Hero Honda Case for Rural

7/31/2019 Hero Honda Case for Rural

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MKTG/219

ICMR Center for Management Research

Hero Hondas Rural Marketing Initiatives in India

This case was written byBarnali Chakraborty, under the direction ofVivek Gupta, ICMR Center for Management Research.It was compiled from published sources, and is intended to be used as a basis for class discussion rather than to illustrate

either effective or ineffective handling of a management situation.

2009, ICMR. All rights reserved.

To order copies, call 0091-40-2343-0462/63 or write to ICMR, Plot # 49, Nagarjuna Hills, Hyderabad 500 082, India or [email protected].

www.icmrindia.org


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Hero Hondas Rural Marketing Initiatives in India

The majority of India lives in rural areas and the government is pumping in a lot of moneythrough various programmes. Hero Honda is focusing a lot on rural markets. Going forward, a

substantial industry growth is expected to come from these markets.1

- Pawan Munjal, MD and CEO, Hero Honda Motors Limited, in May 2009.They [Hero Honda] have positioned themselves as a rural India story, at just the right time.

2

- S. Ramnath, Vice President at IDFC-SSKI Securities Limited3, in March 2009.

The penetration of two-wheelers in rural areas is estimated to be less than 10 per cent andaround 25 per cent in urban areas. This makes us optimistic about the market.

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- Anil Dua, Senior Vice President for Sales and Marketing, Hero HondaMotors Limited, inJanuary 2009.

INTRODUCTION

In April 2009, India-based Hero Honda Motors Limited (Hero Honda) announced that it wasplanning to develop a low-priced motorcycle. The company said that the motorcycle would belaunched specifically for rural consumers and was likely to be priced between Rs. 12,500 and Rs.15,0005. Pawan Munjal (Munjal), Managing Director and Chief Executive Officer of Hero Honda,said, This (a low-price bike) has been on our horizon for a long time but we havent been able tocome up with a solution till now. But this is not the end and we hope to come up with a solution...we continue to work on this.6

Munjal said that although the new motorcycle would be made available at a low cost, the companywould not compromise on its quality and safety. He said, Whatever we bring should certainlyhave a significant price advantage. Just because we have an enhanced rural focus, it does not meanthat rural customers can be offered products which do not stand the test of performance ordurability. In fact, rural customers need sturdier vehicles (than urban ones).

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Started in 1984, Hero Honda was the result of a joint venture between Japan-based Honda MotorCompany Limited (HMCL) and the India-based Hero Group. Hero Honda started its journey withthe launch ofHero Honda CD-100 motorcycle, the first four-stroke motorcycle to be launched in

1 Hero Honda Looking to Gain Market Share, http://in.reuters.com, May 08, 2009.2 Samar Srivastava, Hero Hondas Motorcycle Diary, http://www.livemint.com, March 26, 2009.3 Mumbai, Indiabased IDFC SSKi Securities provides corporate finance and institutional securities

services.4 Priyanka Vyas, Hero Honda Boost Production at Haridwar, http://www.thehindubusinessline.com,

January 18, 2009.5 Rs. or INR refers to Indian Rupee. As of June 25, 2009, 1 US$ INR 48.60.

6 Sindhu Bhattacharya, Hero Honda Working On a Nano Bike, http://www.dnaindia.com, April 23,2009.

7 Sindhu Bhattacharya, Hero Honda Working On a Nano Bike, http://www.dnaindia.com, April 23,2009.


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the Indian market. By the early 2000s, Hero Honda had firmly established its presence in theIndian two-wheeler market.

In late 2007, Hero Honda started paying importance to expanding its presence in rural India. It feltthat rural India had the potential to be a large market for two-wheelers (Refer to Exhibit I for a

note on the Indian Rural Market). In December 2007, the company started a separate ruralvertical and introduced a slogan Har Gaaon... Har Aangan, (every village, every household)targeting the rural consumers.

Hero Honda also strengthened its rural network by increasing sales, servicing, and spare partoutlets in major rural areas across India. Local people were recruited as sales executives by thecompany. They were trained by Hero Honda to market products in rural areas. The companysother strategies to capture rural market share included coming up with promotional offers duringlocal festivals, tying up with local financers to allow consumers to take loans to buy its products,and giving dealerships to local dealers to reach out to more rural consumers.

