Hero MotoCorp ups the ante with focus on R&D
An aggressive Rs 2,575 crore investment in two new plants and an integrated R&D centre to develop home-grown technologies and vehicles marks a new chapter for Hero MotoCorp, essential for its expansion strategy.
Recognising the trend Hero MotoCorp, the country’s largest two-wheeler manufacturer, has revealed an aggressive growth plan. On June 4, it announced an investment of Rs 2,575 crore in expanding capacity at its three existing plants, setting up two new plants (one at Neemrana in Rajasthan and the other in Gujarat) and, importantly, an integrated technology and R&D centre at Kukas in Jaipur.
The company will make an initial investment of Rs 400 crore in the Neemrana facility. Construction of the new unit is to commence soon and it is slated to be operational by the first quarter of FY 2014. The plant will have an installed capacity of 750,000 units per annum and will provide direct employment to over 1,000 people.
Hero MotoCorp has also signed a state support agreement (SSA) with the Gujarat government to set up a new plant in the state; the specific location is as yet not disclosed though land acquisition is underway. The plant will become operational by the second quarter of FY 2014 and will see an investment of Rs 1,100 crore. While the installed capacity of this plant will be 1.2 million units per annum, the second phase will see a rise in this number to 1.8 million units. The unit will provide direct employment to over 2,000 people. This is the second new plant announcement in Gujarat in the past fortnight; on June 2, Maruti Suzuki had announced its plans to set up its all-new unit at Mehsana.
PawanMunjal, Hero MotoCorp's MD and CEO, said that the choice of these two states is because both Rajasthan and Gujarat have offered Hero MotoCorp financial incentives over and above others. “Slowly, we will move down to southern states as well,” he added.
Funding for the new investments will be met through internal accruals as the company has a cash surplus of Rs 4,000 crore, generating Rs 2,500 crore cash surplus each year.
For Hero MotoCorp, the two new plants will help augment its total installed capacity to nine million units in two years, which is in line with the company’s objective of reaching 10 million units in the next five years with the contributions from assembly units overseas. The two-wheeler manufacturer currently has a total installed capacity of around 6.2 million units in its three plants at Haridwar (Uttarakhand), Dharuhera and Gurgaon (Haryana). The company will also invest Rs 500 crore in expanding existing capacity, mainly at the Haridwar plant.
R&D is new mantra
After its much-publicised split with Honda Motor Company on December 16, 2010, Hero MotoCorp has been pushing for technology development and upgradation and the plan to set up the R&D centre is clearly a move in that direction. The research unit, which will be spread over 250 acres, will be the largest two-wheeler R&D centre in the country. Hero MotoCorp plans to invest Rs 400 crore in the facility which will involve 500 engineers.
Having already tied up with motorcycle company Erik Buell Racing (EBR) of the US for technology sharing in February 2012 and engine developer AVL of Austria for bike and engine technologies in March, the company is also exploring additional strategic alliances and partnerships to further scale up its R&D capabilities. Importantly, the R&D centre will enable Hero MotoCorp to strengthen its technological expertise, an area which the company has, till now, been somewhat weak in, having relied on Honda’s might for over a quarter of a century.
The two-wheeler maker is also exploring setting up assembly units in international markets mostly through partnerships, for which paperwork is underway. Later it will look at establishing manufacturing facilities as volumes rise commensurate with demand. Initially the thrust will be on new markets in Central America and Africa where exports of two-wheelers will be in the form of CBU units to be followed by CKD and SKD versions. The first exports to these markets will kick off in the next quarter between July and September 2012 under the Hero brand name.
According to Munjal, growth in these countries is happening earlier than in Latin America, more specifically in Brazil which has different requirements for engines. Brazil uses an ethanol mix in engines and as such the power plants would have to be tweaked for use in that country. “We will target Brazil when we are ready with those engines,” he remarked.
Elaborating further, he said that “our initial focus is on markets where the volumes are large, and products can be sold with minimum changes. So right now, our existing products with suitable modifications will be made available in these new international markets. We have already identified partners for these markets. We expect a growth of at least 25 percent in our international business in the first year of our opening these new markets.”
At present, exports form three percent of the total product basket and the company expects to touch 10 percent of its total production of 10 million units over the next five years.
Following the break-up with Honda, the company is now focusing on pushing the Hero brand in its new range of products. The first two products – the segment-creating 149cc on- and off-road Impulse motorcycle and the 109cc Maestro scooter – have been already launched with the Hero branding. The company, which had a 56 percent share of the motorcycle market in 2011-12, is slated to roll out two new models; the 125cc Ignitor motorcycle, which was displayed at the Auto Expo 2012, will be introduced soon. The Splendor and Passion have already been re-launched under the Hero brand name and the entire re-branding exercise will be completed by the second quarter of 2012-13.
