The news about Honda to sell its 26% stake in Hero Honda has become talk of the town in Indian two wheeler industries. According to sources close to this deal said that Munjal family led by Brijmohanlal Munjal will buy the 26% stake from Honda. The news, broken first by ET newspaper’s business channel. As per current market valuation Honda’s 26% stake is valued at over Rs.9,000 Crores. Hero Honda joint venture was formed in 1984 between Indian Hero group and Japanese Honda. It is one of the most successful joint venture in the world.
According to sources there are series of off market transactions will take place to buy the stake. Munjal family has formed SPV (Special Purpose vehicle) to buy the stake. They will first buy the stake through SPV and later on pledge this share to the bank to avail finance. The private equity option is also there. Honda will sell its stake at discounted price than current price.
The management of both the companies, though, strongly denied it. A Honda Motors spokesman told Bloomberg News that the company had no plans to sell. A statement issued by the Hero group on Tuesday after reports first surfaced of a possible Honda Motor exit surfaced, said, “The news report is incorrect and speculative. We have already conveyed that the Hero group and Honda Motor have for years enjoyed very cordial and fruitful relations, and there has been no change in the relationship in any manner.”
There are lots of differences prevail between Hero and Honda regarding royalty and spare parts. Honda wants to increase royalty from the sales while Hero does not want to increase royalty as majority of sales coming from old model splendor and passion. Honda also forcing Hero to source spare parts from HMSI (Honda Motor Scooters & India), while hero group does not want to do that due to its well developed vendor base.
Apart from this the fact can’t be denied that HMSI has very negligible presence in motorcycle segment. It wants to increase its market share in India but due to joint venture with Hero Honda it is not able to do it aggressively. India is second fastest growing automobile market in the world. Currently Hero Honda has more than 50% market share in Indian Domestic motorcycle industry.
This is not a new story for Indo-Japanese ventures. The same story had been seen with TVS-Suzuki and Kinetic-Honda joint venture. In fact there are lots of similarity between Hero Honda and Kinetic Honda joint venture. Let’s have look to TVS-Suzuki and Kinetic Honda joint Venture.
Kinetic Honda
In 1985 kinetic tied up with Honda to form Kinetic Honda Motors ltd. with both the partners holding an equal stake of 28.56%. The joint venture was running successfully till 1997. The actual problem started in 1998 when Kinetic Honda reported loss of 6 crore rs in the first quarter of 1998. There were lots differences were prevailing between Hondas and kinetic over issues like introduction of new models, advertising expenditure, marketing strategies, etc. Eventually Honda decided to close the matter and called kinetic officials to Japan in December 1998. Honda made an offer to Kinetic- either they will buy their 51% stake or Honda would buy out its 19% stake.
Meanwhile the rumor was prevailing about Honda to divest its stake in Kinetic. Both Honda and Kinetic were quick to deny rumors of a split, though reports of Kinetic quietly raising resources to buy out Honda’s stake kept surfacing. In the same month Kinetic bought Honda’s stake at Rs 45 per share half of the market price at a total cost of Rs. 35 crore. Kinetic also signed an agreement with them for continuing to manufacture and sell the existing Kinetic Honda models. Honda also agreed to continue providing technical know-how in return of royalty and technical fees from Kinetic.
After this deal Kinetic Honda was renamed as Kinetic motors ltd. Kinetic knows that if it has to survive without Honda, Dealer base and new product would be the key. Kinetic also started to manufacturer motorcycles but eventually, Kinetic was failed to survive in the competitive market. Later on the scooter business was sold to Mahindra group. It’s now known as Mahindra two wheelers.
After stake sale in August 1999, Honda established its wholly-owned subsidiary HMSI (Honda Motor Scooter India Ltd.) in India with an initial capacity of one lakh units per year. Today it has 48% market share of scooter market in India. It’s aiming to sell 1.6 million units in current fiscal year 2010-11.