In the fiscal year 2008-09, Hero Honda reported net sales of Rs. 123.19 billion as compared to thenet sales of 103.32 billion reported in fiscal 2007-08, a growth of 19.23 percent. The company

recorded a net profit of Rs. 12.82 billion in fiscal 2008-09 as compared to a net profit of Rs. 9.68billion in fiscal 2007-08, an increase of 32.44 percent (Refer to Exhibit II for financialperformance of Hero Honda in 2008-09). According to Munjal, Our 25

th yearFY2008-09hasbeen the defining year for us at Hero Honda. An unprecedented share of over 57 per cent in thedomestic motorcycle market, particularly when the industry has been witnessing a massiveslowdown on account of the impact of recessionary trends across the globe, the credit squeeze, andthe uncertainty over interest rates in the country is reflective of the strong fundamentals of thiscompany. Weas the market leaderare committed to keep expanding the two-wheeler customerbase by exploring markets across geographies rural as well as urban and across customersegments, which in turn will contribute to the growth of the industry.

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However, there were apprehensions among industry experts on whether Hero Honda would be able

to sustain its pace of revenue and profit growth in the fiscal year 2009-10. They were of theopinion that due to the slowdown in the Indian economy, it would be difficult for two-wheelercompanies to increase revenues at the healthy rate that the previous 3-4 years had witnessed.According to the research report published by CRISIL9 in January 2009, on Indian the two-wheelerindustry, Demand for two wheelers has reached its advanced growth stage and is thereforeexpected to grow at 6-7 percent from 2008-09 to 2012-13Two-wheeler sale are expected toremain flat in 2008-09 and 2009-10 due to continuing difficult finance conditions.10

THE INDIAN TWO WHEELER INDUSTRY

The history of the Indian two-wheeler industry can be traced back to the mid-1900s. In 1952,Enfield India Limited (Enfield) started manufacturing motorcycles. In 1955, Automotive Products

of India (API) began manufacturing scooters in the country.

In the 1960s, two other companies, Ideal Jawa (India) Limited (Ideal Jawa) and Escorts IndiaLimited (Escorts) also entered the motorcycle segment, which, by then, was growing steadily. Inthe fiscal year 1971-72, the motorcycle segment accounted for 36 percent of the total two-wheelersales.

8 Hero Honda Posts Highest Ever March Sales of 10%, http://www.infibeam.com, April 01, 2009.9 CRISIL is Indias leading rating, research, risk and policy advisory company. As of 2009, it was the

worlds fourth largest rating agency (Source: http://www.crisil.com).10

Binal Shroff, Hetal Gandhi and Sachin Mathur, Two Wheelers-Annual Review, http://crisilonline.com,January 2009.


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Till the mid-1980s, foreign players were not allowed to enter the Indian two-wheeler market. Thisrestriction helped domestic players to nurture their own brands. In the mid-1980s, the Indiangovernment allowed foreign players to enter the Indian market through a joint venture with adomestic company.

In the mid- and late 1980s, a number of foreign players including HMCL, Suzuki MotorsCorporation (Suzuki), Kawasaki Heavy Industries (Kawasaki), and Yamaha Motor Corporation

(Yamaha) entered the Indian two-wheeler market. The entry of foreign companies brought about a

significant change in the market. Earlier, the consumers had to wait for couple of years for their

vehicles to be delivered. It was a suppliers market, as there were only a limited number of

companies manufacturing two-wheelers. However, after the entry of the foreign companies, it

became a buyers market, with stiff competition among the companies to capture maximum market

share. The companies differentiated their products in terms of pricing, design, and fuel efficiency.

The entry of foreign companies not only brought competition into the Indian two-wheeler industry

but it also improved the quality of the products. Most of the leading Indian two-wheeler companies

entered into joint ventures with foreign companies, and with the help of the technical expertise of

the foreign partners, improved the quality of their products (Refer to Table I for Collaborationbetween Indian Two Wheeler Manufacturers and Foreign Companies in 1980s and 1990s).

Table I

Collaboration between Indian Two Wheeler Manufacturers and Foreign Companies

(1980s and 1990s)

Year Collaboration

1984 The Hero Group entered into a joint venture agreement with Japan-based Honda MotorCompany Limited (HMCL).

1986 Bajaj Auto Limited entered into a technical collaboration with Japan-based KawasakiHeavy Industries.

1992 TVS Motor Company entered into a joint venture agreement with Japan-based SuzukiMotors Corporation. In 2001, both the companies ended the agreement.

1995 Escorts India Limited entered into a joint venture agreement with Japan-based YamahaMotors Corporation. In 2001, this agreement ended.

1999 Lohia Motors Limited entered into a technical collaboration with South Korea-basedDaelim Motor Company.

Compiled from various sources.

