Hero Honda Split
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INSTITUTE OF MANAGEMENT SCIENCES (LUCKNOW UNIVERSITY) lucknow
What will be the future of Hero group after split with Honda group?
MBA (CM) IV
ROLL NO- 901112037
I express my sincere gratitude to my industry guide MR. ANIL DUA
Marketing and Customer Care Manager, Hero Honda Ltd. for his able
guidance, continuous support and cooperation throughout my case study,
without which the present work would not have been possible.
I would also like to thank the entire team of Hero Honda Ltd. Lucknow, for
the constant support and help in the successful completion of my case study.
Also, I am thankful to my faculty guide MS. SMITA SINGH of my institute,
for her continued guidance and invaluable encouragement.
MBA (CM) IV sem
A joint venture between the Hero Group and Honda Motor Company was
established in 1984 as the Hero Honda Motors Limited
at Dharuhera India. Hero is the brand name used by the Munjal brothers for
their flagship company Hero Cycles Ltd. Manjul family and Honda group both
own 26% stake in the Company. However the Hero Honda group is set for a
split in the end of 2010. After the split the Munjal family will buy Honda
Motor’s 26% stake for around $1 billion, or a little less than half the current
value of the stake in the stock market.
The Japanese auto major will exit the JV through a series of off market
transactions by giving the Munjal family—that currently holds 26% stake in
the company—an additional 26%. Honda, which also has an independent
fully-owned two-wheeler subsidiary—Honda Motorcycle and Scooter India
(HMSI)—will exit Hero Honda at a discount and get over $1 billion for its
stake. The discount will be between 30% and 50% to the current value of
Honda's stake as per the price of the stock after the market closed on
The Munjal family plans to compensate Honda through high royalty payouts,
which could double to nearly 6% of net sales. However, key financial
institutions have objected to this move, saying that the deal could favour the
Munjals but be detrimental to other shareholders.
What will be the future of Hero group after split with Honda group?
Hero Honda is a world leader because of its excellent manpower, proven
management, extensive dealer network, efficient supply chain and world-
class products with cutting edge technology from Honda Motor Company,
Japan. The teamwork and commitment are manifested in the highest level
of customer satisfaction, and this goes a long way towards reinforcing its
After Hero’s Honda divorce, it starts work on its Brand Identity!
Hero Honda has been the largest manufacturer of two–wheelers since a
decade. With a market share of 60% in motorcycles and 43% in two –
wheelers, Hero Honda has been the leader by far. But then as they say
everything isn’t always hunky – dory, Honda recently sold off its stake of
26% in the Hero Group because of problems which have not really come out
in open. So, basically their 25 year old successful association has culminated
in a sad divorce.
So now we have to look about the future of Honda group and its strategies
towards the market.
How this split will affect the hero group?
What will be the strategies of Hero group to maintain its brand image?
AUTOMOBILE INDUSTRY TILL DATE
The automobile industry is one of the biggest industries in the world. Being a
major revenue and job generating sector it drives the economies of some of
the superpowers of the world. In India the automobile industry has grown by
leaps and bounds since the advent of the liberalization era the automobile
industry and especially the two wheeler segment has grown by leaps and
The liberalization has done away with primitive and prohibitive practices of
licensing and restricted foreign investment have been done away with. The
result of which was the entry of foreign players into the Indian market. The
two wheeler segment was largely dominated by Automobile Products of India
(API) and Enfield in the 50s. Later on towards the end of the 50s Bajaj Autos
began importing Vespa scooters from Italian company Piaggio. In the
following decades the automobile industry in India was mainly dominated by
scooters with API and later Bajaj dominating the market. There were very few
products and choices available as far as motorcycle is concerned and Enfield
bullet and Rajdoot dominated the market.
The 80s saw the entry of Japanese companies in the Indian market with the
opening up of the market to foreign companies. Hero Honda and TVS Suzuki
are companies formed in this era of market reform. The market was still
predominantly scooter dominated and Bajaj and LML were the leading
brands producing the products at that time. Scooter was viewed as a more
family and utility friendly vehicle than motorcycle and hence was preferred.
