A09-03-0012

ERO ONDA OTORS NDIA TD

S IT Honda THAT ADE IT A Hero?
Hero Honda Rides Splendor to BecoMe World’s No. 1

India has finally got a world leader in manufacturing with “no problem.” Hero Honda Motors
Ltd. (HHM) has attained the distinction of being the largest two-wheeler company in the
world in volume terms. With a new factory on the anvil, it is gearing itself for Operation One
Billion, targeting $1 billion revenues in 2002-03. “Next year, we will enter the (dollar)
billionaire’s club (in revenues). After Operation Million for volumes in 2001-02, our slogan
for the next year is Operation One Billion,” said Mr. Pawan Munjal, Director & CEO,
HHM. The distinction of being the largest two-wheeler company in the world came in
calendar 2001, with sales rocketing past the one million mark in the first nine months of the
current fiscal year. This performance was in conjunction with Splendor, launched in 1995,
becoming the world’s largest-selling bike.
Business Standard, January 2002

Things could not have possibly looked any better for Mr. Brijmohan Lal Munjal, the Chairman
and Managing Director of Hero Honda Motors (HHM). Quarter after quarter, and year over year,
HHM had continued to grow, delivering superb performance in India’s two-wheeler marketplace.
The com- pany had come from nowhere to whiz past Bajaj Auto Ltd., the traditional leader of the
pack in two- wheelers. Mr. Munjal had not only earned the crowning title of heading the largest two-
wheeler com- pany in the world, but also the personal glory of having presided over one of the most
successful joint ventures in the country. Having built a storied legacy, he could rest easy. Or could
he?

The spectacular track record of the company was being threatened by predatory moves made by
its Japanese partner, Honda Motor Company. The first dark clouds appeared on the horizon in August
1999. Honda Motor Company Ltd. (HMC), HHM’s joint venture partner, announced that it would
be setting up a 100% subsidiary, Honda Motorcycle & Scooter India (HMSI) to initially make
scooters and later, motorcycles as well. HHM’s stock plummeted by 30% on the day of the
announcement. It was apparent that the investors were no longer optimistic about the company’s
ability to continue its sterling performance record, especially in the face of competition from Honda.
Was this a portent of things to come? Adding another dimension to an arena already fraught with
significant complexity, reports from the marketplace clearly showed increasing intensity of rivalry.
Not only were domestic rivals getting better equipped to challenge HHM for supremacy, there were
foreign interlopers as well who seemed determined on giving HHM a run for its money. It was
definitely not a time to rest on past laurels.

Copyright © 2003 Thunderbird, The American Graduate School of International Management. All rights reserved.
This case was prepared by Professor Kannan Ramaswamy and Mr. Rahul Sankhe (MBA Class of 2002, ISB) for the
purpose of classroom discussion only, and not to indicate either effective or ineffective management. Mr. Anuj Rastogi,
Mr. Ravi Yadavalli, and Ms. Divya Ramachandran, from the MBA Class of 2002 at the Indian School of Business,
prepared the first draft of this case.
The Two-Wheeler Industry in India

History and Background

India had the largest population of two-wheelers (around 41.6m vehicles) in the world. 1 They ac-
counted for almost 70% of the country’s automobile market in volume terms. India was the
second largest manufacturer of two-wheelers in the world. Exhibit A provides comparative financial
and oper- ating statistics for the major two-wheeler manufacturers in India.

The birth of the Indian two-wheeler industry can be traced to the small beginnings that it
made in the early 1950s when Automobile Products of India (API) started manufacturing scooters in
the coun- try. Although API initially dominated the scooter market with its Lambrettas, Bajaj Auto
Ltd., a com- pany that later became a legend in the global scooter industry, overtook it fairly quickly.
Although a number of government and private enterprises also entered the scooter segment, almost all
of them had disappeared from the market by the turn of the century. Baja Auto Ltd. stood the test of
time perhaps due to its initial association with Piaggio of Italy (manufacturer of Vespa) that provided
the technologi- cal know-how for the venture.

The license raj that existed prior to economic liberalization (1940s-1980s) in India did not
allow foreign companies to enter the market, making it an ideal breeding ground for local
players. Local players were subject to a very stringent capacity licensing process, and imports were
tightly controlled. This regulatory maze created a seller’s market, with customers often forced to wait
12 years just to buy a scooter from companies such as Bajaj. In 1980 Bajaj had a waiting list that was
equal to about thirteen times its annual output, and by 1990 this list had doubled. Clearly, there was
no incentive to implement proactive strategies to woo the customer. In a 1980 interview with a local
magazine, Mr. Rahul Bajaj, the CEO of Bajaj Auto, observed, “My marketing department? I don’t
require it. I have a dispatch depart- ment. I don’t have to go from house to house to sell.” The motorcycle
segment was no different; with only three manufacturers— Royal Enfield, Ideal Jawa, and Escorts—
there was hardly any significant compe- tition for the customer. While this segment was dominated
by Enfield’s 350cc Bullet, the only motor- cycle with a four-stroke engine at the time, Jawa and
Escorts also had a fair share of the middle and lower end of the market.

The winds of change began to take hold in the mid-’80s when the Indian government
started permitting foreign companies to enter the Indian market through minority joint ventures.
Under these relaxed regulations, the two-wheeler market witnessed a veritable boom with four Indo-
Japanese joint ventures; namely, Hero Honda, TVS Suzuki, Bajaj Kawasaki, and Kinetic Honda all
lining up to target the Indian consumer market for motorcycles. The simultaneous entry of four
players into this underserved market helped boost motorcycle revenues to stratospheric heights. For
the first time, the market dynam- ics changed in favor of the Japanese players in both two-stroke and
four-stroke vehicles, and the Indian manufacturers who had held sway for such an extended period
of time were suddenly cornered. The entry of these new foreign companies transformed the very
essence of competition from the supply side to the demand side. Confronted with a larger array of
choices, the consumers were regaining their influence over the products that they bought. In
keeping up with these higher customer expectations, the industry accelerated the launch of new
models, and every company was trying to outdo the other in terms of styling, price, and fuel
efficiency. The technological expertise that the foreign companies brought to the marketplace helped
increase the overall quality and reliability of the products quite significantly. The old-guard companies
soon found themselves under pressure to improve their offerings and bring their products on par
with their global counterparts.