In the early 1990s, the Indian two-wheeler industry could be broadly divided into three segments scooters, motorcycles, and mopeds, which were small motorcycles with a low engine power. Till

the year 1990, scooters formed the dominant segment in the Indian two-wheeler industry with an

estimated market share of 60 percent in terms of total sales. However, by the year 1998, the

scooters market share had fallen to 44.2 percent. Motorcycles had a market share of 30 percent

and mopeds, 25.8 percent. In the late 1990s, consumers preference shifted to motorcycles from

scooters. The main reason for this shift among consumers was the growing preference for fuel-

efficient and aesthetically appealing motorcycle models. In 1999, for the first time, the sale of

motorcycles was more than that of scooters (Refer to Table II for Changing Market Share among

various segments in the Indian two-wheeler industry between 1993 and 2003).

In the early 2000s, the two-wheeler industry achieved remarkable growth because of affordable

pricing, easy availability of credit, low interest rate, and the increase in average disposable income


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among consumers. In the fiscal year 2006-07, the overall industry sales increased by 12 percent in

terms of units. While motorcycle sales increased by 14 percent, the sale of geared scooters

declined by 47 percent. As of 2006-07, motorcycles had a market share of 84 percent in the overall

two-wheeler market.

In the fiscal year 2008, India was the second largest producer of two-wheelers in the world. In themotorcycle industry, Hero Honda had the largest market share, followed by Bajaj Auto Limited(Bajaj Auto) and TVS Motors. However, in the same year, the industry experienced a decline insales by 8 percent mainly because of concerns regarding a global slowdown. Moreover, increasinginput costs, inflation, and lack of retail finance also affected the sales.

Table II

Market Share among Various Segments in the Indian Two Wheeler Industry

(1993-2003)

Year Market Share of

Geared Scooters

Market Share

of UngearedScooters

Market

Share ofMotorcycles

Market

Share ofMopeds

Market Share

of Step-Thrus*

1993 41.8% 9.4% 20.2% 20.0% 8.6%

1994 43.3% 7.9% 21.6% 17.6% 9.6%1995 42.6% 8.6% 23.9% 15.1% 9.8%

1996 40.6% 9.1% 24.8% 16.8% 8.7%

1997 38.4% 8.9% 27.1% 16.5% 9.1%1998 35.4% 8.8% 30.0% 15.5% 10.3%

1999 32.7% 8.3% 34.6% 14.6% 9.8%2000 2.9% 10.0% 42.7% 14.1% 7.3%

2001 16.0% 10.9% 54.1% 12.9% 6.1%2002 12.3% 9.5% 66.2% 8.7% 3.3%

2003 6.7% 10.5% 74.4% 6.2% 2.2%

* Step Thru is a mini bike, considered ideal for city driving. Some step thrus ava ilable in the Indian marketwere Hero Honda Street, Kinetic K-4 100, Bajaj M 80, Hero Puch etc.

Source: Bajaj Auto Annual Report, 2002-03.

Some analysts predicted that in the fiscal year 2009, the two-wheeler industry might witness a 10percent decline in sales. They opined that economic uncertainty and high interest rates wouldaffect sales growth. According to industry experts, rural India had a lot of potential where sales oftwo-wheelers were concerned. The disposable income of this section of the population hadincreased significantly in the past couple of years. And with the demand in the urban marketremaining more or less flat, every two-wheeler company began trying to capture market share in

rural market. They started taking marketing initiatives to attract rural consumers.

ABOUT HERO HONDA

The history of Hero Honda dates back to 1984, when Hero Group entered into a joint venture withJapan-based HMCL, to manufacture motorcycles. HMCL was to provide technical support to thecompany. In the joint venture, HMCL and the Hero Group each held a 26 percent equity stake.Through this joint venture, HMCL entered the motorcycle market of India. In the early 1980s, thegrowth in the Indian motorcycle market was sluggish compared to the scooters market in India.Motorcycles were perceived as unsafe and unsuitable for Indian roads.

In 1985, Hero Honda launched its first product, the Hero Honda CD-100, the first four-strokemotorcycle launched in India. Apart from its four-stroke engine, its fuel efficiency, which was

approximately 80 kilometers per liter, and low emission attracted consumers and it went on to


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become a major success for the company. In 1987, Hero Honda achieved the milestone ofproducing 100,000 motorcycles. In 1989 and 1991, the company launched two new models theSleekand the CD100 SS, respectively.

In 1994, after renegotiating terms and conditions, the Equity and Technical Collaboration

Agreement between HMCL and the Hero Group was extended till 2004. In 1999, HMCLestablished Honda Motorcycles and Scooters India Pvt. Ltd (HMSI), as part of its plan to introduceits own two- wheelers in the Indian market. HMCL announced that it would manufacture scootersfor the Indian market and would not enter the Indian motorcycle market till 2004.