TVS Suzuki
Suzuki entered India through the TVS Suzuki joint venture, originally incorporated as Indian Motorcycles Pvt. Ltd in 1982. In the 90’s when competition was intensifying in Indian motorcycle market TVS approached Suzuki for more funds and technical support. Instead of providing more technical support and funds Suzuki started creating road blocks in the management. Finally, in September 2001, TVS group and Suzuki Motor Corporation announced their break up. TVS bought the 25.97% stake of Suzuki for Rs. 9 crore increasing its stake to 58.43%. TVS also ended the technical license agreement with Suzuki Motor before the maturity date. The move benefitted in terms of royalty payment to Suzuki as it has 30,000 booking orders for its bike TVS Victor.
Post stake sale TVS Suzuki was renamed as TVS motors Company. The company started focusing on Research & development as its key to survive in the business. TVS Motor won the Deming Application prize in 2002, becoming the first and only Indian two-wheeler company to win the award given to companies that do outstanding work in the field of Quality Management. It is considered to be one of the world’s most prestigious quality awards Today it’s able to produce bike like Apache and scooter like Wego.
On the other hand according to mandatory lock in period of three years Suzuki Motor Corporation was not able to enter into Indian two wheeler segment till 2005. In 2006 Suzuki Motorcycle Indian Ltd was established. The company is rapidly expanding in Indian two wheeler market.
Coming back to Hero Honda what could be scenario if Hero will buy the stake from Honda?
- Hero Honda will able to save Royalty which accounts for 2.5 to 3% of total Sale. The saving in royalties could well be directed towards R & D.
- Although Hero Honda’s success contributed to Honda’s technology, the fact can’t be denied that the Hero group’s marketing acumen and knowledge of the consumer has also played a big role in the company’s success. The company has well established brand and distribution centre.
- Hero Honda’s technical agreement with Honda will expire in 2014 so the company still has 3 years time to build its own R & D.
- It will result in more aggressive HMSI as Honda will able to directly compete with Hero Honda
- There are concerns about the ability of Hero to build product development facilities – like Bajaj Auto and TVS – in a short span of time. On the other hand it will take time Honda to build facilities in India. These both the factors could well serve to the competition.
- What will happen with Hero Honda’s new product line after 2014 is still a question.
As still nothing has been confirmed officially by any company let’s wait and watch.
- Mahavir Kothari
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{ 36 comments… read them below or add one }
When two people fight the third persons gets benefited.If hero and Honda alliance splits then biggest looser will be hero group.hero group will become zero as they dont have R & D capability like Honda to launch new products that could withstand compition.biggest gainer will be Bajaj auto.my guess is hero will loose its market grip,it will be HONDA v/s Bajaj in future as honda has studied the market well now.
without honda……………. hero honda will just be hero cycles..lol …good news for bajaj and tvs
Do u know that,now hero can buy technology not only from honda but also from other advance firm of the world.
I dont want Hero and Honda to split. They are serving us since the 1980s.
But yes, bajaj should take full advantage of this moment. And should double its pace of growth. i want them to grow, as they are the only one hu can challenge the biggies i.e. Yamaha, Honda etc. and can reach a level equal to theirs.
I want the alliance to continue.if they split we will see only bicycles from hero and platina and discovers from bajaj which is not good.
i dont want to hear this bad news from hero honda…..they are the best bike maker………other companies will get advantage of that….. i don’t want my best bike manufacturing companies to go down… hope it does not break..
Hero Splendor, Hero Karizma, Hero CBZ… I won’t care to pay attention when there the “Honda” is missing. Hero will become zero without Honda.
Do u know that,now hero can buy technology not only from honda but also from other advance firm
Honda has laid out well thought out plan as far as this split goes.. by another year Honda is going to double their capacity..and then when they are going to split with Hero. But, Bajaj & TVS will also be well placed to take advantage of this situation if it happens.. and to some extent competition will also have benefit.
It should not be splited but it is important for honda as it cant be no.1 if hero honda will be present.It will certain be tough time for hero group when split will happen but after gaining a long experience they must be in state of devloping their own good R&D.customers also will feel akward of buying hero suplandor or hero passion , but nothing last forever.
good move by honda. Now Hero group will realise the true situation. The biggest gainer will be Bajaj which may very well take the highest spot.
After breakup the products will be called as follows : -
Hero Splendor
Hero CBZ
Hero ZMR
Hero Karizma
Hero Pleasure
Hero CD Dawn – how does that sound? CHEAP!
