The company that put middle class Indians on wheels is now set to be separated. After 24 year long spell of this ambitious joint-venture between Hero Group and the motorcycling giant Honda, they have decided to go their own ways finally. However they have singed a new License agreement till 2014, starting January 2011. Hero Group will buy Honda’s 26% stake in Hero Honda.
Hero has been bailing themselves out for a long time now, after it renewed its venture with Honda in 2006. However, this time around Hero will have the brand name changed over the time and will pay royalty to Honda till the time they are using its brand name attached to their motorcycles. Hero can use Hero Honda branding until June 2014 on the condition that the brand will be dropped if any changes are made into the vehicles. Market sources’ speculation that the royalty will be higher than it was at present has been thrashed by CEO Pawan Munjal in its press meet today. The royalty will be at 4.3% of Sales and the company is free to export products in new markets.
The biggest beneficiary of course is Honda which will get around $2 billion for its 26% stake in Hero Honda. They can pump this money directly in to its Indian operations, Honda Motorcycle and Scooters India Ltd. (HMSI) However both have agreed to a smoother transition, I would foresee some turbulence going forward assuming Honda’s aggressiveness with HMSI.
What remains to be seen is how Hero will source technology since it does not have its own R&D factility, while Honda will continue to provide products but no clarity has been revealed till when will Honda continue to provide new products. However, Hero is free to source technology or develop its own R&D facility with product development operations. Other issue, the biggest one rather, is the brand. Hero in India has done well in Cycling brand Hero Cycles, however all other areas where it is in, the brand doesn’t inspire the confidence as much as Hero Honda does. Its well known that Honda name is associated with Quality and this gave Hero Honda a great push up to its credibility which over the years proved to be successful and the trust only increased.
What Hero today has is a very strong dealer network and its existing product range.
I was more confident of TVS coming out alone from its JV (was a kid that time but am like this since my childhood) was its split and the subsequent 7 year no entry agreement with Suzuki. In these 7 years, TVS made sure that it products were considered among the best by engineering brilliance and taking the game forward. Suzuki today is finding it tough to create the same success that it enjoyed with TVS.
Honda doesn’t give that option to the Munjals. Honda already has its presence in India and now, a formidable competitor to Hero Honda. HMSI is leading the war path now with back to back product launches that may change equations for Hero Honda. Hero for sure can come out of this and stronger at that if it continues to inspire customers with its Quality products. It will be the key for Hero Group.