Till the mid-1990s, Indias two-wheeler market was dominated by scooters. However, with theentry of Hero Honda, the preference of the Indian consumers shifted toward motorcycles. Thecompany launched an advertising campaign titled Fill it. Shut it. Forget it to draw consumersattention to the fuel efficiency of its motorcycles. By launching another campaign titled NoProblem Bike, the company emphasized the low maintenance cost of its motorcycles.Commenting on the changing dynamics of the Indian two-wheeler market, Sanjiv Bajaj, the thenExecutive Director of Bajaj Auto, which was one of the leading players in the Indian two-wheelermarket and was a leading manufacturer of scooters, said, With consumer preference changingfrom scooters to motorcycle we were unable to hold on to the number one position and had torelinquish it to a company (Hero Honda) that had only motorcycles in its product portfolio.11

In 1994, Hero Honda launched Splendor, which later became its best selling model. In 1997,another new model, Street, was introduced. In the same year, the company started its secondmanufacturing facility at Gurgaon.

In the year 2001, Hero Honda became the worlds largest two-wheeler company. The companyproduced one million motorcycles that year. The sales figure of the company increased from43,000 units in the fiscal year 1985-86 to 1,677,537 units in the fiscal year 2002-03.

In June 2004, the agreement between HMCL and the Hero Group was renewed till 2014.Commenting on the renewal of the agreement, the management of HMCL said, Hero Honda has

been one of the most successful two-wheeler joint ventures of Honda worldwide and thisrelationship will only be made stronger and solid. Honda would continue to provide Hero Hondawith the latest and most advanced engine technology, with full technical support and assistance fornew product introductions and for any other area of our joint operations. Hero Honda willdefinitely be a core part of Hondas integrated India strategy to develop business in India.

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By October 2004, Hero Honda was able to capture a market share of 48 percent. In 2004, thecompany sold more than two million motorcycles. Till 2004, the total sales of the company hadcrossed 10 million units.

In 2005, Hero Honda entered the scooter segment with its first scooterette model, Pleasure. Withthis product, the company explored a new segment the young Indian woman. Munjal said, Thescooter segment in India is over one million units and has been witnessing an impressive growth

for the past few months. Further, there is a huge untapped segment of women customers, whichoffers immense growth potential. With this launch, we are now ready to extend our products andservices to this vast customer profile.

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In an effort to attract women buyers, the company opened the Just4Her chain of Pleasureshowrooms, which catered to women consumers and had women sales executives and servicesupervisors. In addition, the company also offered membership of the Lady Rider club to itswomen consumers. The club membership entitled customers to free gifts, discounts on the

11Gaurav Choudhury, Innovative Scooter Models on Cards, www.tribuneindia.com, September 21, 2003.

12Honda and Hero Honda Renew Technical Collaboration Agreement, http://www.herogroup.com, June

02, 2004.13Neha Kaushik, Ungeared for Growth, http://www.blonnet.com, February 09, 2006.


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purchase of spare parts of the scooter, and also attractive offers on insurance of the scooter. Thecompany also launched a marketing campaign specific for Pleasure with the punch line, Whyshouldboys have all the fun? (Refer to Exhibit III for the advertisement of Hero Honda Pleasure).

In the financial year 2007-08, while sales in the Indian motorcycle market declined by 12 percent,

Hero Honda reported a sales growth of 4 percent (Refer to Exhibit IV for the Financial Highlightsof Hero Honda between 2003 and 2007).

As of 2008, Hero Honda continued to be the worlds largest two-wheeler manufacturer. It hadthree manufacturing plants in India Dharuhera and Gurgaon in Haryana and Haridwar inUttarakhand. With its strong distribution network, the company expanded its business both inurban and rural markets. The company offered several models including CD Dawn, CD Delux,Splendor +, Passion Pro, Passion Plus, Super Splendor, Pleasure, Glamour, Achiever, andKarizma. Commenting on the performance of the company, Brijmohan Lall Munjal, the Chairmanof Hero Honda, said, We pioneered Indias motorcycle industry, and its our responsibility now totake the industry to the next level. Well do all it takes to reach there.

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As of the quarter ended December 31, 2008, the growth story of Hero Honda continued, with a

domestic motorcycles market share of more than 54 percent (Refer Exhibit V for market share ofHero Honda between 2004 and 2008). The net profit of the company after paying tax in the thirdquarter of 2008-09 stood at Rs. 3.00 billion, an increase of 9.24 per cent in comparison with thethird quarter of the previous financial year.15 The retail sale in the third quarter of 2008-09increased by 3.5 percent compared to the corresponding quarter of 2007. However, another majorplayer in the Indian two-wheeler industry, Bajaj Auto, reported a decline of 22.43 percent in netprofit for this quarter compared to the corresponding quarter of the previous year (Refer to ExhibitVI for a comparison of financial results of Hero Honda and Bajaj Auto in the third quarter of 2008-09).

