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Hero without Honda: Will brand 'Hero Honda' survive after Honda's exit?

After the exit of Suzuki from a joint venture, TVS Motors took many years to find its bearings. Will this be the case with Hero too?

The exit of Japanese Honda Motor Corp from a joint venture with the Hero group may open new avenues for India's number one two-wheeler maker. Although the experience of another Indian company which had gone through a similar experience, has not been so good. In fact, after Honda exited from another joint venture, Kinetic Honda, the Firodia group failed to cope up and ended up selling Kinetic Engineering Ltd to Mahindra & Mahindra (M&M) in 2008. In another instance, the TVS group struggled for many years to develop new products and launch them across the country after its breakup with Suzuki. So what will happen to Hero without Honda?

"One big differentiation between Hero Honda and other automobile companies is the scale and strong brand recall," said Deepak Jain, assistant vice president and research analyst, Sharekhan. "Hero Honda's Splendor is a decade-old motorcycle brand. However, automobile divorces are very challenging. Retaining core customer group will be the incremental challenge for the Hero group apart from cut-throat competition."

As per the new licensing arrangement between Hero Honda Motors Ltd and Honda, the Indian entity will be free to start its own research and development (R&D) capabilities and exploit global export and manufacturing opportunities. The Hero group, promoted by the Munjal family, will buy Honda's entire 26% stake in the joint venture for an undisclosed sum.

With both companies deciding to end their 26-year old partnership, the question being asked is what may have caused the split? There are two likely reasons. One, the increasing cost of royalty and technology (R&T) and second, the growing presence and market share of Honda Motorcycle & Scooter India (HMSI), a 100% subsidiary of Honda.

R&T payments are the third biggest expenses for Hero Honda after raw materials and employee cost. However, even as it has to pay more to Honda under the R&T head, its margins are actually falling. This coupled with higher input cost means that Hero Honda was left with marginal revenues; on the other hand, Honda was walking away with a bigger chunk, year after year.

Even Hero Honda's product development cost (PDC) is much higher than that of its competitors. The PDC for Hero Honda is over 2.7% of its net sales, while it is 1.4% and 2.3% for Bajaj Auto Ltd and TVS Motors Co Ltd, respectively. Hero Honda pays about 90% of the PDC as R&T cost to Honda, while there is no R&T cost for TVS Motors.

"Royalty deregulation received the government's nod only in December 2009 which was earlier capped at 5%. Maruti's parent, Suzuki, took the lead in hiking royalty charges. We were anticipating Honda to do the same," Mr Jain said.

HMSI, which is the market leader in the scooter segment, is increasing its presence in the motorcycle space. The motorcycle segment in India is divided into three broad categories, entry-level bikes, executive segment and premium segment. Currently the entry-level motorcycles (defined by engine capacity as 75cc to 125cc) caters to about 72% of the market, while the executive segment (125cc to 250cc) and premium segment, constitutes 27% and 1%, respectively.

Hero Honda is the market leader in the entry-level segment while Bajaj dominates the executive segment. During April to November 2010, Hero Honda sold 29.5 lakh units, a growth of 9.6% over corresponding period last year, in the entry-level segment. At the same time, HMSI sold 1.2 lakh units in this segment, a phenomenal growth of 4,34,703%, over the corresponding period a year ago!

In the executive motorcycles segment, Bajaj's sales continued to grow at 47%, while HMSI achieved a growth of 27% during the eight-month period till November 2010. Hero Honda's sales increased 30% to about 2 lakh bikes in the same period. The rapid rise of HMSI and its pricing policy may have become a cause of concern for Hero Honda, especially the Hero group.

Although, Honda will continue to provide support to Hero Honda, the Munjals have a very short time to get their bearings right. The Hero group has two options, either to go for in-house R&D or choose a domestic/foreign partner for technical collaboration. However, analysts do not see the group going in for a partnership with anyone.

Mr Jain from Sharekhan said, "Creating an alliance with a domestic partner is not value accretive or a possibility for Hero Honda. A new foreign alliance would never substitute Honda as a brand.  We do not see this as a possibility in the short term."

"Even if the agreement (with Honda) is not renewed, the fact that the current agreement is in place till 2014 provides the Hero group sufficient time to beef up its R&D capabilities. In fact, this also alleviates our concerns on any premature termination of the contract," said Kaushal Maroo, auto analyst at Religare Capital Markets.

