Motorcycle & Scooter India (HMSI), which would initially manufacture scooters. By 2001, HMSI was up and running in India. This had certainly raised some doubts about the future of Hero-Honda Motors Ltd. By 2004 when the terms of the deal were again to be considered, HMC finally announced that it would introduce motorcycles under HMSI to the Indian market. Although HMC agreed to delay the entry of motorcycles into the Indian market, it never agreed to back down. It had prepared for this day years in advance by setting up dealership networks and a manufacturing plant. According to different published sources, one of the major reasons cited for the breakup was when Honda asked HHML to increase supply of components from HMSI. Another important reason was that the terms of the JV agreement prohibited HHML from exporting bikes to promising foreign markets. The above discussion summarizes some of the major reasons which led to the break-up. In highly competitive market, both groups wanted a bigger market share. HMSI became a direct competitor for HHML. Both offered similar, though not entirely identical product lines.
  14. 14. 14 Financial Aspects of the break-up Honda owned 26 per cent stake in HHML. The selling price of this stake was believed to be substantially lower than the market prices. Honda would cover this up with royalty payments that would last till 2014. Honda would need to fulfil financial formalities in Japan . Honda would divest its stake to its Indian partner for $1.2 billion (Rs 5,400 crore) when the then prevailing market value of its holdings was nearly $2.1 billion (Rs 9,900 crore), that was a discount of nearly 45 per cent to the market. Both companies had initially revealed very little about the agreement. It was being predicted that 5.2 per cent stake would be bought by the Hero group, while 20.8 per cent by private equity players. The Hero group would buy back this stake from the PE players over the next five years. The deal was planned to be completed in two phases. In the first part, the Munjal family, led by Brijmohan Lal Munjal group, would form an overseas-incorporated special purpose vehicle (SPV) to buy out Honda’s stake. To acquire the stake through an SPV, the Munjals would need to raise a short-term or a bridge loan. The final step for Hero would be to divest 60-70 per cent in the SPV to a group of private equity firms to pay back the loan. What compelling reasons forced Hero Motor Corporation and Honda to part ways? In 1984, Honda formed two JVs; one was to manufacture motorcycles with the Hero Group and the other was with Kinetic Honda to manufacture scooters. Honda sold its stake in Kinetic Honda in 1997 and about a year later decided to set up its own scooter manufacturing subsidiary. At that time Press Note 1 was in force, which made it mandatory for it take a No Objection Certificate (NOC) from its existing JV partner, that is, Hero Honda. The NOC was given with the understandi ng that Honda will not manufacture motorcycles whereas Hero Honda will not make scooters for five years. Honda kept its commitment, despite the fact that scooters was a declining
  15. 15. 15 market at that time. To Honda’s credit, it grew and transformed the market and today, they have about 55-60 per cent share of this market. The other agreement that was made at that time was to set up a model committee comprising a representative each from Hero Honda, Honda, and from Honda’s newly formed Indian subsidiary Honda Motorcycles and Scooters India Private Limited (HMSI). The third agreement was that Honda would manufacture the products based on the individual specifications of both companies. The conflict arose when HSMI decided in 2010 to launch a 110cc motorcycle, the segment that formed over 70 per cent of Hero Honda’s sales. Honda dismissed Hero Honda’s apprehensions that HSMI’s motorcycle will become a direct competitor to its largest selling bikes – Passion and Splendor. What were the main reasons for parting? There were really three constraints on Hero Honda which it had shared with Honda in 2008. 1) The first was the issue of exports. According to the shareholder’s agreement signed in 1984, the joint venture was only for domestic production and consumption. Who would have thought then that one day, this company will become the world’s biggest player in the motorcycle segment? 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.
  16. 16. 16 2) 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. 3) The third 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’. What is the vision for the company post the split? Our vision is that by FY 16, we should be a 10 million volume company, of which 10 per cent should come from exports. Today, exports is negligible. WHY HERO HONDA WAS SUCCESSFUL • hero is an indian company that specialised in producing bicycle parts and components. • Honda is a Japanese automobile company that is the current leader in the two wheel market Attractive marketand aligned strategic goals and processes Attractive market  735 Million people (growing forecast)  2.2% grow annually  estimated to be billion in 2000  Growing middle income earners larger demand for “two wheelers Strategic
  17. 17. 17 goals and processes  Both saw potential of Indian market as production facility and target market  had common goals of profit and market share  Formed partnership because both could gain advantages from each other Benefits for Honda  Safe and quick distribution channels  Efficient and trust worthy suppliers  Political protection  Brand reputation  Effective HR –  Low costs of production Benefits for hero  Improvement in Research and Development (technology)  More funds for expansion  Access to new global markets  Benefits from Honda’s marketing practices and production  quicker debut into global market So why was HERO Honda a great partnership?  Because they had similar goals  Were able to align their processes  And could mutually benefit
  18. 18. 18 THE NEW THREAT Today’s partner is now tomorrow’s enemy Opportunity can become a threat Threats of new competitor  They know all your trade practices  Will try and use same distribution channels and suppliers (price)  Splitting market share  Similar technology  Legal issues (when negotiation fails) Protecting yourself from Joint venture dissolution  Create intellectual property/confidentiality agreements  Select favourable jurisdiction of laws to apply  Be effective yet cautious of partner Conclusion  Well conducted Joint ventures ensure business growth  Identify similar opportunities  Align strategic goals and processes  However Joint ventures are not always permanent (HERO HONDA broke up after 26 years)  Business partners can turn out to be your future business threats  Be effective, cooperative yet cautious  Remember a joint venture is not a merger and is between two separate entities