In the October-December 2008 quarter, Hero Honda launched several new models including NewCD Deluxe, New Passion Pro, Splendor NXG, New Pleasure, New Glamour, New Glamour FI,

and the new CBZ X-treme.According to Munjal, Our third quarter results reflect Hero Hondasremarkable resilience in the current deteriorating business environment and also illustrate thebenefits of the strategic initiatives that we have undertaken over the past couple of years. We havebeen able to deliver another solid quarter of strong earnings and improved operating margins.

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HERO HONDAS RURAL THRUST

The global financial crisis of 2008-0917 resulted in a credit crunch, rising unemployment, decliningincome, and turmoil in the stock markets across the world. The Indian automobile industry alsohad been battling with the crisis since early 2008. Most of the players in the Indian automobileindustry had seen a decline in demand and sales. To counter the negative sales growth, automobilecompanies in India started focusing on rural markets, which were less affected than urban markets.

Hero Honda also started emphasizing on rural markets from late 2007.

14 Driven by Passion Annual Report, 07-08, http://www.herohonda.com.15 Hero Honda Q3 Shows Encouraging Growth, http://www.domain-b.com, January 21, 2009.16 Growth Story Continues at Hero Honda with EBIDTA at 14.47 Per Cent in Q3, 2008 -09,

http://www.herohonda.com, January 20, 2009.17 The global financial crisis was an ongoing major financial crisis that affected all countries across the

world. The crisis was triggered by the sub-prime mortgage crisis in the US in which mortgages wereoffered to the borrowers without proper checks being done on whether they would be able to repay theloan or not. When several of these borrowers defaulted, there was a ripple effect in the US economy. Thefinancial crisis became prominent in mid-2008 with the failure of several large US-based financial firms.Soon, it started affecting the financial markets of other countries also.


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According to the National Sample Survey Organization (NSSO), as of early 2008, eight percent ofthe households in rural India had a two-wheeler in comparison to the 25 percent in urban India.18To tap this potential, Hero Honda started a rural vertical and introduced a slogan HarGaaon...Har Aangan, in order to cater to the rural consumers in December 2007. According to Munjal,

We have created a special rural vertical to push growth and this would spearhead our expansionin the rural market. There is a large market to be tapped. The objective is to reach out to as manypotential customers as possible.

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In an effort to understand the needs of rural consumers and their spending patterns, the companystarted collecting all the required data about rural consumers demand, their spending pattern, andthe factors that affected demand. The companys dealers also provided information on thespending patterns of rural consumers. Although no specific product was introduced targeting ruralconsumers, Hero Honda marketed its fuel-efficient motorcycles with smaller engine capacities inthe rural market. Commenting on Hero Hondas increasing emphasis on the rural market, VaishaliJajoo (Jajoo), auto analyst at Angel Broking, said, As a market leader, Hero Honda has to look atvarious alternatives to fuel growth. Theres the replacement as well as the rural market, which willrequire investments to create and then tap the opportunity.20

RURAL NETWORK

During the financial year 2007-2008, the rural network of Hero Honda covered 18,000 of thetargeted 23,360 villages with a population of more than 5,000 across India. The company alsoannounced its plan to cover 100,000 villages of the total 600,000 villages in India by the end of thefinancial year 2008-09.

In an effort to cater to the rural population, Hero Honda started expanding its sales network andadded more service and spare parts outlets. In the fiscal year 2008-09, the company expanded itssales network to 3,500 customer touch points (dealerships, service and spare parts outlets, spareparts stockists, and authorized representatives) as compared to 2,000 in the financial year 2006-07.

The company also planned to increase the number of customer touch points by 600 in the financialyear 2009-10.21 The company ensured that availability of spare parts for its motorcycles andgetting the vehicles serviced would not be a problem for rural consumers.

Understanding that increasing sales and service points would not be enough to cater to the demandof vast population of rural India; the company also employed and trained 521 rural salesexecutives across India to market its motorcycles. These executives were required to travel in therural areas to market Hero Hondas products.