1
T wo-wheelers include all motorized vehicles using a two-wheel chassis (e.g., motorcycles, scooters, and
mopeds).

2 A09-03-0012
The Indian ConsuMer

Two-wheelers had become the standard mode of transportation in many of India’s large urban centers.
Increasing urbanization, saturation of cities, and the lack of adequate roads helped to propel demand
for two-wheelers. The two-wheeler was typically a prized possession in the average Indian household. It
was normally used to transport both people and goods, substituting for a car that was
prohibitively expensive. While a two-wheeler normally cost around Rs. 40,000 [1 U.S. $ = 49
Rupees (Rs.)], an entry-level car was priced around Rs. 300,000. Two-wheelers had long road lives,
and were often used for even 15 years, passed down from one generation to the next. However, in
global terms the market was far from mature. Industry watchers reported that India had a penetration
rate of 10% as of the late 1990s (107 two-wheelers for every 1000 adults), far below the penetration
rates of other developing countries. It was clear that the manufacturers had a lot of ground to
cover.

There were indeed visible signs that the companies were gearing up to address this growing mar-
ket. While the production and sales of motorcycles grew substantially (CAGR of 22% between 1996
and 2001), the performance of the other two segments of two-wheelers was poor. Scooter production
grew by only 0.5%, while the production of mopeds fell by 29% during 2001-02.

The Legend of Hero Honda

The Hero Group

The Munjals, owners of the Hero Group and promoters of HHM, had made a modest beginning
as suppliers of bicycle components in the early ’40s. Currently, the group’s bicycle company, Hero
Cycles, manufactured over 16,000 bicycles a day and had sold over 86 million bicycles in aggregate as
of 2002. It had been acknowledged as the world’s largest bicycle manufacturer in 1986 when it
overtook the U.S. manufacturer, Huffy. Despite the lack of significant process automation, the
company had been able to achieve among the highest levels of employee productivity and efficiency on
a global basis. Although a publicly traded company, the family was extensively involved in day-to-day
management of operations, as well as setting strategic direction.

Much of the company’s strategy was anchored to the fundamental principle of providing
products of superior value at reasonable prices to the consumer. This basic belief was reflected in the
company’s approach to product innovation, quality, and reliability. Over time, the group had nurtured
an excellent network of dealers to serve India’s expansive markets. This network was not just focused
on the high- density urban centers, but also encompassed rural outlying regions that typically did
not attract the attention of large manufacturers. The company truly believed in its mission of bringing
transportation to the masses.

Over the years, the Hero Group had entered multiple business areas, largely related to the trans-
portation industry. The group evolved into a fairly integrated set of operations that spanned multiple
areas of raw material processing, such as steel rolling, to the manufacture of subassemblies and compo-
nents. Many of these ventures were owned and controlled by members of the Munjal family or
operated by very close friends and associates. Thus, the company had seemingly established control
over all facets of production and marketing. Exhibit B shows the portfolio of Hero Group
businesses.

Honda Motor CoMpany of Japan

Honda Motor Company had surprisingly similar origins like its counterpart in India. Founded in
1946 as the Honda Technical Institute by Mr. Soichiro Honda, the company produced its first bicycle
engine a year later. There had been no looking back from that time on as the company grew to
dominate the global automotive market, with over 100 plants in 33 countries selling 11 million
product units as of 2002. The engine was the centerpiece of Honda’s global expansion. It had
A09-03-0012 3
 parlayed this expertise into a wide range of products such as lawnmowers, generators, scooters,
motorcycles, and cars.

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 Honda called its global strategy “glocalization” to signify its approach of building plants locally
to meet local demand. Within this web of localized operations, the company had been able to
leverage synergies in R& D and manufacturing by regionalizing its operations, consolidating local
strategy at the regional level. It had worked quite well. The reach of wholly owned subsidiaries was
augmented through astute management of select joint ventures, although not a preferred mode of
entry for the company. In many cases, the company was motivated to enter into joint ventures either
because of regulatory con- straints or because of a desire to access local market knowledge that was
not easily available.

Forging a Partnership with Honda Motor CoMpany

Given the impending liberalization of India’s markets, HMC had come looking for suitors. Initial
plans called for entry both into the two-wheeler market and the electric generator market. HMC
identified a short list of Indian companies that it felt would make good partners. Topping the list in
the two-wheeler category was Bajaj Auto, a company that traced its reputation to the storied history of
Piaggio of Italy and the chic-yet-egalitarian brand of transportation it offered through its series of
Vespas. When that first choice did not work out for HMC, it moved on to its second choice, the
Firodia group, an automo- tive products conglomerate based in the prosperous western Indian state of
Maharashtra. Kinetic Engi- neering Ltd. (KEL), the group’s flagship company, manufactured the
first mopeds in India. Hugely popular in the late ’70s and early ’80s, KEL had a 44% share of the
Indian moped market and about 15% of the entire two-wheeler market. It seemed to hold much
promise at the time, and thus attracted the attention of HMC. KEL and HMC entered into a 50/50
joint venture, Kinetic Honda Motors Ltd., with the express objective of launching a line of scooters in
India. It was widely reported that KEL was offered a choice between scooters and motorcycles and
chose scooters based on prevailing trends that favored scooters. Honda was already close to signing
on another partner for its other venture in power products, and hence its bid for a motorcycle JV
was all that was left in play.

