Hero Group and Honda say sayonara

In the April-November 2010 period, Hero Honda sold 3.5 million bikes, 14 percent above the year-earlier period. On seven occasions in the last year, the company’s monthly sales have touched the 400,000 mark. With products that were well priced and offered what buyers perceived to be real value for money, a Hero Honda bike was a first bike for many Indian families. The Splendor and Passion bikes were brands and this duo gave the company the numbers in the game which kept it ahead of Bajaj Auto and other bike manufacturers.

Except for September 2008, when both Hero Honda and Bajaj Auto came within 35,000 units of each other in overall sales, Hero Honda’s sales figures have been way ahead. What made Hero Honda tick? Firstly, it has a wide portfolio that ranged from 100cc bikes, for the entry-level buyer to the more powerful Karizma that with its sporty character was meant to appeal to true-blue bikers. The company constantly refreshed its products and this worked particularly well for the Splendor. Launched in 1994, the bike became one of the world’s largest selling two-wheelers in 2000 and crossed one milestone after another. In 2004, sales crossed the five million mark. Five years later, the 11 millionth production Splendor rolled out.

Hero Honda constantly refreshed the brand and kept buyer interest focused. The Super Splendor debuted in 2005 followed two years later by the Splendor NXG. A year later, the NXG came with a power start feature. The customer saw value and put down money. And while the Splendor and Passion (and their variants) worked the magic for Hero Honda, there were other brands that did not have the kind of impact that these two had. Many models such as the Joy, Ambition and Street, considered a good product, were withdrawn. Scooters to the fore

In 2008, Hero Honda forayed into scooters, a sector that its partner made its debut in and in which it has carved out a niche. Here too, with a sound marketing plan, Hero Honda was selling in the region of 25,000 units, no mean man feat for a company identified with motorcycles. The company targeted women with its Pleasure scooter and was able to make a good impact.

In recent years, the company's CBZ Extreme and Karizma ZMR, new versions of earlier bikes, aimed at leveraging the trend towards an increasing preference for sportier looking bikes. While this was a trend that it is plausible to assume the company spotted early on, it was the big sellers that engaged its attention.

Now, that the Hero Group and Honda have signed an MoU under which Honda’s stake will be bought in a phased manner among two or more qualified promoters, what’s in store of it? Hero Honda has a small window to carve its own new path.

In the foreseeable future, the existing relationship will continue with the Japanese company continuing to support its Indian partner. Existing products continue and a new licensing arrangement with Honda will be inked under which new products will be supplied to the Hero Group. Whether these have the kind of impact that the current portfolio has remains to be seen. As the sole promoter of the company post-buyout, the Hero Group will now be able to tap the export markets. It did this in small numbers earlier but now has a chance to do so more extensively.

A conference call with the company’s head of marketing suggest that the Group will foray into exports in a major way. That’s one clear challenge but the biggest will be R&D new product development capabilities. Hero Honda has none of its own. It success was premised on the Japanese brand name and the engine technology but as the JV unravels, Hero’s main challenge will be to either buy or license technology, both of which are not going to be easy or cheap. Now, a company like Piaggio which recently launched a two-cylinder engine made along with Ricardo is one that can potentially be targeted. The search for a technology partner will necessarily be driven by someone who can provide fuel efficiency and scalability for upcoming emissions. Will the Hero Group shop around in China for technology? Chinese bikes, it may be recalled, did not get past ARAI in 2002 but improvements since then cannot be ruled out.

As part of the split, the company will over time change its name and brand and will continue to launch some new Honda products but whether these will be cutting-edge products remains to be seen. Clearly, as its JV partner, the Japanese company has provided full technical support to Hero Honda but that commitment cannot be counted on going forward.

