A Case Study : Reasons for separation of Hero Honda

Reasons For Separation of Hero-Honda

Background of Hero "Hero" is the brand name used by the

Munjal brothers for their flagship company, Hero Cycles Ltd. A joint venture between the Hero Group and Honda Motor Company was established in 1984 as the Hero Honda Motors Limited at Dharuhera, India. Munjal family and Honda group both owned 26% stake in the Company.

During the 1980s, the company introduced motorcycles that were popular in India for their fuel economy and low cost. A popular advertising campaign based on the slogan 'Fill it – Shut it – Forget it' that emphasised the motorcycle's fuel efficiency helped the company grow at a double-digit pace since inception.

In 2001, the company became the largest two-wheeler manufacturing company in India and globally. It maintains global industry leadership till date. The technology in the bikes of Hero Motocorp (earlier Hero Honda) for almost 26 years (1984–2010) has come from the Japanese counterpart Honda.

It is interesting to know that HERO started its journey just from manufacturing of Cycles which is know as “Hero Cycles” & lately joined hands with Honda in  two-wheeler manufacturing.

Background of Hero

Hero Showroom & Manufacturing Plant

Honda is the world’s largest manufacturer of two Wheelers , Recognized the world over as the symbol of Honda two wheelers , the ‘Wings’ arrived in India as Honda Motorcycle and Scooter India Pvt. Ltd. (HMSI), a 100% subsidiary of Honda Motor Company Ltd., Japan ,in 1999. Since its establishment in 1999 at Manesar, District Gurgaon, Haryana, Honda has lived up to its reputation of offering the highest quality at the most reasonable price. Despite being one of the youngest players in the Indian two-wheelers market, Honda has become the largest two wheeler manufacturer as well as the second largest two-wheelers company in India.

Background of Honda

Honda Showroom & Manufacturing Plant

1956 - Formation of Hero Cycles in Ludhiana (Majestic Auto Limited)

1983 - Joint Collaboration Agreement with Honda Motor Co. Ltd. Japan signed. Shareholders Agreement signed

1984 - Hero Honda Motors Ltd. Incorporated.

2001 - The company became the largest two-wheeler manufacturing company in India and globally.

2010 - The board of directors of the Hero Honda Group had decided to terminate the joint venture between Hero Group of India and Honda of Japan in a phased manner.

2011 - Both Companies Split up.

Hero Honda Timeline

In 1998 Honda decided to set up its own scooter manufacturing subsidiary. At that time Press Note 1 was in force, which made it mandatory for it take a No Objection Certificate (NOC) from its existing JV partner, that is, Hero Honda. The NOC was given with the understanding that Honda will not manufacture motorcycles whereas Hero Honda will not make scooters for five years.

Reasons For SeparationReason 1- Honda make a separate entry

The conflict arose when Honda Motorcycles and Scooters India Private Limited decided in 2010 to launch a 110cc motorcycle, the segment that formed over 70 per cent of Hero Honda’s sales. Honda dismissed Hero Honda’s apprehensions that HSMI’s motorcycle will become a direct competitor to its largest selling bikes – Passion and Splendor.

Reason 1- Honda make a separate entry

According to the shareholder’s agreement signed in 1984, the joint venture was only for domestic production and consumption. BUT In 2001 Hero Honda had become the world’s largest & biggest player in the motorcycle segment. So in 2008 Hero Demanded to export.

Reason 2 - Issue Of Exports

When the issue of exporting the Indian JV’s products to other countries came up, Honda said that Hero Honda will have to compete on its own since it could not influence its subsidiaries abroad to import the JV’s products. Honda’s subsidiaries are run very independently and decide which countries they want to source their products from. This was a bitter pill to swallow for Hero Honda.

Reason 2 - Issue Of Exports

The third contentious issue was that of board representation. Of the four Honda representatives on the board, one executive director was the head of Honda in India, to whom HSMI reported, and the other located in Bangkok, represented Honda’s two-wheeler business in Asia. The other two were nominated by Honda.

Reason 3 – Board Representation

As directors on the board of Hero Honda, all of them had access to its plans and strategies while Hero Honda had access to none of Honda’s plans. This, Hero Honda felt amounted to a conflict of interests.

Reason 3 – Board Representation

The fourth issue was related to Hero Honda wanting to do its own independent R&D and manufacturing its own products. When it asked Honda to be allowed to do so, subject to approval from the head office in Japan, Honda’s response was ‘R&D is like its heart and it can’t give its heart to anyone’.

Reason 4 – Hero’s own R&D

On other hand,Honda was making its expansion stronger in India by introducing efficient models. Thus gaining more market share in India.

Models such as Activa, Dio & Eterno were introduced by Honda

Reason 5 – Honda’s Success

As Honda was engaged in developing itself separately with Japanese technologies which were not being availed to Hero, the R&D for Hero Honda was not given importance . Thus Honda was not showing enough interest in its own venture

Example : Self-Start Technology.

Reason 6 – Honda’s Reducing Interest in

Venture

In simple words, Hero wanted to export his motor bikes to other EU nations, and Honda on the other hand didn't agree. Honda was already selling it's Motors to most of the country and certainly no one would want to compete our own brand. So they mutually ended their pact in a very positive way.