HMC came to the Hero group as the last choice for its motorcycle venture. The market for
motorcycles was not booming in any sense of the term in the early ’80s. Many Indian consumers still
believed that motorcycles were more accident prone and less safe for Indian roads. The market had
been largely carved among three Indian firms with various levels of old imported technology. It was
against this backdrop that the Hero group sought to throw its hat into the ring as a means of
consolidating its position in the two-wheeler market. Since it had a flourishing bicycle business and a
fairly strong moped business as well, the Munjals felt that entering into a joint venture with a
company that enjoyed a worldwide reputation would help them achieve their goal of dominating
the two-wheeler market in India. It was indeed a golden opportunity for Mr. Brijmohan Lal Munjal
to achieve the distinction of “beating Bajaj,” a seldom-vocalized desire that he had harbored.

The Deal Is Done

The negotiations between HMC and the Hero group had by all accounts gone quite smoothly. Al-
though there had been some lingering resentment that HMC had come to Hero as a last resort,
Mr. Brijmohan Lal Munjal had tried to maintain the enthusiasm amongst the members of the
Munjal family, emphasizing the benefits of the alliance they were about to enter. The negotiations
culminated in an agreement that was signed in June 1984 creating a joint venture firm called Hero
Honda Motors Ltd.

Honda agreed to provide technical know-how to HHM and assist in setting up manufacturing
facilities. This included providing the design specifications and responsibility for future R& D efforts
relating to the product lines that the company would offer. For these services, HHM agreed to
pay Honda a lump-sum fee of $500,000 and a 4% royalty on the net ex-factory sale price of the
product. Both partners held 26% of the equity with another 26% sold to the public and the rest held
by financial institutions. HHM became a public company listed on the Bombay Stock Exchange
(BSE).2
A09-03-0012 5
2
Bombay Stock Exchange is one of the two biggest stock exchanges in India. http://www.bseindia.com

6 A09-03-0012
 A 13-member board was formed to oversee the governance of the company. Honda had four key
appointees including the Joint Managing Director, a particularly powerful position in Indian compa-
nies. The Hero group was represented by four family members and appointed the chairman of
the company. Honda brought in its staff of technical experts to run the engineering and quality
support functions. Hero brought in local talent to manage all other functions including marketing,
finance, and HR. A seven-member top management team drawn almost exclusively from local ranks
took charge of the daily operations of the venture. Both partners agreed to review the terms and
relevance of the agreement in 1994 when the current joint venture arrangement would lapse. Time
was short, and it was clear that HHM would have to act very quickly to build a foothold in the
motorcycle business.

Rubber Hits the Road

The manufacturing plant which was established in Dharuhera in the state of Haryana started
manufac- turing the CD-100 model motorcycle in 1985. The CD-100 was powered by India’s first
four-stroke engine, the unique selling point that put Hero Honda in the driver’s seat in the
marketplace. Soon, the CD-100 set the standards for fuel efficiency, pollution control, and quality.
Perhaps the most appealing characteristic of the CD-100 was its fuel efficiency (approximately 80
km/litre), an attribute highly valued by the Indian consumer. As the CD-100 was the only one with
a four-stroke engine at the time, it became a runaway success. Interestingly, it was Mr. Munjal who
persuaded HMC to launch the 100cc vehicle instead of the 70cc version that HMC had originally
planned to offer. Given his long experience with the manufacture of bicycles and mopeds, he really
understood the intricacies of the Indian market- place very well. “Our bicycle and moped
manufacturing background gave us insights into the customer psyche that the running cost of the vehicle had
to be low,” he recalled in a press interview focusing on the rationale behind the CD-100. The
organization had since spearheaded many “firsts” for the auto sector in India, being the first two-
wheeler manufacturer to implement an ERP across the functions, and the first to implement
initiatives such as six-sigma.

Under the stewardship of Mr. Munjal, HHM had grown consistently, earning the title of the
world’s largest motorcycle manufacturer after having churned out 1.3 million vehicles in 2001. Its
motorcycle volumes nearly quadrupled during the period 1997-2001, a feat unparalleled in the Indian
two-wheeler industry. While the motorcycle market grew at an average 21.74% per annum between
1997 and 2001, Hero Honda averaged a growth rate of 35.46% a year. In 2001-02, it again doubled
volumes from 0.76 million in 1999-2000 to 1.3 million. However, there were several significant bumps
on the road along the way.

The CD-100 had captivated the Indian consumer when it was first launched, but the uniqueness
soon wore off. Exhibit C illustrates some of the product offerings from HHM. Competitors such
as TVS-Suzuki and Bajaj-Kawasaki were introducing feature-rich models that were vying for the
attention of customers. Many of these vehicles boasted comparable fuel efficiency and some were
priced much lower than the CD-100. However, Mr. Munjal was boxed in by the relationship with
HMC. His depen- dence on Honda for all product innovation inputs hobbled HHM’s ability to
respond to emerging changes in the market. Honda had decided to consolidate all its R& D activities
worldwide in three countries, and India was not one of them. Therefore, Hero Honda was forced
to wait its turn before getting any changes vetted by Honda’s R& D. New product designs did not
materialize as fast as the market demands dictated. It was quite difficult to sustain customer interest
when all HHM could do was to release newer models that were only variations of the CD-100
platform. This was particularly costly for the company, since it did not have any new products, when
competitors were releasing new products to ride the boom in demand from 1993 to 1996, when
industry sales grew at a cumulative average rate of 31% per year.

HHM managed to dampen some of the negative impact of these years through astute marketing
and by leveraging its knowledge of customers and markets. It had built an expansive network of dealers
who were extremely loyal to the company. Much of this network was culled from Hero Group’s bicycle

A09-03-0012 7
 operations. The company instituted modern programs and incentives to motivate its dealer
network.