The Japanese companies not only collaborated with Indian companies to
produce the already existing products but also brought in new technology as
a result of which the ever conquering 100cc bikes which were extremely fuel
efficient with 4 stroke engines were launched in India. These proved to be
highly successful as they provided a cheap and affordable means of personal
transport to all those who could not buy a car. The flourishing middle class
took a great liking for these bikes and the bike sales in India began to grow
exponentially year on year leading to Hero Honda becoming the leader in the
two wheeler industry in India and the largest producer of two wheelers in the
The post 90s era was the era of liberalization and weakening of restrictive
measures. The government went on an overdrive to support the industry and
all FDI regulations and licensing was abolished. 100% FDI was allowed in the
automobile industry and the excise duty was also considerably reduced to its
current level of 12% on two wheelers.
All these factors combined with the rising fuel prices, the increasing
dispensable incomes of households, easy access to finance, etc. have led to
two wheeler industry becoming the backbone of the automobile industry in
The two wheeler industry in India forms a major chunk of the automobiles
produced in India. According to Society of Indian Automobile Manufacturers
statistics for the year 2008 – 2009, two – wheelers comprise 76.49% of
market share among the vehicles produced in India.
The production share of two wheelers is quite similar to the market share.
The two wheeler industry comprises around 74% of the total automobiles
produced in India. The SIAM data for the year 2009-10 states that 8,418,626
two wheelers were produced during the year against a total of
11,175,479vehicles produced during the year.
SEGMENTATION OF TWO WHEELER
A two wheeler sector sub-segmenting in the three segments-
Breakup of the Industry by Segment
Hero Honda Motors Ltd. is the world's largest manufacturer of two –
wheelers, based in India. The company is a joint venture between India's
Hero Group and Honda Motor Company, Japan that began in 1984.
In 2001, the company achieved the coveted position of being the largest
two-wheeler manufacturing company in India and the ‘World No.1’ two-
wheeler company in terms of unit volume sales in a calendar year by a
single company. Hero Honda has retained that coveted position till date.
Today, every second motorcycle sold in the country is a Hero Honda bike.
Every 30 seconds, someone in India buys Hero Honda's top-selling
motorcycle – Splendor.
The Hero Honda story began with a simple vision – the vision of a mobile
and an empowered India, powered by Hero Honda. This vision was driven
by Hero Honda’s commitment to customer, quality and excellence, and
while doing so, maintaining the highest standards of ethics and societal
responsibilities. Hero Honda believes that the fastest way to turn that
dream into a reality is by remaining focused on that vision.
Hero Honda’s key strategy has been driven by innovation in every sphere
of activity – building a robust product portfolio across categories,
exploring new markets, aggressively expanding the network and
continuing to invest in brand building activities.
Hero Honda bikes are manufactured across three globally benchmarked
manufacturing facilities. Two of these are based at Gurgaon and
Dharuhera which are located in the state of Haryana in northern India.
The third and the latest manufacturing plant is based at Haridwar, in the
hill state of Uttrakhand.
In the 1980’s Hero Honda pioneered the introduction of fuel-efficient,
environment friendly four-stroke motorcycles in the country. Today, Hero
Honda continues to be technology pioneer. It became the first company to
launch the Fuel Injection (FI) technology in Indian motorcycles, with the
launch of the Glamour FI in June 2006.
Hero Honda's product range includes variety of motorcycles that have set
the industry standards across all the market segments. The company also
started manufacturing scooter in 2006. Hero Honda offers large no. of
products and caters to wide variety of requirements across all the
The company's growth in the two wheeler market in India is the result of
an intrinsic ability to increase reach in new geographies and growth
markets. Hero Honda's extensive sales and service network now spans
close to 4500 customer touch points. These comprise a mix of authorized
dealerships, Service & Spare Parts outlets, and dealer-appointed outlets
across the country.
The company has been continuously investing in brand building utilizing
not only the new product launch and new campaign launch opportunities
but also through innovative marketing initiatives revolving around cricket,
entertainment and ground- level activation.