Despite intensifying competition in the domestic motorcycle market, Hero MotoCorp has maintained its market share at around 55 percent over many years. As per a recent ICRA report, in the 75-125cc segment (that represented 70.3 percent of total motorcycle sales in 2011-12), Hero had an overwhelming share of 75 percent (71 percent in 2010-11). Its market leadership in the 100cc commuter segment is not likely to come under threat anytime soon, albeit some commuter bikes have rolled out recently – Honda’s Dream Yuga and Suzuki’s Hayate.
Despite being among the oldest two-wheeler brands in India, Hero MotoCorp’s CD Dawn/Deluxe, Splendor and Passion continue to enjoy strong brand equity in both rural and urban markets, thanks to regular product upgrades on the common platform.
The manufacturer is optimistic about the scooter segment and according to Munjal, the Maestro has received a good response in line with the rising fortunes of the scooter segment in India. Hero MotoCorp had a 16.3 percent share of the scooter market in 2011-12 and clearly wants more of the pie with its Pleasure and Maestro models.
Compared to bikes, the faster volume growth of the scooter segment is expected to be driven by the growing acceptability of gearless scooters by women, rising urbanisation and the increasing population of working women, expanding product offerings and a comparatively lower base. Accordingly, the scooters segment is expected to gradually increase its share from 19.1 percent in 2011-12 to over 27 percent by 2016-17. This means volumes in the domestic scooter market are estimated to double by 2016-17 over their current levels.
On the sales front, despite the sluggish market sentiment, Hero MotoCorp notched sales of 556,644 motorcycles and scooters in May 2012. It opened fiscal 2012-13 with sales of 551,557 units in April 2012. The company’s management has forecast growth of 9-10 percent for FY13 with volumes of 6.8 to seven million units.
SIAM has forecast an 11-13 percent growth for 2012-13 for the overall two-wheeler industry which sold 13.4 million units in 2011-12, recording 14.16 percent growth. But Hero MotoCorp is looking beyond that, readying future capacity in time for FY 2014, when the two new plants go on stream. And giving a fillip to that ambition will be a beefed-up R&D programme.
INTERVIEW WITH PAWAN MUNJAL, MANAGING DIRECTOR & CEO, HERO MOTOCORP
What role will the new R&D centre at Kukas play?
We will establish a state-of-the-art centre for research, design and innovation on 250 acres at Kukas, Jaipur in Rajasthan. This will be the largest R&D centre for two-wheelers in the country.
We will also have a wide variety of test tracks including a high-speed test track which will be over 2km-long and useful for testing high-end bikes. This technology centre will have prototype and in-house testing facilities.
How will you staff the R&D team?
Hero MotoCorp is ramping up its R&D set-up both in terms of infrastructure and people. There are currently close to 300 engineers at our R&D set-ups at our Gurgaon and Dharuhera plants. We are strengthening our own capabilities both organically as well as through tie-ups, for example, with EBR and AVL.
What has been the response to the Impulse thus far?
The Impulse, the first Hero-branded two-wheeler, has been received well and is also generating volumes in upcountry markets. This adds to our strong portfolio in the premium segment comprising the Hunk, CBZ Xtreme, Karizma and ZMR. After the Impulse, we have recently launched our first scooter under the new Hero brand — the 110cc Maestro which is a sturdy, feature-loaded scooter targeted at young college-going males, and first-jobbers.
Currently, scooters are outpacing motorcycles in terms of growth. Are you planning to add new scooters to your portfolio?
Our current offering, the Pleasure — specifically targeted at women customers — has helped expand the scooter market. Now with the launch of the Maestro, we are clocking an average of about 40,000 units of both scooters every month, and are confident of further increasing our presence in the gearless scooter market.
What is Hero MotoCorp’s current market share?
In the past one year, our share in the domestic motorcycle market has grown from 54 percent a year ago to over 55 percent at present. We are moving with great speed towards giving shape to the vision that I outlined at the launch of our new brand identity in London in June last year.
What is your vision for the company, in terms of positioning it globally?
Now that we are on the threshold of becoming a truly global company, our initial focus is on markets where the volumes are large, and products can be sold with minimum changes. So right now, our existing products with suitable modifications will be made available in these new global for which we have already identified partners.
We expect a growth of at least 25 percent in our international business within the first year of our opening these new markets. These exports will begin in the July-September 2012 quarter and includes countries in Central America and in Africa, all under the Hero brand name.
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