8 A09-03-0012
The best dealers were chosen to visit the Japanese operations of Honda each year. They formed
an extended family and HHM was perceived as being very supportive of its dealers. As of 2000, the
com- pany had close to 400 dealers across the country. It was this well-penetrated dealer network that
allowed the firm to actively market its products in rural India, a significant departure from other
firms that concentrated solely on the urban market. The challenge of rural marketing would have
been quite difficult without intimate knowledge of the dramatic differences, not only between the
urban and rural consumer, but also the various shades of gray that differentiated rural consumers in
one region from another.

The dealers were strongly supported through major advertising campaigns. HHM retained the
best advertising agencies to execute its campaigns. Its “fill it, shut it, forget it” campaign promoting the
maintenance-free nature of its motorcycles was a major hit with the Indian public. These
campaigns also leveraged the Honda name to maximum advantage. Capitalizing on Honda’s
reputation for the quality of its engines, HHM ran advertisements that proclaimed, “It is the Honda
that makes it a Hero.” Exhibit D provides an illustration from this advertising campaign.

Hero Honda was among the first manufacturers to understand the impact of product differentia-
tion and market segmentation on sales revenues. While the differentiated positioning brought
price premiums, the customer got a much more fuel-efficient and reliable product in exchange. The
mantra of fuel economy formed the core of all HHM’s product launches. On a single platform (CD-
100 series), it devised three models catering to different market segments. The CD-100 bike was an
excellent pick for the rural and semi-urban customer for whom cost was critical consideration. The
CD-100 SS was a basic model for the urban market. Splendor catered to the middle-class, office-going
segment. Since all these products came from a single platform, product development costs were
spread over higher vol- umes, and after-sales service quality was maintained, thereby reducing costs
and increasing margins.

The influence of the Hero group was quite visible in the way the supply chain was organized at
HHM. The company had built an extensive network of primary and secondary suppliers for compo-
nents and subassemblies. Since the Indian government had stipulated that the joint venture must
indigenize production within a fairly short period of time, developing the supplier network was
deemed crucial. By 1996, over 95% of the motorcycle was manufactured from locally procured parts,
a rate of localization that even Honda at times thought would be difficult to achieve. However, the
Munjals realized that it was not only in the interests of the Indian government to indigenize but also
in their own interests, since they would otherwise be held hostage to the rupee-yen exchange rate
which had histori- cally been unfavorable to Indian firms relying on imported components. The
Munjal family had set up a range of firms to supply components, not just to HHM, but also to other
buyers. These operations ranged from the manufacture of shock absorbers and wheel rims, to
aluminum castings and plastic products. Munjal family interests ran seven of its crucial supplier
firms. HMC had also helped estab- lished some of these ventures, and HHM had a controlling
shareholding in Munjal Showa, for shock absorbers, and Sunbeam Castings and Munjal Castings,
both of which supplied castings.

Honda did not seem to be concerned about the rate at which foreign sources were replaced with
Indian suppliers. However, HHM shareholders had expressed some concerns. The preferred provider
network of suppliers was filled with either Hero family companies or firms that were run by
promoters who were closely aligned with Munjal family interests, and this posed a potential conflict
of interest. Since HHM was a publicly traded company, it was felt that the profitability impact of
outsourcing to allied firms would affect shareholder returns. The flip side of this sourcing approach
was the reliability of the network and its ability to respond quickly to environmental change. There
was very little inven- tory in process or waste due to supply chain bottlenecks, which resulted in better
margins. Of course, this also ensured that many among the Munjal family were gainfully engaged.

Renegotiating the Venture in 1994

As 1994 rolled around, the sentiments amongst the Munjal family were mixed but largely

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negative. Some felt that while Hero had ploughed a lot into making HHM a success, HMC had not
contributed

10 A09-03-0012
as much. There was a lack of new product innovation and much uncertainty surrounded the negotia-
tions at that time. Even routine design changes were taking too long, and HMC’s R& D engineers did
not appear cooperative on this count at all. The impending negotiations paralyzed HHM, and it had
to sit on the sidelines while its competitors roared past. Archrival Bajaj had introduced a new four-
stroke engine for its motorcycle line and usurped the lead that HHM had carefully nurtured. In the
meantime, HMC had negotiated new ventures with other Indian partners for manufacturing
automobiles and power equipment. Mr. Munjal would have liked very much to have been part of the
automobile ven- ture, but did not allow this disappointment to color the relationship.

Perhaps in protecting its own destiny, Hero had been evaluating alternative product lines
and market approaches right from 1986. It entered into a collaboration agreement with Steyr
Daimler Puch, an Austrian subsidiary of Daimler A.G., to manufacture motorcycles in the 50cc-
65cc range. This business was organized under the Hero Motors banner and targeted both Indian and
foreign markets. Hero Motors was successful in exporting completely knocked-down (CKD) kits for
assembly in Spain, Iran, Mauritius, Vietnam, Bangladesh, and Egypt. Bolstered by these initial
successes, Hero Motors even entered into discussions with BMW of Germany to manufacture 650cc
bikes. Although these talks eventually fizzled out, they could hardly have inspired any trust or
confidence at Honda headquarters.

It was 1995 by the time the joint venture agreement was renegotiated and extended until 2004.
HHM was able to negotiate far more attractive terms from HMC with respect to royalties. They were
able to persuade HMC to accept a paltry Rs. 200 per vehicle in 1995. Licenses to manufacture future
models were dealt with on a case-by-case basis using a mix of lump sum payments and royalties.
By 1999, the proportion of royalty payments to sales revenues had declined considerably from a
high of 4% at founding to about 0.5%. Honda displayed new willingness to share its R& D and
product suites in a more timely fashion. Subsequent to the 1995 contract renewal, Honda licensed
HHM to manufac- ture Street, a model that was based on Honda’s recent global hit called the Dream,
which had sold over 25 million worldwide. In addition to the reduced royalties and fast-track transfer
of technology, HMC agreed to increase the extent of components and subassemblies purchased
from Hero’s supplier net- work.