If hero honda breaks gainner wil be honda.loser hero than hero wil hav 2 name their cycle with passion pro with 21 gears,hunk with rear disc brake,
LoL
Hero HUNK???
Hero Group Management style has been acclaimed internationally by World Bank and BBC, UK.Hero Group is discussed as a case study at London Business School, UK and INSEAD, France. World Bank has acclaimed Hero Cycles as a role model in vendor development based on a world-wide study. The London Business School, UK, has done a case study on the Group as model of entrepreneurship.
Boston Consulting Group has ranked Hero Group as one of the top ten Business Houses on Economic value, in India.
The Hero Group is recognized as a long term partner and an ideal employer:
@fas & @admin
May be they should call the bikes like wat u guys say, but without the respective engines, without HONDA they can’t manufacture the Engine of any of their bikes….instead they can assemble them with the Cycling PEDALS to which they are well known.
Imagine the bikes with Pedals Guys, LOL thats Disgusting….!
Question to Munjal bhai : Are you [now] Indianizing [the research and development] or is it done abroad? Are you producing your own intellectual property around R&D?
Munjal: R&D is on product and process. The product R&D is with the Japanese, especially in Hero Honda. We are nurturing our own R&D now. We have a small setup in Austria, and we have our engineers placed there close to the customer. That story is building up now.
Check this article on pankaj munjals aspirations for hero honda and other businesses
http://knowledge.wharton.upenn.edu/india/article.cfm?articleid=4503
Dear All,
Still it is very early to predict the fate of company. Hero Honda has grown so large and company has well developed Vendor base and distribution network. TVS and Bajaj also survived in the market where Honda is dominating. Given the fact that it is producing 5 million motorcycle in this fiscal, any other technical partner may emerge like Bimota, Aprilla.
In fact this will become a great case study of Munjal’s move after joint venture break up.
So till that time stay tuned.
Thanks,
Regards,
Mahavir Kothari
Its a new challenge for the Hero group. But I am sure they will cope up with this.
Hero group is a responsible business company which has always taken care of the consumers. The motorcycle business of Hero is following the same line. Bikes like Splendor and Passion have become so much popular throughout India. Zero maintenance, good resale value and quality are the key ingredients.
I dont think companies like Bajaj and TVS will get any advantage out of this. Bajaj got success due to its Pulsar. But even after so many years of its launch, Pulsar has remained as a defective bike with drooping indicators, faulty tail lamp, vibrating rear mud guard.
TVS had a good product, Victor. But TVS itself lost interest in it and discontinued. (though Victor is in the international product list of TVS website)
The break up wont affect the reputation of Hero bikes. And even if it gets difficulty in developing a R&D, outsourcing technology from other companies is a open option for Hero.
~~P.S My next bike will also be a Hero.
@Suman – That would make it a moped.
Honda deserves this.. Hero Honda got its name and reputation solely due to the honda engines and components.. everyone trusted hero honda and not honda.. its now time for honda to go ahead and show everyone whos the real boss…
@ Karthik,
Hero glamour PGM-FI! Now with pedals, what will “pgm fi” means?!!!
Dear Ishan,
It’s programmed fuel injection.
Thanks,
Regards,
Mahavir Kothari
I seriously ant honda to break up and let go. Who will buy a HERO KARIZMA
Hero is nothing without the Honda behind it, just a cycle making company.
Nobody can beat the Japanese in Technology, not vene the americans can do…. we are Indians after all… May be after 2000 years Hero will come close to licking Honda’s boots
quote:
“I dont want Hero and Honda to split. They are serving us since the 1980s.
But yes, bajaj should take full advantage of this moment. And should double its pace of growth. i want them to grow, as they are the only one hu can challenge the biggies i.e. Yamaha, Honda etc. and can reach a level equal to theirs.”
Are you kidding me? Bajaj will catch up with Yamaha and Honda?[:D] This is the joke of the year. A 220cc Pulsar is beaten by a 150cc Yamaha bike(YZF-R15)
Forget all this.. Yamaha and Honda have ruled Moto GP for the last two decades and you seriously think some boot-licking Indian Company will come close to the legendary Yamahas and Hondas?
