Wednesday, December 22, 2010

Hero Honda Group

Hero and Honda: - Ride ends for Hero Honda


There is sense of proximity when I saw the commercial Dhak Dhak Hero Honda during Cricket world Cup so it was quite disappointing when Hero Honda said sayonara to the Honda Group. The known nostalgia we felt when Bajaj discontinued its iconic Bajaj Chetak and we had one in our house called Tussi and we used to fill it with RS 15 petrol and carried three of us to school. It was atleast 30 years old scooter. Change is inevitable and it has to happen so better accept it in every way of life
Hero Honda is the world’s largest manufacturer of two wheelers based in India. It is a joint venture of India’s Hero Group and Honda Japan started in 1984.Hero group is owned by Munjal Group and 26% of Hero Honda is owned by Honda Group. The ride so far has been fruitful for both of these companies as one out of every third bike in India is a Hero Honda bike. Hero Honda launched CD-100 in 1984 and it was an instant success in Indian Market that was dominated by Royal Enfield, Ideal Jawa, and Escorts. Since then the group is growing at the rate of 20% every year for last decade. The valuation of  26% stake will be around 8717 crores going by the stick price of 1679.Hero group will compete with Honda in domestic and overseas market. Honda will get the opportunity to foray into 2nd- largest market for two wheelers. On the Hero group side, they can retain the brand name till 2014.Lets see this venture in little more detail

Q1. Why Honda join Hero Group?
The license raj that existed between 1940s and 1980 in India did not allow foreign companies to enter the market and imports were tightly controlled. This regulatory maze, before the economic liberalization, made business easier for local players to have a seller’s market. Customers in India were forced to wait up to 12 years to buy a scooter from Bajaj. The CEO of Bajaj commented that he did not need a marketing department, only a dispatch department. By the year 1990, Bajaj had a waiting list that was twenty-six times its annual output for scooters When Hero Honda was formed in 1984, Indian regulations forbade foreign firms from owning 100 percent subsidiaries in the country. For Honda, entering India on its own without knowledge of the local market was risky anyway, and having Hero as a partner was valuable for the group's marketing expertise. By the time, Govt relaxed those regulations; Honda acquired enough expertise and setup its HMSI in 1999. However, it makes sense to move out of the venture to exploit world’s 2nd largest two wheelers market after China.

Q2. Why would Honda sell its stake at the discounted price?
The big discount represented in the reported sale price is not surprising, analysts say. With Honda's exit from Hero Honda, the remaining company will likely eventually lose the right to keep Honda in its brand name in a huge negative for goodwill. Honda is by far the world's biggest motorcycle maker, and its brand is synonymous with two-wheelers in many countries.The sale price would also have to be taken in the context of what Honda gets in return, such as increased royalty payments for licensing its technology.

Q3. What is there for consumers?
The split between Hero and Honda is destined to raise a price war in Indian market compared to that of telecom and consumers can expect a lot of freebies and discounts.