Hero Honda has been actively promoting various sports such as hockey,
cricket and golf. Hero Honda was the title sponsor of the Hero Honda FIH
Hockey World Cup that was played in Delhi during Feb-March 2010. Hero
Honda also partners the Commonwealth Games Delhi 2010.
Total unit sales of 46,00,130 two-wheelers, growth of 23.6 per cent
Total net operating income of Rs. 15860.51 Crores, growth of 28.1 per
Net profit after tax at Rs. 2231.83 Crores, growth of 74.1 per cent
Final dividend of 1500% or Rs. 30 per share on face value of each share of
EBIDTA margin for the year 17.4 per cent
EPS of Rs. 111.77, growth of 74.1 per cent
HERO HONDA'S MISSION
Hero Honda’s mission is to strive for synergy between technology,
systems and human resources, to produce products and services that
meet the quality, performance and price aspirations of its customers. At
the same time maintain the highest standards of ethics and social
This mission is what drives Hero Honda to new heights in excellence and
helps the organization forge a unique and mutually beneficial relationship
with all its stake holders.
In view of the increased competition due to globalization and the expansion
of economy, all industries need to constantly add more attributes and
features which consumer want in two-wheeler. In this context companies
have to adopt more innovative and consumer friendly attributes so that their
product should be more popular among the customer. The project is aimed
at studying the reason why the consumer purchase any particular two
wheeler or which are those attributes which affect more to the consumers in
making the buying decision. Moreover the attributes which satisfy then the
most. In the market there are many players, but Bajaj, Hero Honda, Honda,
TVS Motors etc are the major players in the market. Let us first identify the
current market leaders in each category. In the economy segment Bajaj is
the leader with 46% of the market share with boxer being the largest selling
bike in this segment. In the executive segment Hero Honda is the clear
leader with 67%market share with splendor and passion leading the market
in this segment .The research assigned to me was to study the parameters
or the features that affect most of the customer satisfaction in two wheeler
There were many features which affect the two wheeler industry but the
importance among all of them were the following: -
1. Fuel efficiency
3. Availability of the product
4. Resale value
5. Look and style
6. Image of the brand
By the study conducted on the customer satisfaction in two wheeler industry
it will make companies more delighted about which attributes to inculcate in
the product and which attribute is of the least importance.
Divorces happen if either of the partners have issues with each other. And in
this case Honda has finally realized that the Hero Group is nothing but
In a country where the disposable income is continuously increasing with the
economy growing at more than 8.5% p.a. and new players coming in
everyday, which company, would want to lose out on this market?
How will this affect the Hero Group?
This divorce would affect the Hero Group at three different levels: -
Hero Honda has built its massive customer base because it is HERO HONDA!
The fact that there wouldn’t be any Honda after 2014 (the time till which
they can use the Honda name) has excited the competitors. A decade of
leadership hasn’t really given the competitors an opportunity to do
something special. Because something special for them is fantastic for Hero
Honda! The name is what attracts people to Hero Honda because it is
associated with trust and quality.
But then communication too is important for the “top of the mind” recall for
customers, isn’t it? The “Fill it – Shut it – Forget it” as well as “Desh Ki
Dhadkan” campaigns of Hero Honda are probably some of the most famous
ad campaigns in the country. With Hero breaking up from Honda, the Hero
Group would have to come up with an entire new communication strategy.
The branding campaign would have to be completely changed because
people wouldn’t be able to associate with the Hero Group so readily.
And this is the reason they have asked JWT to help them. Their plans include
using a branding strategy for motorcycles even though they are present in
the bicycles segment as well. The most important thing they need is
“reinforcement of the brand” and smooth transition from being “Hero
Honda” to just “Hero”.
The ones who are grinning from ear to ear at this divorce are Hero Honda’s
competitors. Launching of new products, poaching their employees and
dealers as well as greater spending on R & D – Hero Honda’s competitors are
licking their lips.
HOW JWT TO HELP HERO-
With the Hero Group’s 26-year-old association with Honda Motor Co. Ltd
coming to an end, India’s largest selling motorcycle maker is devising a new
branding strategy to make sure it doesn’t fritter away consumer goodwill.