With the emergence of significant competition from similarly positioned offerings from Bajaj
and TVS-Suzuki, Hero Honda had become more aggressive in terms of its marketing with new
product launches and market segmentation. The company had announced new product launches
(two every year) to continue this effort. This phenomenal rate of new product introductions was, of
course, solely dependent on HMC’s continuing its R& D support, since HHM had not explored
setting up R& D facilities in India. HHM had also undertaken significant expansion of its
distribution network.

The going was good for HHM, and the financial results followed. The company had
reported flawless quarter-on-quarter growth for 18 consecutive quarters between 1997 and 2001. Hero
Honda’s quarterly sales during the period grew 303.28% and its net profit jumped from Rs. 16.28
crore3 to Rs.
98.34 crore. HHM hardly required any incremental working capital over the seven-year period follow-
ing the renegotiation. In fact, its working capital was lower in 2001 than in 1994 by Rs. 1160m,
despite sales having grown by approximately 7X during this period. Return on average capital
employed (ROACE) at 65% was among the highest in the country. Hero Honda was among the few
Indian companies that enjoyed the distinction of generating a positive economic spread for an
extended period of time. Be- tween 1995 and 2001, the economic spread (difference between
WACC and ROIC) expanded from 16.5% to 65.4%. This performance had not been lost on the
investors who helped the share rise among the ranks of established blue chips. Exhibit E charts the
performance of HHM shares. However, just as things appeared to be set for a smooth sailing, storm
clouds appeared.

A09-03-0012 11
 3
1 Crore = 10 million

12 A09-03-0012
Storm Clouds and Silver Linings
Competition began to intensify in the late ’90s as many of the foreign joint ventures in the Indian
motorcycle industry reached maturity. Players such as Kawasaki and Yamaha were helping their local
companies mount a credible assault on Hero Honda. Closer to home, HHM partner HMC was forced
to dissolve Kinetic Honda Ltd., the venture it set up with Kinetic Engineering to manufacture
scooters. This left a void in HMC’s product suite in India and it was poised to enter the scooter
market on its own. Both of these developments were cause for significant alarm.

The CoMpetition Revs Up

The
TABLcompetitors for HHM were Kawasaki-Bajaj, TVS-Suzuki, and Yamaha Motors, a familiar bevy of
powerhouses
E1 from
Major Japan. Table 1 shows the key competitors by two-wheeler category in the
Players
Indian marketplace.
Hero Honda, Refer
Bajaj to Exhibit
Auto, F for recent sales and production figures for these players in
Yamaha
the two-
Subse wheeler market.
Motors Escorts, TVS Suzuki, Eicher
gment Bajaj Auto, LML, Kinetic Motor Co.,
Motor Maharastra Scooters, TVS Suzuki TVS
cycles Suzuki, Kinetic Engineering, Majestic
Scoote Auto, Bajaj Auto
rs
Mope
ds

Bajaj Auto

Bajaj Auto Limited was one of India’s largest two- and three-wheeler (three-wheelers, also known as
auto-rickshaws, are unique to the South Asian region) manufacturer. The Bajaj group came into exist-
ence in 1945 and got a start by importing scooters and three-wheelers from Italy for sale in India.
In 1960, it struck a technical know-how agreement with Piaggio of Italy, and the company became
a public corporation the same year. Scooter production commenced in 1961 and three-wheeler
produc- tion was followed in 1962. The Piaggio collaboration expired in 1991. Since then, the
company’s scoot- ers and three-wheelers were sold under the brand name of Bajaj. As of 2001, Bajaj
had become a market leader in scooters with annual production in excess of 1.34 million units. It
offered products in all segments such as mopeds, scooters, motorcycles, and three-wheelers.

Subsequent to the opening up of the two-wheeler sector to foreign technology and equity
partici- pation in the mid ’80s, Bajaj Auto entered into a technical collaboration agreement with
Kawasaki of Japan. It started production of Kawasaki 100cc motorcycles in 1986. Bajaj became a key
manufacturing base for Kawasaki and accounted for 60% of the latter’s global sales. The company
had chalked out a strategy for co-existence with Kawasaki, wherein Bajaj would concentrate on
developing products in the price range of Rs 30,000–60,000 and Kawasaki would offer a wider choice
of products priced from Rs 35,000 up to Rs 250,000. Though the company planned to introduce
some high-tech motorcycles from the Kawasaki range, it was fighting an uphill battle trying to
shed its image of a “screwdriver” company (assembler as opposed to manufacturer) by developing
its own range of motorcycles.

TVS-Suzuki

A leading producer of automotive components, the TVS group was formed as a transport company in
1911. Originally incorporated in 1982 as Indian Motorcycles Pvt. Ltd to produce motorcycles in col-
laboration with Suzuki, Japan, the company later went public under the banner Ind-Suzuki
Motor- cycles Limited, which was later renamed TVS-Suzuki Limited. The perfect blend between
the best design engineers and the latest technology made TVS-Suzuki one of the leading two-wheeler
manufac- turers in the country.

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 However, the relationship between Suzuki and TVS was far from amicable. A divorce was on the
cards for nearly a decade. In August 2001, TVS bought out the 25.97% stake of the Japanese partner
in August 2001, increasing its equity holding to 32%. The parting also meant that Suzuki would not
be allowed to enter India for a 30-month period. The decision to buy out Suzuki was prompted by
the fact that the partners felt it was in their own long-term interests to pursue their own interests
separately rather than through the joint venture.