So what does the future hold? What markets can the company target? In this context, take a look at what the company’s chairman Dr Brijmohan Lal Munjal had said at the 2009 AGM. “There will be more competition on price, on technology, on models, on styling and on design, and a lot of it may happen in our mainstay segment." Somewhere else in the speech, Munjal says, “There are more than seven million new bicycle users every year in India, and most of them aspire to upgrade to two-wheelers. The growing aspirations, expanding road networks and growth of satellite townships across India are some of the factors that will spur demand for two-wheelers in the near and medium term." Clearly, there is and will continue to be demand for bikes beyond the big cities. This will be a segment that Hero can target given that easier finance options and higher aspirations are huge market drivers.

Hero Honda has always supported its products with catchy ad campaigns that focused on the new generation of young Indians and the intensive association with cricket paid off handsomely. In this context, it’s plausible to say that Honda’s story was a marketing success. Now without Honda, its key challenge will be on the technology front. After TVS and Suzuki parted ways in 2003, the Indian player launched the Victor and has even worked on its indigenous technology. That technology has seen one like the clutchless mechanism that found itself in the Jive. Bajaj Auto has developed its DTS-i technology and used it in its entire bike range. The company can also now tap KTM for know-how for joint development of the water-cooled four-stroke 125 and 250cc engines.

In contrast to Hero Honda that has exclusively dealt with Honda technology, Bajaj has had the benefit of combining local and international. But that does not mean it cannot tie-up for new and cost-effective technologies. Honda and its future in India

What about Honda? The first inkling of its own ambitions in India were indicated in the message that Honda CEO, Takanobu Ito gave shareholders in July 2010. He said, “Honda’s total unit sales rose along with expanded sales of the Activa and the new CB Twister in India and with products like the PCX and 110iAT in Thailand.”

What’s more interesting is Ito's statement about the future. His message puts it succinctly: "To overcome the tough operating environment we face and attain new growth, our keys words will be simplicity, concentration and speed.” He added that while in the past the company has “grown its automobile production operations in emerging nations by applying know-how based on its experience in industrialised countries, going forward, we believe it will be important for Honda to utilise the development, procurement and production know-how we have gained in Asia to manufacture automotive products that meet customer needs.”

Under Honda Motorcycle & Scooter India, the company has carved a reputation for itself in scooters with a powerful product like the Activa. Along the way, it had to discontinue a product like the Eterno, a geared scooter that the company had betted would sell well in smaller towns. Clearly, automatics are the norm, who ever makes them and given the kind of traffic conditions that prevail in the cities, customers are not going to demand less.

With Honda now in charge of its own destiny, as it were, it will bring to bear the full force of its technology and branding to bear. Going by media reports, Honda wants to introduce a new bike that may be its cheapest in order to boost the sales numbers in emerging markets like India. The bike will likely cost 4,000 Yuan or $599 that would make it about the price of the Bajaj Platina. That would potentially be real value for money. A product like this, it has been suggested, could boost Honda’s revenue as demand for motorcycles weakens in the developed markets. Higher emerging-market sales may also offset potentially lower profits repatriated from Hero Honda Motors Ltd.

With Honda soon to be on its own, it will look for greater synergies with its other markets in Asia, one of them being Thailand. There could also be opportunities for Honda to leverage the FTA agreement that both the countries inked some time ago. Senior Honda sources have already indicated that as demand in developed markets declines, the option is to boost output from overseas. currently 56 percent. That ratio is set to only rise.

With Honda on its own, it could also expedite plans to make its India-based facilities a hub for products destined for other parts of Asia. HMSI’s second plant is coming up fast at Tapukara in Rajasthan and a third one is also planned. Bigger numbers spell more business of the country’s vendor base as well.

In the local market, Honda will have its own challenges setting up more dealers on its own which isn’t easy. (India Yamaha has begun to look at selecting and nurturing sub-dealers). The company will also have to handle labour issues. HMSI has had several labour issues concerning contract staff with one flash strike occurring soon after the companies decided to go their separate ways.

Marketing-savvy Hero and technology-powerful Honda represented the best in a business alliance that worked for both. As separate entities, they will undoubtedly compete in markets overseas, if not locally.