Echoing a similar sentiment, Mr Jain said, "Manufacturing entry and executive segment bikes would not be much of an issue (for Hero Honda). We believe that the company would have already internalised the technology so far. However, manufacturing, marketing and delivering premium bikes would be a challenge."

In the 1980s, Hero Honda grabbed everyone's attention with its campaign 'Fill it - Shut it - Forget it', which emphasised fuel efficiency of its vehicles and helped the company grow at a double-digits. Now, Hero may have to revise the 'Forget it' part, to re-invent (especially, its R&D capabilities) and refill (the euphoria, once attached to it), to survive in the coming years.

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COMMENTS

SRINIVAS

5 years ago

The main differentiates is the technology & R&D between Hero & Honda. Hero has not been able to showcase a technologically advanced product till now in terms of mileage. They will get faded away like Hindustan Motors old ambassador cars without contemporary technology. See the products offered by TVS group even though they do not have the market share as of Hero, their products are much superior. Hope Hero listening.

Peeyush Kumar

5 years ago

I was surprised already when I saw just 'Honda' in market, 2 years before at 1st it was confusing that which company is this even? Now 'Honda' is trying chash their brand made by Hero as 'Hero Honda'. Hero must get royalty and brand value ransom from Honda for earlier advertisements and marketing strategies.
And as per for survival I dont see 'Heromotocorp' is a name which can impact buyers mind. They must have chosen a better name. But also Bajaj is their with pulser and XCD and platina to prove that Indian company is far better than these japan's and also dont forget M&M. So Heromotocorp will get its place, the only thing is needed continue R&D and little time.

DKJain

6 years ago

This is typical film story of Indian spinster HERO marrying foreign girl HONDA.
Theme of story is marriage that last long but not forever.

Hero married to Honda way back in the year 1986. Before that Hero was very hard working spinster doing business in Bicycle segments and was well known in India . Honda was coming from very rich family, a modern techno foreign girl from Japan. Seeing the vast opportunity in India, Honda married to Hero. Since their marriage, relationship (business) grown in manifold and came to extent to reckon as one of the largest manufacturer (motorcycle) of world. During those years, Hero used to give money every year to Honda by way of alimony (royalty & technology fees). Out of matrimonial lock they have various issue namely CDS, Splendor, Passion and so on. All were successful. People were admiring their marriage. Recently to celebrate their marriage silver jubilee, they distributed huge gift (DIVIDEND OF 5500 PERCENT in year 2010). However, sadly, on one frightful day of year 2010, as used to happen with now’a’days spouse, HONDA asked for divorce. Pursuant to divorce, she want to continue with alimony under the guise of Royalty & technology fees till 2014, in addition to huge amount against her 26% stake . She has taken all advantage of HERO, since past several years and now being known India as vast opportunity want to settle her feet on her own. (SMART & OPPORTUNIST) May be she started believing in being single and in live-in relationship since past few years by setting up her own home (HMSI) and explored the opportunity once again. Hero being aggrieved of Indian marriage & divorce law and institution is HELPLESS HERO. Now what will happen to HERO whether he will be able to survive on his own or whether HONDA will be able to make new opportunity a positive possibility (TURN IN TO MORE PROFITABILITY), no its not THE END, its INTERVAL . We may see wanted BRIDE or WANTED GROOM from both side in coming day’s.

Shadi Katyal

6 years ago


why should Honda pay any good will ? Is it not because of Honda name that Hero is able to sell the product. Hero or Munjal group do not have any name in any world market. even Hero cycle is not in any world class products.
WE cannot judge what JV agreement is and one cannot state that Hero put money in advertisement etc. but that is part of any product sale policy. I presume in India since during good old
Nehru and Permit raj with low quality products and no imports we didn't need any such large advertisement but times have changed and with many products in the market one's survival depends on the perception of buyer and only way is advertisement.
Did Hero made any efforts on R&D or just dependent on Honda??
Not knowing the reason of such separation it is Hero which will suffer as most of the customers will question the quality

Dk Jain

6 years ago

There is two concern which need to debated. First Honda should have paid Goodwill amount to Hero group, since it is JVgroup, which has built brand equity for Honda also, since inception of JV in the year 1986. Secondly, in brand 'Hero Honda' the word 'Honda' has more brand recall then the Hero, which being generic word does not have its own brand image of its own. Moreover, People associate 'Hero' with bycycle. Hence Honda in my view is definately on more advanteguous position rather Hero, which mean Hero Gruop will spent amount on advertising & marketing of Hero Honda, and benefits will innure to Honda in addition to royalty amount which is agreed for. Lastly How Brand 'Hero Honda' and Brand 'Honda' will co-exist post split till 2014? Brands which create confusion in the mind of customer are not allowed simpliciter se as per Indian TradeMark Law.