In the fiscal year 2007-08, the rural sales executives approached more than 100,000 opinionleaders in the villages that were covered by the rural network of the company. The opinion leadersincluded the sarpanch(village head), school teachers and doctors, and those people who couldhave an impact on the spending decision of rural consumers. According to Anil Dua (Dua), Senior

Vice President for Sales and Marketing of Hero Honda, Rural elders have been roped in tocommunicate our message to prospective customers. In villages, the opinions of people such asvillage panchayat heads and teachers are taken seriously.

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18 Samar Srivastava, Hero Hondas Motorcycle Diary, http://www.livemint.com, March 26, 2009.19 Hero Honda Eyes Rural India to Step up Sales, http://www.automotive -business-review.com, April 29,

2008.20 Hero Honda Net Profit Rise 49.90% in Q2, http://economictimes.indiatimes.com, October 21, 2008.21Naazneen Karmali, Indias Motors on, http://www.forbes.com, May 14, 2009.22 S Kalyana Ramanathan, Hero Honda Takes Rural Road to up Sales, http://www.business-standard.com,

July 18, 2008.


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DISTRIBUTION

Hero Honda followed a Hub and Spoke System in distributing its products in rural areas. Thecompany gave a dealership to one dealer who would take care of a district. The dealer generally

had an office in the district headquarters and could again give dealerships to authorizedrepresentatives who were its sub-dealers. Local rural people could purchase their motorcyclesfrom these sub-dealers and could also get their vehicles serviced by them. The companyunderstood that if consumers had to travel to district headquarters every time they wanted to gettheir motorcycle serviced, they might not be interested in buying from Hero Honda. Therefore, thecompany ensured that the consumers would be able to get their vehicles serviced by these localsub-dealers. Sandeep Mukherjee, Sales Manager at Hero Hondas All India Rural Division said,We realized that while someone might be willing to travel 50km to buy a bike, they dont like todo that every time they need to get it serviced.23

PROMOTION

Hero Honda promoted its products aggressively during festive seasons in different regions of Indiaas sales during festive season was generally higher compared to the rest of the year. For example,products were promoted during Durga Puja in the eastern region, Gudi Padwa in the westernregion, Diwali in the northern region, and Pongal in the southern region of India. Most Indianconsumers preferred buying automobiles and other household items during festivals as theyconsidered it auspicious to do so.

Hero Honda also roped in dealers to run promotional activities in their respective districts. The subdealers arranged promotional activities in villages. Sometimes, they displayed some motorcyclesin thepanchayat(village council) office throughout the day. Villagers could take a test drive andcould find out more about the product from the companys rural sales executives. They could alsoget information on how to run the motorcycles and on their maintenance.

Dealers also organized service camps where the customers could get their motorcycles serviced.They also helped consumers get finance to buy motorcycles from them. In an effort to convincethe consumers, the local dealers put up price lists of the two-wheelers at tea shops, the localmarket, tailor shops, and in thepanchayat(village council) office. According to Akhilesh Sharma,Hero Hondas Sales Manager in Rajasthan, Dealers understand their area the best, and so weleave local activities to them. The company does provide broad guidelines.24

RETAIL FINANCE

The growth of the Indian two-wheeler industry was highly dependent on the availability of retailfinance. According to analysts, lack of financing could result in a decline in sales. As Hero Hondamotorcycles had good resale value, the process of getting loans to buy these motorcycles from

banks and financial institutions was not very stringent. Banks sanctioned loans for themotorcycles. If any consumer defaulted on the loan payment, the bank could seize the motorcycleand resell it to recover the loan amount.

To ensure easy availability of finance to people in the rural areas to buy its vehicles, Hero Hondaplanned to start its own finance division. The finance division was to provide finance to ruralconsumers who were interested in buying its two-wheelers. It entered into agreements with co-operative banks, Grameen banks, and other financial institutions which offered microfinance.

23 Samar Srivastava, Hero Hondas Motorcycle Diary, http://www.livemint.com, March 26, 2009.24 Samar Srivastava, Hero Hondas Motorcycle Diary, http://www.livemint.com, March 26, 2009.


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Hero Honda entered into agreements with local retail financers including Shriram TransportFinance Company (Shriram) and Fullerton India Credit Company Ltd. (Fullerton) in February andJuly 2008 respectively. After the tie-up, Shriram and Fullerton could set up their own counters atHero Honda dealerships and offer finance to the customers of Hero Honda. Commenting on its tie-up with Hero Honda, G. S. Sundararajan, MD and CEO of Fullerton, said, Our understanding ofthe small credit market in India and our international experience in the mass market segment willbe beneficial in servicing the wide spread network of Hero Honda Motors. We see a lot ofsynergies in this tie-up. Hero Honda, Indias leading brand of two-wheelers, targets customers inthe same mass market as we do in urban, semi-urban, and rural areas.25