PS: I am a automobile engineer
ok guys let me put some light on things here
first -honda has not given any product to hero honda from last 7 yrs since they have come in india by themselves, its hero honda feeding the indian market with their own design, customer network and marketing strategies – it clearly means that people recognize Hero honda brand not Honda alone.
second- if honda exits from hero it will be honda which will be a looser, to prove this one can see that what market share percentage they have in the two wheeler market currently even after 10 yr of their alone in the market, Hero group can buy the stakes from honda india at 9000 cr and i think if they will not buy the whole 26% they will be buy at least 5 % which will make them the 30 % of the whole stakes
third- honda and hero has their agreement till 2014 means even if honda decided to exits from hero by selling their 26% stakes in hero honda, hero honda can use their R & D till 2014
and hero honda will remain hero honda if not there will be a new brand name given to the company…..
forth- i agree with some of the comments like bajaj taking advantage and all
but one can see that till now what bajaj could do to hero honda……the answer is nothing much….. and there will be always a market leader and follower of its
moral and ending para
this split will not be as tvs or kinetic one ….it will be the other way around
hero honda will be no. 1 as always
who knew honda motorcycles in india in 90′
it was hero honda which made the Brand
i m sure
“they know much more than they are letting us know”
Babuji Sri B.M.Lall is the godess maa Swaraswati in munjal family,just babuji Sri O.P.Munjal also the godess maa Mahalaxmi in Munjal family.one is the hard core professional personality,like MAN OF PRINCIPAL and another is big heart personality like MAN OF RELATIONSHIP with every one.just like mother and son.
So,i think if both are working within joint hand,nobody can reach nearby them.Besides i am sure any up-coming problem will be solved automatically.They are not only world no 1. in Bicycle or Motorcycle manufacturer.They also be a world no 1.family relationship keeper. WITH REGARDS.
Its very sad to hear about the break up between the HERO group & HONDA group.There should be quick solution about this , otherwise the END of HERO is soon like the KINETIC. HERO dosent have the ability to develop new powerfull and reliable engines without HONDA & if HERO sticks on their own bullish nature like this then there will be real sad days for HERO.
No one would buy a two-wheeler having names like,
HERO CBZ, HERO HUNK , HERO ZMR, etc.
hey y all of them giving advantage to honda engine only. bajaj as a indianized company ruling the two wheeler next to them na…… like tat hero will also show their performance…. but let c till 2014
yes BAJAJ is running next to HERO HONDA and if HERO & HONDA breaks up and there is 95% chance of break up then BAJAJ will get advantage, but think what will happen to all the workers who were involved with that company?? 1000s would be jobless as majority of customers will shift on other companies and no one would like to buy HERO CBZ, HERO HUNK, HERO KARIZMA, etc. Once HERO HONDA’S big name and fame would be into darkness. Yes there is another 50% chance that HERO gruop can pull out of this and put on their crown back, but it would atleast take 3 to 4 yrs.
THINK ABOUT THE SITUATION ???
Hey Friends ,
Aren’t we overreactingg…
Hero Honda had been there since 25 years; 25 years r gud enough time to build own R&D and Technical know-how…
Honda , i heard in an interview, is not directly involved in Indian Hero Honda business .
They just enjoy Share..
Hero Honda is known for its marketing capabilities and customer centric product development initiatives & capabilities..
Anywaz, its not a good news from Country’s perspective as well…
Bajaj is goood player but Hero honda( we may call Hero group as well) means Quality and longevity and Trouble Less products…Unlike Bajaj..
Bajaj gettign benefit sounds unlikely…
Lets wait n watch…
thanks to mr mahavir kothari for giving proper information abt both company
but my opinion is honda breaking tieup with hero there is no big loss to hmsi(honda) bcoz honda have power name and fame of its own tecnology but honda have to supply his products to other multi dealers show room thats the only key for huge marketing and in free of cost bcoz hero honda has applied this tecnic to built there basement .
sorry mr sunny its not sure that the bajaj company conquare markets bcoz now indian market is not blind there is a chance to suzuki mahindra tvs and also bajaj but although i prefer honda is no1 in all the things from the begning superior tcnology
why honda is not minggled with indian maarket
Because of short supply of his product in market but there is huge demand
after break up,I think Hero Hindustan will be a good name for the Hero groups