The TVS Group wanted to promote the TVS brand, grow their revenues, and develop products
indigenously. Further, they wanted to export TVS-made vehicles to the rest of the world, a proposition
Suzuki Motors opposed. From Suzuki’s point of view, its contribution to the joint venture was shrink-
ing. With the exception of the two-stroke Suzuki Max 100R, an evolution of the original Ind-
Suzuki, none of the company’s fast-selling two-wheelers had a major Suzuki contribution. TVS-
Suzuki’s bread- and-butter product, the moped, was fully Indian. The hugely successful TVS Scooty
was also a non- Suzuki product. It was only in two-stroke motorbikes that TVS-Suzuki had to rely
on the Japanese parent. However, with the decline of two-stroke motorcycles in India, and with the
recent launch of the all-Indian TVS Victor, it was clear that the Indian partner could do without the
Japanese collaborator.

As per the terms of the joint venture agreement, there was to be a 30-month licensing
arrange- ment, during which time the joint venture would continue to pay royalty to Suzuki. After
this period, TVS was free to sell the four licensed vehicles (Samurai, Max 100, Max 100R, and Fiero)
as TVS vehicles. As it turned out, TVS had localized production ahead of schedule and voted to
terminate the agreement before the 30-month period could lapse.

Escorts-YaMaha (EYML)

EYML was a joint venture between Escorts Ltd., the flagship company of the Escorts Group, and the
global giant, Yamaha Motors Co. Ltd of Japan. Ever since signing the first technical assistance agree-
ment between the two companies in 1985, Yamaha Motor Company Limited (YMC) and Escorts
Limited had built a cooperative relationship dedicated to the manufacture and sales of Yamaha-brand
motorcycles. In November 1995, the two companies established the joint venture company,
Escorts Yamaha Motors Limited, based on a 50-50 capital investment. In June 2000, that investment
ratio was changed to 74% for YMC and 26% for Escorts Limited, and YMC assumed managerial
control of the company with the name being changed to Yamaha Motors Escorts Limited (YMEL). It
then undertook numerous measures to build the company’s motorcycle manufacturing and
marketing operations. In June 2001, an agreement was reached between YMC and Escorts Ltd. under
which YMC acquired the remaining 26% of the stock held by Escorts. The stated aims of this move
to make YMEL a 100% YMC subsidiary were to increase the overall speed of managerial and business
decisions, to improve product development capabilities and production efficiency, while also
strengthening the marketing organiza- tion.

Kinetic Honda Ltd.

Kinetic Engineering Ltd. (KEL), one of the leading manufacturers and exporters of two- wheelers for
over 20 years, came into existence in 1970. It manufactured scooters, motorcycles, and mopeds
that were all well known for their fuel economy and quality. KEL was the beneficiary of Honda’s
advances when the Japanese company first came to India shopping for partners. They set up a 50-50
joint venture called Kinetic Honda Ltd. (KHL) to manufacture and market scooters. Unfortunately,
the terms of the agreement specified that KHL could not enter the motorcycle business. KHL
seemed to be doing an excellent job in cornering the market and was within striking distance of a
leadership spot in the race for market share. When the two-wheeler business began to boom in the
early 1990s, Honda wanted to take charge, an idea that was welcomed by the Indian partner. KEL
felt that such a move might motivate Honda to bring in new products more quickly to India.
Strangely, Honda began to lose interest in the venture and decided to turn off the spigot, putting the
brakes on R& D spending, which was a paltry 0.31% of sales when Indian competitors were

14 A09-03-0012
spending 1.5%. It also decelerated its advertising spend-

A09-03-0012 15
ing significantly when the competition was blitzing the consumer with new campaigns. All these ac-
tions hurt the sustainability of the company, and soon the personal relationship started to sour
and culminated in a KEL buyout of Honda’s interests. This effectively released Honda to pursue
its own agenda in the scooters segment.

Other Challengers

In addition to domestic competition, another competitive threat took shape in the form of cheap
Chi- nese imports when import restrictions were lifted in 2001. A relatively unknown company
named Monto Motors in Alwar (Rajasthan4) was the first to import Semi-Knocked-Down (SKD)
kits from one of the top motorcycle manufacturers in China. A 72cc motorbike from China cost the
customer Rs. 27,000 on road, a 125cc would cost Rs. 33,000, and a 250cc motorbike would cost Rs.
36,000. The Indian models seemed frightfully expensive in comparison. In early 2002, a moped
cost around Rs. 22,000, a 100cc motorbike cost around Rs. 45,000, and a 125cc motorcycle cost
around Rs. 50,000. The domestic two-wheeler industry was bound to feel the pinch, especially in the
mid and lower price segments of the motorcycle, scooter, and moped segments.

The Other Shoe Drops

HMC, having extricated itself from the KHL venture, announced plans to set up a new company,
Honda Motor Scooters India Ltd., for the sole purpose of manufacturing scooters for the Indian mar-
ket. At that time, it also announced that it intended to enter the motorcycle market in 2004,
ominously the very year when the HHM joint venture agreement would come up for its next
revalidation. This announcement shocked the top brass at Hero Group. Mr. Munjal put on a brave
face and announced that Honda had made its plans public only after Hero signed off on its plans.
This led to further speculation as to why Mr. Munjal would give his blessings to a venture that would
place the destiny of HHM in peril.