THE ROAD AHEAD

At a time when most of the automobile manufacturers had to decrease production, Hero Hondaincreased its production capacity at its Haridwar manufacturing plant from 2,000 units per day to3,000 units per day in January 2009. It took advantage of the tax benefits offered by thegovernment to companies for establishing manufacturing plants in hill states like Uttarakhand.Hero Honda was not required to pay excise duty to the government for the first 10 years andincome tax for the first five years of production at its Haridwar plant. According to Amish Shah,analyst at Antique Stock Broking Ltd., When you increase production at this [Haridwar] factory,you save on the tax payments. It adds to the bottom line and profit margin of the company.26

Hero Honda believed that favorable government policies for people in the rural areas would helpthe company increase its sales in the rural market. For example, the National Rural EmploymentGuarantee Act ensured every poor household in rural India at least 100 days of work to one adultmember of their family. Moreover, the government had also increased the procurement prices foragricultural commodities. According to the analysts, these developments had resulted in anincrease in rural disposable incomes. Hero Honda expected that with the increase in disposableincomes, more and more people in the rural areas would use two-wheelers for traveling.Commenting on the growth potential in the rural market, Munjal said, I believe thats where moreof the growth is going to come from. The governments policies over the last couple of years have

been to grow the agricultural sector, to take infrastructure into the rural areas, so there is moneygetting to the rural consumer.27

In the fiscal year 2008-09, Hero Honda sold 3.72 million two-wheelers, compared to 3.34 millionvehicles in 2007-08, a growth of 12 percent. According to Jajoo, The companys aggressive forayinto the rural market, which is a cash down segment, has helped the companys salestremendously.

28 In the fiscal year 2008-09, Hero Honda was able to generate 40 percent of itssales from the rural market, compared to 35 percent the previous year.29

Riding on its healthy sales growth, Hero Honda had captured a 57 percent market share in thedomestic motorcycle market. Its market share in the overall two-wheeler market was 48.95 percentin 2008-09 (Refer to Exhibit VII for market share of leading players in the Indian two wheelermarket in 2008-09). According to analysts, in addition to Hero Hondas good product and brandvalue, its emphasis on expanding its business in rural India had contributed to the impressive salesperformance of the company. Commenting on the impressive sales growth, Dua said, Ourstrategy of exploring untapped markets in rural and upcountry areas has paid off. The rural marketis evolving and growing at a fast pace and gives us huge incremental numbers transpiring intostable growth in sales.

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25Fullerton India and Hero Honda Signs MoU, http://economictimes.indiatimes.com, July 29, 2008.

26 Hero Honda Expects Record Sales as India Demand Gains, http://www.bloomberg.com, April 17, 2009.27 Hero Honda Sees Growth in Tough 2009/10, http://economictimes.indiatimes.com, January 31, 2009.28 Hero Honda Jan Sales up, Bajaj Dips, http://www.business-standard.com, February 3, 2009.29Naazneen Karmali, Indias Motors on, http://www.forbes.com, May 14, 2009.30 Chanchal Pal Chauhan Hero Honda Beats Rivals by a Mile, Sales up 12%,

http://economictimes.indiatimes.com, March 17, 2009.


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In April 2009, Hero Honda announced that it expected its sale to increase by 7.5 percent in thefinancial year 2009-10. The company expected to sell four million vehicles in the financial year2009-10, compared to 3.72 million vehicles in the financial year 2008-09. Commenting on therationale behind the projection of sales growth, Ravi Sud, Chief Financial Officer (CFO) of Hero

Honda, said, We are betting on economic growth and strong rural demand.

31

However, analysts opined that financial year 2009-10 would be a tough one for the two-wheelerindustry in India. According to them, the global financial meltdown and the resultant slowdown inthe Indian economy would continue to impact consumer spending. Hero Honda also agreed withthis view but was optimistic that the economic scenario in India would improve soon. According toMunjal, Going by the current circumstances, it is difficult to predict for the next fiscal but the firstquarter is looking good and the second quarter may not be as good as the first one due to issueslike rain. We have a couple of tough quarters ahead to go through but India will probably be thefirst to come out of the downturn.

32

31Hero Honda Expects Record Sales as India Demand Gains, http://www.bloomberg.com, April 17, 2009.32No impact of Nano on Two-Wheeler Industry, http://www.livemint.com, March 26, 2009.


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Exhibit I

A Note on the Indian Rural Market

According to estimates, in July 2009, Indias population would reach 1.17 billion .

