Honda wants to set up a scooters unit on its own. But it won't hurt market-leader Hero Honda-for 7 more years.

By Ranju Sarkar

In January, 1998, when Atul Sobti was sounded out about joining Hero Honda Motors (Hero Honda) as its Senior Vice-President (Sales & Marketing) from Eicher, he asked the company's 44-year-old CEO, Pawan Kant Munjal: ''1997 has been your best year ever. Your sales have grown by 50 per cent without your having a marketing chief. Why do you want me?'' Pat came the reply: ''I'm not looking at today. I want you to prepare for 4 years down the line.''

Twelve months, as it turned out. For, India's largest and most successful manufacturer of motorcycles may already have arrived at its most critical crossroads.

Not only is Hero Honda's dominance being challenged, the joint venture-a 26:26 equity partnership between the Munjal family and Japan's Honda Motor Company-could be slipsliding into uncertainty. For one, this may still not be the only route that Honda wants to take into the market. BT learns that Honda-Siel Cars-Honda's 95:5 cars venture with the Siddharth Shriram Group-may have applied to the Foreign Investment Promotion Board for permission to set up a scooter-manufacturing facility, asking for a No Objection Certificate (NOC) from the Munjals before doing so. Last year, it may be recalled, Honda broke up with Kinetic Engineering, selling its stake in that scooter-making joint venture back to the Firodias.

To complicate matters comes the news that the Munjals are tying up with Honda's worldwide rival, Peugeot of France, for a scooters venture in this country. Admits Pawan Munjal: ''We are in touch with Peugeot, but there is no agreement yet.'' Are these not the first signs of cracks in a successful joint venture? Perhaps. Perhaps not, since the Munjals' NOC says that Honda will not launch motorcycles for the next 7 years in India. If, however, its interest in the Indian market is rising, will Honda be satisfied with a 26 per cent stake in Hero Honda?

Muses S. Arun, 37, Analyst, smifs Securities: ''Honda could use this as a ploy to acquire greater say in Hero Honda's management.'' Nor can the Japanese company be blamed for trying. In 1998-99, Hero Honda did splendidly: its sales volumes rose by 38 per cent, its turnover shot up by 34 per cent, and its net profits did a perfect wheelie: they were up by 58 per cent. Riding rings around corporates sent reeling by the recession, the company's board announced a record dividend of 75 per cent-an outgo of Rs 28 crore from its coffers. Of course, there were 2 components to it: a 50 per cent normal dividend and a 25 per cent Millennium Bonus.

In the marketplace too, Hero Honda appears to be zip-zap-zooming along. With a 37.50 per cent share of the motorcycles market in 1998-99-ahead of Bajaj Auto (marketshare: 27 per cent), TVS Suzuki (18.60 per cent) and Escorts (13.30 per cent)-Hero Honda is revving into the next century on all 4 strokes. However, after years of near-unchallenged dominance, the company's bastion will be put to its stiffest test now. For one, a slew of 4-stroke launches is carrying the battle to Hero Honda's USPs. In addition, Hero Honda is losing key managers, who are turning into bad ambassadors for the company. An analysis of this 15-year-old market-leader reveals 4 factors that could neutralise Hero Honda's 4-S advantage.

COMPETITION. In addition to the rising intensity of competition in the two-wheelers market, Hero Honda's rivals are whizzing in with 4-stroke scooters, such as the Bajaj Legend, the TVS Spectra, and the Kinetic k4-100, and 4-stroke mobikes, such as Escorts' Yamaha 125, the Bajaj Caliber, and the yet-to-be-named offerings from TVS-Suzuki and LML. Naturally, for Hero Honda's ageing fleet-the CD 100 (launched in 1985), the Sleek (1989), the CD 100ss (1991), the Splendor (1994), the Street (1997), and the 150-CC CBZ (1999)-it isn't going to be easy riding. Warns Bharat Caprihan, 45, Executive Director, Escorts Yamaha: ''Once the new bikes are out, Hero Honda will be under pressure.''

However, the 45-year-old Sobti takes the flip side of the 4-stroke flurry: ''If our competitors start talking 4-stroke, it will only reinforce our image.'' His logic: if all the 2-stroke players shift to making 4-stroke mobikes, it will be an acknowledgement of the supremacy of the technology that has always powered Hero Honda's bikes. Besides, Honda continues to be the world leader in 4-stroke two-wheeler technology. Will the customer brake to think about that?