SANarayan

6 years ago

In most JVs with multinational Cos, the foreign partner invariably uses their apparent clout in R&D and technological superiority to the hilt by creaming off upfront their return on investment by way of royalty and techical support fees. Then they, in the JV decision making process, insist on large spends on brand building either of their foreign name or their jt. name where the foreign partner's name almost always is seen as superior to the Indian name(given the Indian psyche of fawning at everything foreign). If HMSI is doing so well it is in large part due to the brand building spends on Hero-Honda where the Honda is perceived as the mainstay.Returns and recoupment to the Indian partner is after all this.Because of this the Indian partner , if in the Pvt sector gets into cosy ancilliary supply arrangement, while the PSU partner in such JVs just fume and fret. Take all the JVs in the lubricants sector with PSUs or Pvt Cos, they have all failed! Infact its surprising that Hero-Honda lasted so long. A Mckinsey study on JVs has found their average shelf life at 7 years only!

MUKESH

6 years ago

IT'S THE OTHER WAY AROUND! IT'S THE HERO IN IT THAT HONDA SUCCEEDED IN INDIA FOR A QUARTER CENTURY OF JV-MARRIAGE, UNLIKE ANY OTHER IN INDIA! THE JV-PARTNERSHIP PROCESS WAS SO LONG & ARDUOUS THAT ALL THE EX-BIGGIES WERE LEFT BEHIND BY HERO GROUP - PURELY HOME BRED, BUT WITH GREAT WORK CULTURE, PHILOSOPHY & MINDSET THAT THE JAPS WERE SO IMPRESSED WITH THEM TO START THE MOST SUCCESSFUL DESI-VIDESI MARRIAGE OF CORPORATE WORLD, TAKING IT TO THE GREATEST HEIGHT - BECOMING THE NO.1 2-WHEELER CO., WHICH EVEN HONDA IS NOT ON ITS OWN!

UNLIKE TVS' CONSERVATISM, HERO GROUP STARTED FROM SCRATCH AS REFUGESS AFTER PARTITION WITH ALMOST NOTHING TO WHERE THEY ARE TODAY - TRULY FROM ZERO TO HERO!

WITH HERO & HONDA, BOTH COMLEMENTED EACH OTHER! ON ITS OWN, HONDA COULD NOT/WOULD NOT HAVE GOT THE SUCCESS IT DID!

SAD BUT TRUE OF THEIR PARTING. BUT HERO WILL DO EVEN BETTER SANS HONDA AS WELL. IT IS A MATTER OF TIME.

NOBODY CAN CATCH UP WITH HERO' MOMENTUM, LAURELS & THE LEAD! IT IS THE SACHIN TENDULAKR OF 2-WHEELERS!

REPLY

shadi katyal

In Reply to MUKESH 6 years ago

There is no question that Munjal family made this from scratch after partition and like many other families came with nothing.
To state that Honda flourished due to Hero is very misleading.Why did Hero went for joint venture?We must recgonise that Honda is a world brand name whereas no one knows about Hero. Please dont mislead others.
Few years back when enquired for exdports of Hero bicycles ,we found out that Hero doesnot make any 10 speed gears and thus was dependent on Korea and Japan and was unable to export. This shows you how much Research and Development was being done.
One wonders why dont we recgonise that unless we have our own R&D and some world brands we cannot succeed.
Look back and see how with old technologies we continied to make same old scooters and motor cycles.
I am not sure how far Hero has moved with the bicuycle technology now
We as a nation with such ideas that foreign brands flourish in India. Is this why we go for joint ventures???

Vikas

6 years ago

If TVS could survive, then Hero Honda is miles ahead in terms of Cash war chest and strong management.

I wonder why Honda did not try to buyout Hero with the kind of money they have and the kind of market they could have got?

Vinay Isloorkar

6 years ago

16.12.10

Rajiv Bajaj has gone on record to say that Splendor and Passion are 2 very strong brands that will not wilt in a hurry. TVS' divorce from Suzuki was a blessing in disguise for the co. They went on to confidently enter the 4 stroke space, developed their own models like Victor and of late are a respectable player in the profitable 3 wheeler space. It is hoped that Hero will also convert adversity into opportunity and give it on the chin to the Japs. Bajaj with their Pulsar development have proved to the world that 2 wheeler tech is not rocket science.

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