AFTER THE DIVORCE - HERO AND HONDA, BOTH GROW STRONGER

By Ruma Dubey

It’s been four and half years since the divorce and both, Hero as well as Honda have learnt to lead and live separate lives, so much so that one is left wondering if they were married at all in the first place. That what enterprise and growth does to even a 26 year old relationship.

Hero and Honda decided to part ways in December 2010 and this winter, their split would mark 5 years of separation. This ‘five year’ mark is very significant as Hero had set itself a set of milestones to achieve by December 2015 when they split. And as near this deadline, it looks as though Hero is miles away from achieving those targets.

The first target was a $10 billion revenue – it ended FY15 with a revenue of $4.3 billion and there is no way on earth that it can close this gap and get to $10 billion in one year. One can blame it all on the depreciating rupee also to some extent. The average rupee to dollar rate in 2011 was at around Rs.45-50/US dollar and today it stands at almost Rs.70/dollar.

The second target was sale of 10 million unit – it ended FY15 with a total sale of 6.63 million units. This means, it needs to show a jump of 51% units sold this fiscal or 3.37 million units more over FY15. Now that again seems like a very tough milestone to achieve.

The third target was to achieve a 10% export share of total sales and the achievement of this target was dependent on the fourth and last milestone - 6 new factories or assembly units would be opened outside India by end of FY16 . Hero’s export contribution to total sales in FY15 was a measly 3% and this can be blamed on the opening of only four units outside India till date. One more unit in Nigeria is scheduled to go on stream before FY16 comes to an end. Yet, achieving a 10% export target is a tall order.

The biggest expertise which Honda got on the table for Hero was the design for new bikes from Japan. It owns the largest number of patents and created a huge value on its IP – Hero cannot even imagine getting halfway. But imagine the plight of Hero when Honda walked away with all the designs? Hero has no painstakingly built its own R&D, with some 400 engineers. It tied Engine Engineering, AVL and Magneti Marelli for design expertise but the crowning glory was the tie-up with hall-of-fame designer Erik Buell. In fact it was huge coup when Hero bought a 49% stake in Erik Buell. But sadly, Buell filed for bankruptcy in April’15 and shut down. This means Hero will no longer get these coveted, premium technology from Eric and Hero has to bear a Rs.155 crore impairment loss on this equity deal. For now, Hero is trying its level best to get into the high margin, premium segment of bikes while trying to capture the lucrative scooters segment – which is the best performing in entire two-wheeler segment.

Hero is doing well, no doubts about it, especially in the low cost, high mileage sector.  It remains India’s largest two-wheeler maker. In April’15, the company reported a 7% (YoY) drop in sales at 5,33,305 units and it said that this was due to poor rural demand impacted due to unseasonal rains witnessed in the month of March.

And after the split, how is Honda doing? The Japanese company is gaining fast ground. In FY13, Hero had a market share of 42.85% and Honda was at 18.89%. This changed in FY14 – Hero down to 41.30% and Honda gains at 24.03% and FY15 – Hero is further down to 40.18% and Honda is gaining fast at 26.64%. So Honda is slowly but surely creeping ahead. Its Dream series bikes are doing well and Neo too but both are yet to get the kind of mileage which Splendor has though its scooter sales are doing exceedingly well. The company is expanding the distributorship network across India. It’s new plant at Gujarat, with a capacity of 1.2 million scooters per annum is expected to on stream this fiscal. But what it is really working on is displacing Hero’s Splendor from the top mantle. That will take a while for sure.

Bottomline – The divorce has worked well for both, ushering in growth and new markets. For the rest in the industry, surely there is increased competition to contend with.