Or will he just be thrilled by the fact that the market offers 4 times the choice? Already, Hero Honda's rivals together control 62.50 per cent of the motorcycles market. What's more, the new entrants-like the Bajaj Caliber and the Escorts Yamaha 125-are more contemporary models while Hero Honda's popular models-such as the CD 100, the CD 100ss, and the Sleek-are of an older vintage. That is already showing up. Last year, Bajaj's Caliber (price: Rs 43,819), which is positioned against Hero Honda's largest-selling Splendor (Rs 42,005), did well at 72,208 units versus the latter's 235,705 units.

What Hero Honda could be banking on is the fact that the customer is shifting towards motorcycles: their share of the two-wheelers market shot up from 29.50 per cent in 1995-96 to 41.40 per cent in 1998-99. So, although Hero Honda could concede share to its rivals, it will still sustain volumes. Says Munjal: ''With our lead in 4-stroke bikes, we should be able to maintain our volumes.'' But then, Hero Honda's leadership may, eventually, be pared down in a growing market.

Hero Honda's volumes primarily come from the Splendor (44.43 per cent), the CD 100 (25.16 per cent), and the CD 100ss (23.08 per cent), with the remaining 7.46 per cent trickling in from its Achilles' (w)heels: the step-through Street (6.84 per cent) and the Sleek (0.49 per cent). Adds Sobti: ''We have the basic range which meets the customer's requirements of fuel-efficiency, style, and power. We don't want to introduce products merely for the heck of it.''

Sure, but Hero Honda's newest bike, the CBZ, has done extremely well since its launch, showing how Sobti does need to add more products to his range. Even overseas, Honda has a range of 13 four-stroke mobikes, and occupying every price-position in a crowded market could prove to be crucial in future. Argues Escorts' Caprihan: ''Once there is competition from models with better features and prices, Hero Honda will feel the heat.''

Of course, Hero Honda has been making some smart moves too. Apart from tying up with the Centurion Bank to offer finance at a flat rate of 11.90 per cent-which translates into an internal rate of return of 25.50 per cent against a market rate of 27-30 per cent-it is enhancing its dealer- and service-network. While the number of dealers will go up from 350 to 400, service-points will multiply from 75 to 425, with Hero Honda targeting small towns and rural markets-such as Agartala (Tripura), Tinsukia (Assam), and Bhagalpur (Bihar)-where it can garner volumes because of its brand equity. Remarks Virender Uppal, 50, General Manager (Sales), Hero Honda: ''We want to be as close to the customer as possible.''

That, however, may not be enough. Says Manishi Roychoudhuri, 31, an analyst with ICICI Securities: ''Caliber has eaten into Hero Honda's potential marketshare, which could have grown to 45 per cent over the next 2 years.'' Adds SMIFS Securities' Arun: ''Hero Honda can, at best, expect to grow at the same rate as the market.'' So, although Hero Honda may be able to sustain its volumes, it will have to concede marketshare to its competitors unless it expands its range.

FINANCE. Hero Honda's seemingly-strong financials could get a drubbing if its royalty-payments to Honda-Rs 12.38 crore in 1998-99-shoot up. Since the company plans to launch 2 fresh models every year in future, it will have to fork out more since it does not develop any technology itself.

Besides, to meet the emission-norms for two-wheelers, Hero Honda's CD series will have to be upgraded. Insists K.K. Agarwal, 50, Senior Vice-President (Operations), Hero Honda: ''Already, 75 per cent of our products meets the India 2000 emission-norms. We will have to make slight modifications in the bikes to make them totally compliant.'' Agrees former senior vice-president (Gurgaon plant), P.B. Menon, 54: ''The norms can be met by certain modifications in the carburettor, and by changing the air-cleaner, which will not cost more than Rs 500-Rs 600 per bike.''

Hero Honda's operating margins are under duress, and thanks to the competition, it will find it difficult to pass on any hike in raw material costs to the consumer. Warns I-Sec's Roychoudhuri: ''As competition mounts, Hero Honda's operating margins could come down by 0.40-0.50 per cent: from 12.80 to 12.30 per cent.'' Agrees Ravi Sud, 43, CFO, Hero Honda: ''If more funds are deployed, our overall Return On Net Worth will decline.''

HUMAN RESOURCES. At times as crucial as these, many old company hands have quit Hero Honda. Vikram Sharma, Vice-President (Marketing) left in May, 1997, to join Escorts JCB as CEO. Prosad Dasgupta, Vice-President (Finance) left in December, 1997, to join Apollo Tyres as the CFO. P.B. Menon quit in April, 1999, to join Apollo Tyres as the head of its Vadodara plant.