“In terms of branding, there will be a gradual shift going towards 2014. They
are planning a whole new corporate identity, including a new brand logo,” a
Hero Honda Motors Ltd board member said on condition of anonymity. “The
company is likely to hire a branding company soon to develop a new logo.”
Honda Motor is selling its 26% stake in Hero Honda to New Delhi-based Hero
Group for an undisclosed amount. Honda’s stake in Hero Honda, formed in
1984, has a market value of nearly $2 billion (Rs.9080 crore today).
Under the new agreement, the Hero Group has bought time to develop its
own research and development (R&D) capability by signing a fresh licensing
agreement until 2014 with the Japanese company for both current models
and new launches.
“A new branding strategy will be critical as there are doubts whether
popular bike brands like Splendor and Passion continue to evoke the same
excitement or whether the absence of the Honda brand will change the
fortunes of the company,” said Prayesh Jain, an analyst at brokerage India
The firm will continue to use the Hero Honda brand until 2014. “However, the
company will evolve its own brand name over a period of time,” Munjal had
The split between Hero and Honda will have major impact on Indian motorcycle market. Japan’s Honda one of the major players in Indian two wheeler market. The company recently sold the 26 % stake of holding in Hero Honda to Hero group.
The first impact would be on the brand image of the Hero-Honda bikes in India. However, the Hero groups can reportedly use the Hero-Honda name till 2014. So Hero should have to maintain its brand image.
The slip among the two major two wheeler maker will give opportunity other bike and auto companies in India to take a lead. Here Hero should not lose its market share.
Hero should go for R&D to maintain its brand image in the customers mind.
Exports may not rise as fast as expected because it takes time to understand
local markets and to build supply chains. Additionally, they cannot use the
Honda name for exports. Branding will be a challenge.
Hero Honda has three years to develop its R&D capabilities—not a very long
time, but enough to come up with decent models at least in the entry-level
segment from where it gets 70% of its sales.
Since the name Hero – Honda can be used up to 2015, I am sure it gives a
great chance for both – the Hero Group as well as Honda India to develop
their respective strategies. With the infrastructure already there and
continuous research and development, both these organizations would be
really successful in the long run.
With both companies deciding to end their 26-year old partnership, the
question being asked is what may have caused the split? There are two likely
reasons. One, the increasing cost of royalty and technology (R&T) and
second, the growing presence and market share of Honda Motorcycle &
Scooter India (HMSI), a 100% subsidiary of Honda.
While people are wondering about how Hero will sustain their profits, market
share and brand image; I would like to congratulate the Indian giant for the
divorce with Japanese company which will only bring exhilaration into the
The questions are open to Hero but the management is smart, experienced
and veteran. They not only got their 26% share from Honda at 40% discount
to the market rate, but also have gained expertise over the Japanese
technology during their operations of 26 years.
There was out rightly no need to piggyback the brand name Honda anymore
which came with a huge royalty fee. The technology shared by Honda has
now been learned and mastered by Hero during their long 26 years of
marriage. The profits were now merely shared for customers’ sake for they
love to see the two names HERO and HONDA together on their bikes.
Although, the guild of the two names was giving maximum sales however
was of limited value to the company.
New Markets :
The Hero Group will gain from dissolving the partnership with Honda Motor
by being able to export more motorcycles and scooters around the world.
Hero Honda, which has a 44 percent domestic market share, is currently
limited to exporting motorcycles only to India’s neighboring countries due to
Honda’s global presence.
"We will be able to make our own global presence felt in global markets,"
Hero Honda managing director Pawan Munjal told a news conference.
New segments :
Motor cycles have been surging in line with the rising incomes of India’s
middle class, who number up to 350 million, which has been aiming at high-
end customers, now will target the large entry-level segment.
The Hero Group has been responsible for marketing and distributing Hero
Honda’s motorbikes while Honda mainly provided technology. Hero will now
leverage the plus.