HMSI was indeed a troubling development for the Munjal family and the shareholders of
HHM. However, Mr. Munjal was looking for the silver lining in what was apparently a huge
storm cloud brewing. He announced that HHM had negotiated three key concessions from Honda.
First, Honda agreed to delay entry into the motorcycles segment until 2004. It also agreed to form
a four-person committee with two members from HHM to examine any new motorcycles that it
would release post- 2004. Lastly, it offered an opportunity to HHM to share in the equity as a
minority holder in HMSI. These assurances were followed by a visit by Mr. Yoshino, the CEO of
Honda from Japan, for the launch of Honda’s first scooter in India. At the launch ceremony, he
addressed the simmering problems that were perceived by HHM and its investors. He observed, “By
2003 the two companies will together be selling 25% of the world’s projected seven million market for two-
wheelers.”5 The President and CEO of HMSI, Mr. Takiguchi painted a similar scenario in his
interview with a leading news magazine. He said, “The discussion in 2004 will not be on whether to
continue with the joint venture. We will sit and discuss about the products which both the companies—
Hero Honda and HMSI— should build on.’’6 However, in the same breath, he also observed, “Our
strategy will be to offer motorcycles which keep up with the overall market trend in the post-2004 scenario.’’7 It
was anybody’s guess what that statement truly meant.
Honda was already bolstering its dealership network and had plans to set up over a 100
dealerships by the end of 2002. It was also spending Rs. 1 billion to set up a manufacturing plant
that would double HMSI’s existing capacity.8 Given the rate of growth of scooters that was in the 4%
range, it was difficult to imagine how Honda would be able to use the capacity effectively without
stepping onto HHM’s turf.

4
Rajasthan is one of the states in West India.
5
Business Standard, Entrepreneur of the Year issue, 2001.
6
Hindu, Businessline, June 19, 2001.

16 A09-03-0012
7
Ibid.

A09-03-0012 17
 Mr. Munjal seemed to be reassured about the situation, however. After Mr. Yoshino’s visit, he pro-
claimed, “His visit has made a lot of difference to the outlook at Hero Honda.”9

Are There Road Hazards Ahead?

Mr. Munjal sifted through the various options he had in front of him. While the investors were sated
with the flurry of announcements and reassurances for now, what would the future hold for
HHM? How should the company arm itself for the post-2004 marketplace? How would the
competitors, especially the Japanese companies, respond to the uncertainties that faced HHM?
What if HMSI, despite all its assurances, saw the potential marketplace in 2004 and decides to
push HHM to the periphery and engineer a frontal assault on the motorcycle business? Would HMC
go back to its old ways of withholding R& D now that it had plans to make motorcycles in India
post-2004? The joint venture had been in existence for a very long period of time by international
standards. Perhaps its time had come. Would HHM have to be dismantled in the same way its
competitors in India had been? These were troubling questions, but nevertheless very critical
ones. Charting the future strategy of HHM would undoubtedly require clear answers to all these
questions. These were indeed the best of times and the worst of times for HHM.

Bibliography
http://www.herohonda.com/web/index.htm
www.yamaha-motor.co.jp
http://www.indiainfoline.com
www.securities.com
http://www.expressindia.com/ie/daily/19980823/23550444.html
http://www.businessworldindia.com/archive/7Jan99/corpo3(1420).html
Transcript of interview with Ms. Sulajja Firodia Motwani, Joint Managing Director of Kinetic Engi-
neering, February 22, 2002
Business World, January 28, 2002
Report on TVS Motor Company Limited— ICICI Securities, January 18, 2002
Business Line, Sunday, Sept 30, 2001
Business Line (International Edition), Tuesday, June 19, 2001
Reports on Hero Honda Motors Limited:
HSBC, March 28, 2002
HSBC, September 21, 2001
Merrill Lynch, June 20, 2001
CSFB (Hong Kong), July 6, 2000
Probity, December 16, 1998
Dresdner Kleinwort Benson Research, May 8, 1998
Morgan Stanley, May 31, 1996
Reports on Automotive Sector in India
LKP Shares & Securities Limited, February
2002 Scope Marketing, September 2001

8
moneycentral.com, July 25, 2002.
9
Business Standard, Entrepreneur of the Year issue, 2001.

18 A09-03-0012
1

Exhibit A Comparative Financial and Operating Statistics for the Major Tw o-Wheeler Manufacturers in India