And they are not the only ones. Actually, Hero Honda has had 3 hr heads in the last 4 years. Alleges a senior manager, who left the company in 1997: ''There's no interaction between the top and the professionals. There's no growth potential. The Munjals don't believe in having professional managers on the board.''

While Munjal refused to comment on the issue, his managers admit that there may be an issue. Says a senior executive of the company: ''People may be leaving. When your employee turnover down the line is almost negligible, it means that there is something wrong with the organisation.'' Adds Ravi Virmani, 39, CEO, Noble & Hewitt: ''I would only say that Hero Honda, probably, needs to ensure that its people are aligned to its business strategy.''

TECHNOLOGY. Ever since Honda decided, in September, 1998, to sell off its 51 per cent stake in Kinetic Honda Motors to the Firodias, the Japanese major's relationship with Hero Honda has been placed under watch. Although Honda and the Munjals each have 26 per cent stakes in the joint venture, it is the latter who are in the rider's seat albeit under the eagle eye of a Honda, which has 3 full-time directors on the pillion: Takehiko Nakajima, Matsuo Yamasaki, and Y. Kobayashi. While Honda's role is restricted to operations, the throttle, the clutch, and the gears of the company are in the hands of the Munjals.

That's not something the Japanese giant will be delighted about. In Honda-Siel, for instance, Honda increased its stake to 95 per cent after starting out with 60 per cent. In order to freely transfer contemporary technology, Honda could insist on a majority stake in Hero Honda too. But the Munjals vehemently deny the mere suggestion that anything could change in the partnership. While Honda's directors are non-committal, when BT contacted Honda's headquarters in Tokyo, the company's Director & Deputy coo for Asia & Oceania, S. Toshida, chose not to answer, saying: ''We are not in a position to comment on these issues at this stage since it is relevant to our current partner, the Hero Group.'' True.

When the Hero Group tied up with Honda in January, 1984, it defied market convention. At that time, the market was grown by 2-stroke 100-cc motorcycles-such as tvs Suzuki's Ind-Suzuki ax 100, Escorts' Yamaha RX 100, and the Kawasaki Bajaj's kb 100 RTZ. Yet, Hero Honda launched its 4-stroke 100-CC CD 100, which paid off. Between 1986-87 and 1995-96, the sales of the basic CD 100 leapt by 92 per cent, pushing Hero Honda to the No. 1 position in the motorcycles market.

So striking was its success that even Hero Honda's rivals have good things to say about it. Remarks A.N. Ravichandran, 45, Vice-President (Business & Product Development), Bajaj Auto: ''They (Hero Honda) have good products, good branding, and good positioning.'' Explains Munjal: ''The product, the distribution, the marketing set-up, the vendor support, and the supply chain-these have created a matrix which has delivered.''

If Honda does exit from the joint venture, it will be a crippling blow for the Munjals since Hero Honda owes much of its brand equity and all its technology to its Japanese partner. That may not happen easily because, according to the agreement, Honda is bound to supply technology to the joint venture till 2004, when it comes up for renewal. However, if Honda does walk out, the Munjals will have to either develop their own products, or shop around for technology-like LML which, after breaking up with Piaggio, has tied up with Danieli and Beneli for scooters, and Daelim of South Korea for motorcycles.

Besides, this is hardly the time for a split. Hero Honda has been a dream financially (while Kinetic Honda failed to make much money in 12 years.) And Honda has benefited from its meteoric growth: its 26 per cent stake helped it rake in Rs 7.80 crore (US$1.80 million) by way of dividends last year. Plus, it earned Rs 12.38 crore ($3 million) as royalty on the bikes the joint venture sold.

Thanks to a strong investor orientation, Hero Honda's capitalisation has gone up from Rs 1,744 crore to Rs 4,000 crore in the last 12 months, with the scrip ruling at Rs 995 (June 3, 1999) on the Bombay Stock Exchange, showing an appreciation of 108 per cent over its 12-month low of Rs 477.50 on August 17, 1998. Last year, the company's free cash-flows from operations rose from Rs 95.39 crore to Rs 143.79 crore.

Clearly, Hero Honda is coasting along. With competition growing, an unstable management is the last thing both its parents will want. In other words, Honda needs the Munjals as much as the Munjals need Honda-at least, for the next 7 years. And since the future of their relationship with the Indian customer-and each other-will depend on how the company fares in the 2000s, that, if nothing else, should keep Hero Honda on a roll.

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