Hero Honda said that the royalty costs for Honda technology would either
remain steady or fall as a result of the deal, in contrast to media reports and
the technology would be shared till 2014 to fill the gaps, if any.
After the exit of Suzuki from a joint venture, TVS Motors took many years to
find its bearings. Will this be the case with Hero too?
One big differentiation between Hero Honda and other automobile
companies is the scale and strong brand recall. Hero Honda’s Splendor is a
decade-old motorcycle brand. However, automobile divorces are very
challenging. Retaining core customer group will be the incremental challenge
for the Hero group apart from cut-throat competition.
Royalty and Takeover payments are the third biggest expenses for Hero
Honda after raw materials and employee cost. It’s another challenge to
optimize the savings to rebranding activity.
The Hero group has two options, either to go for in-house R&D or choose a
domestic/foreign partner for technical collaboration. However, analysts do
not see the group going in for a partnership with anyone.
It will be a challenge for Honda to compete with robust Hero’s marketing and
distribution team and a challenge to Hero will be to live up to the
expectations of customers at technical level.
A third challenge that is expected to stare Hero in the face is that of carefully
handling the differentiation of its two baskets -- the Hero Cycles range and
its motorbikes. The former has a highly earthy, lower-end fragmentation,
while the latter is in an entirely different space.
Then there are those who view the break-up as nothing short of a liberalizing
opportunity for both parties. The real implications of the development will be
felt only in 2014 -- the year in which brand Hero Honda will actually dissolve.
What has happened today is a mere financial decision, the marketing
implications of which will be felt later. After 2014, both brands will be at par,
as they'll get three years to build their individual identities.
It is an opportunity for Hero to stand on its own without international support
and a chance to expand on an international scale in its own right.
Whether the split will turn out to be an ugly divorce with open wounds for
both parties; and a healthy break-up where the partners move on with
valuable leanings, there’s a third party that stands to gain the most -- the
consumer. Ultimately, the Indian buyer will benefit from this development, in
terms of potential new products/variants to choose from, both brands'
attempts to view the Indian market in fresh ways and both brands' inevitable
efforts to fill in the gaps left by their former partner.
A look at the pros and cons of the Hero Honda split reveals more long-term
negatives if at all, in the short term nothing much has changed.
In the short term, I don't foresee any major impact. Just because Hero and
Honda have split, it does not mean that their bike Passion would stop selling,
however, it gives a strategic opportunity. The impact would be felt in the
long run, especially on how Hero launches new products for the domestic
market without Honda’s support
• Not much change in the near term for Hero Honda since it continues to get
technical support from Honda and gets to use the brand name till 2014.
• Zero royalty payments after 2014.
• Royalty payment will start falling sooner than expected (the management
says as early as next month) if the company will develop more models itself.
• Higher exports, as the company can now export to locations where Honda
has a presence.
• Even if Honda reserves its good models for Honda Motorcycle & Scooter
India (HMSI), its wholly-owned subsidiary, Hero’s old ‘Splendour’ and
‘Passion’ models constitute 70% of its sales; all new bikes in the last few
years add up to only 8% of its sales—so this should not be a huge problem.
Some Negatives -
• Although Honda needs to provide new models to Hero Honda under the
new agreement, there is a possibility it will reserve all the good ones for
• Hero will have to pay new model fees, which could be hefty.
• R&D spends for Hero Honda will rise—Bajaj spends about 1.5% of sales and
TVS about 2% on this. Although it is not impossible that HH may come up
with good models, since it is getting three years to develop them, historical
evidence shows it has not been easy. Bajaj had many failures after its split
with Kawasaki—like Wind, Caliber, Discover 125CC, XCD 125CC. Hero Honda
has indicated that it will pay about 1.5%.
• Exports may not rise as fast as expected because it takes time to
understand local markets and to build supply chains. Additionally, they
cannot use the Honda name for exports. Branding will be a challenge.
• Advertising and selling expenses are likely to shoot up after the split.
In a conference call on 20th December, Hero Honda said it will have to
create new capacities to meet the growing demand, and in addition to de-
bottlenecking it may look at setting up a fourth plant which would entail
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