Kinetic Honda Hero Honda TVS Suzuki Bajaj Auto

1990 1993 1996 1999 2001 1990 1993 1996 1999 2001 1990 1993 1996 1999 2001 1990 1993 1996 1999 2001
Sales (Gross) 132.1 157.7 315.2 321.1 423.1 149.8 301.5 632.7 1536.4 3177.2 143.1 186.1 618.3 1018.6 1821.0 1018.1 1246.0 2742.9 3604.7 3628.7
Sales (Net) 110.4 126.8 257.6 264.9 350.8 149.3 300.3 630.8 1532.8 3171.2 141.6 182.9 606.1 1000.2 1781.6 814.7 1011.3 2309.9 3039.0 3052.9
Cost of goods sold 77.6 124.2 235.4 238.2 291.2 134.0 266.8 515.5 1240.9 2533.5 120.5 150.9 484.9 770.3 1517.6 686.7 891.5 1687.2 2203.8 2598.4
R& D expenditure 0.0 0.0 1.5 0.2 4.1 0.0 0.0 2.0 3.5 5.1 0.0 0.8 6.1 15.5 16.1 4.5 9.2 22.7 31.4 61.0
Advertising and sales expenditure 0.9 2.6 6.2 13.4 32.7 4.0 9.5 28.1 54.4 122.3 4.5 6.7 25.4 76.8 119.0 13.2 26.6 105.0 198.6 245.5
Capital expenditure 0.6 2.4 9.3 2.2 10.1 10.7 10.4 30.6 106.2 121.2 11.5 2.3 53.0 85.0 74.2 75.7 59.9 297.5 229.8 367.9
Imports (imported materials) 22.7 15.2 54.6 44.7 19.8 18.0 35.7 68.8 235.6 420.6 19.4 10.3 50.3 99.4 179.3 111.8 64.1 215.6 255.3 338.4
Imported materials (% of COGS) 0.3 0.1 0.2 0.2 0.1 0.1 0.1 0.1 0.2 0.2 0.2 0.1 0.1 0.1 0.1 0.2 0.1 0.1 0.1 0.1
Current assets 20.3 44.3 69.8 88.6 98.0 34.1 93.2 146.2 326.1 663.8 49.1 58.5 144.2 257.6 363.2 364.2 505.8 1425.0 2964.1 2608.7
Current liabilities 15.4 24.1 55.6 63.1 72.7 57.1 59.3 145.6 308.7 460.1 76.9 77.8 150.9 160.3 322.3 315.1 350.1 871.3 1570.5 1547.4
PBDIT (operating profit) 10.7 5.6 11.5 16.4 34.6 12.4 32.4 59.7 220.4 459.6 9.9 18.2 74.8 144.8 149.0 181.3 186.3 666.9 836.6 474.4
Net income (PAT ) 4.4 0.4 5.2 3.5 15.6 -0.2 16.7 26.8 120.1 250.1 -5.5 3.8 35.2 68.5 63.1 58.1 32.8 405.9 481.6 298.9
Return on sales 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.0 0.1 0.1 0.0 0.0 0.1 0.1 0.0 0.1 0.0 0.1 0.1 0.1
Return on investment (ROI) 0.3 0.1 0.1 0.1 0.2 0.1 0.2 0.2 0.3 0.4 0.1 0.2 0.3 0.3 0.2 0.3 0.2 0.3 0.2 0.1
Return on average equity 1.0 0.0 0.1 0.1 0.3 0.0 0.4 0.3 0.5 0.5 -0.4 0.3 0.5 0.4 0.2 0.2 0.1 0.3 0.2 0.1
Total debt 16.9 17.0 22.0 40.1 21.8 50.8 63.3 50.0 78.2 69.2 36.5 41.5 33.5 142.4 225.2 159.6 164.4 197.2 351.2 527.3
Net fixed assets 17.7 20.2 29.2 46.9 52.1 60.2 67.0 103.9 308.6 453.9 54.1 51.0 97.6 187.5 436.1 301.4 291.9 559.7 921.8 1362.4
ROCE (% pre-tax) 40.3 16.0 27.3 23.3 45.7 46.8 34.7 55.5 122.3 78.6 64.3 52.2 86.8 61.2 29.8 51.4 38.4 46.8 31.1 14.2
A09-03-
Exhibit B Portfolio Of Hero Group Businesses

Business Hero Cycles Limited Hero Cycles Limited (Unit II) Gujarat Cycles Limited
Established in 1956 Established in 1988 Established in 1988
Bicycles Product: Bicycles Product: Bicycles Product: Bicycles

Business Hero Honda Motors Limited Majestic Auto Limited Hero Motors
Established in 1983 Established in 1978 (A division of Majestic
Auto New Delhi Product: Mopeds and Auto Limited)
Two-Wheelers Product: Motorcycles Fitness Equipment Established in 1988
Collaborator : Honda Product: Mini-
Motor Co. Ltd., Japan motorcycles
Collaborator: Steyr
Daimler Puch, Austria
Product: Scooters
Collaborators: Malguti,
Italy

Business Rockman Cycle Industries Highway Cycle Industries Munjal Showa Limited
Limited Limited Established in 1985
Bicycle Established in 1960 Established in 1971 Product: Shock Absorbers
and Auto Products: Automotive Products: Freewheels and Collaborator: Showa
Components and Bicycle Chains; Steel Special Machine Tools Manufacturing Co.,
Japan
and Aluminum Hubs

Business Munjal Castings Sunbeam Castings Hero Cycles-Cold

Established in 1981 Established in 1987 Rolling Division
Castings Product: Nonferrous Castings Product: Nonferrous Castings Established in 1990
and Steel Product: Cold Rolled
Steel Sheets and Coils

Business Hero Exports Hero Corporate Services Munjal Sales Corporation

Established in 1993 Established in 1995 Established in 1975
Services Product: International Trading Product: Corporate Services Product: Sole Selling
Company dealing in in Finance, HRD, IT, and Agents of Bicycles and
Commodities and Engineering Strategic Planning Bicycles Parts for
India Items

A09-03-0012 13
 Exhibit C Some Offerings from the Hero Honda Stable

14 A09-03-0012
 Exhibit D Advertisement of Hero Honda

A09-03-0012 15
 Exhibit E Hero Honda Stock Performance Chart

16 A09-03-0012
 Exhibit F Comparative Sales and Production Figures for Tw o-Wheeler Manufacturers

Two-Wheelers (April 2001 to February 2002)

Production Sales
Number % Change Number % Change

Motorcycles 2,666,456 33.7 2,650,822 36.4

Hero Honda 1,288,933 37.7 1,289,838 38.3
Bajaj Auto 654,051 29.2 649,920 32.9
TVS Motor Co. 399,151 20.0 395,494 22.8
Yamaha Motor 212,954 29.6 210,568 40.0
LML 40,380 15.6 42,115 44.6
Kinetic Engg 48,992 40,937
Eicher 21,995 10.6 21,950 11.7

Scooters 808,185 0.5 808,768 -1.6

Bajaj Auto 347,997 10.0 347,785 7.0
TVS Motor Co. 136,070 2.3 135,432 1.8
LML 119,163 -24.6 121,857 -23.3
Kinetic Motor Co. 103,253 -7.8 103,292 -10.7
Mah Scooters 54,532 -35.9 53,601 -39.8
Honda Motorcycle 47,170 46,801

Mopeds 454,680 -29.2 451,784 -28.8

TVS Motor Co. 246,317 -28.6 247,136 -27.6
Kinetic Engg 96,606 -31.8 91,467 -32.5
Majestic Auto 75,997 -23.7 77,014 -24.3
Bajaj Auto 35,760 -36.4 36,167 -35.2

A09-03-0012 17