Approximately, two-third of this population hails from rural areas. In 2008, rural India wasspread across more than 600,000 villages, with an average population of 1,100 per village

The interim budget of 2008-09 focused on expanding the National Rural Employment GuaranteeAct (NREGA) to all states of India. In addition, the farm loan waiver of US$ 13.86 billion andthe Bharat Nirman Program, which made available US$ 34.84 billion, was expected tocontribute significantly to the development of rural infrastructure and the income of rural people.According to the Eleventh Five-Year Plan announced by the Indian government, the totalprojected investment in rural India amounted to US$ 283.83 billion, of which US$ 80.82 billionwould be spent on improvement of rural infrastructure.

Although the per capita income of rural people was low when compared to that of urban people,in 2007, the increasing output of agricultural products and the growing subsidies on agricultural

products given to farmers resulted in an increase in rural income. The rise in income wasreflected in increasing demand among rural people.

Since early 2008, while urban markets had witnessed a flat or negative growth, rural India hademerged as a growing market for the companies. Riding on the increasing income of rural India,companies from fast moving consumer goods (FMCG), telecom, pharmaceutical, retail,consumer electronics, and automobile sectors enhanced their focus on rural markets.

According to the Associated Chambers of Commerce and Industry of India (Assocham), in2008, FMCG companies witnessed a higher growth in rural markets compared to urban markets.According to a study by the Rural Marketing Association of India (RMAI), by 2017, the percapita consumption of FMCG products in rural India would be equal to the level of per capitaconsumption in urban India in 2008.

According to the Indian Communications and IT Ministry, India would have 200 million ruraltelecom connections by 2012.The life insurance market in semi-urban and rural areas was alsoexpected to increase to US$ 20 billion by 2012 from US$ 5 billion in 2008.

As of 2008, India was the second largest two-wheeler market, the worlds fourth largestcommercial vehicle market, and the eleventh largest passenger car market in the world.However, the automobile market in rural India was highly untapped. In the rural markets, therewas high demand only for tractors and two-wheelers. The reasons included the high price of fourwheelers, poor rural infrastructure, and not enough service and spare parts outlets.

To tap the rural market, automobile companies started rural marketing campaigns. For example,Maruti Suzuki launched a marketing campaign, the Ghar Ghar Mein Maruti (Maruti in every

household) to target rural consumers. Hyundai Motors also started a promotional scheme forgovernment employees and members of village administrations for its car, the Santro. BajajAuto also planned to launch special finance schemes for rural consumers.

Notwithstanding the high potential of the rural market, some analysts opined that there would besome challenges before the companies. They were of the opinion that as Indias villages werespread over 3.2 million sq km, it would be quite difficult for the companies to ensure consistentavailability of products or services. Moreover, given the poor rural infrastructure, deliveringproducts and developing an efficient distribution networks across rural India would be a majorchallenge.

Compiled from various sources.


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Exhibit II

Financial Performance of Hero Honda (2008-09)

(Rupees in Million)

Particulars Quarter endedMarch 31, 2009

(Unaudited)

Quarter endedMarch 31, 2008

(Unaudited)

Year endedMarch 31,

2009

(Audited)

Year endedMarch 31,

2008

(Audited)

No. of two wheelerssold (In Units)

997,855 884,075 3,722,000 3,337,142

Net Sales/Income fromoperations

34,118.4 27,886.5 12,3191.2 103,318.0

Total Net OperatingIncome

34,225.2 27,998.9 123,568.8 103,645.4

Total Expenditure 29,177.9 24,202.9 107,880.2 91,427.5Net profit for theperiod

4,021.7 2,987.0 12,817.6 9,678.8

Basic and dilutedearnings per share (inRupees)

20.14 14.96 64.19 48.47

Source: http;//www.herohonda.com.

Exhibit III

Advertisement of Hero Honda Pleasure

Source: S. Muralidhar, Riding into a New Market with Pleasure, http://www.blonnet.com, February 05,2006.


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Exhibit IV

Financial Highlights of Hero Honda (2003-2007)

(Rupees in Million)

Particulars 2003-04 2004-05 2005-06 2006-07 2007-08Sales (in units) 2,070,147 2,621,400 3,000,751 3,336,756 3,337,14

2

Growth in sales (in percentage) 23.4 26.6 14.5 11.2 0.01Total net income 59,970 75,590 887,000 100,900 105,170

Growth in total income (inpercentage)

15.5 26.1 17.4 13.7 4.2

Profit before tax 10,720 12,170 14,120 12,460 14,100Profit after tax 7,280 8,100 9,710 8,580 9,680

Share capital 39.94 39.94 39.94 39.94 39.94Reserves and surplus 10,990 14,530 19,690 24,300 29,460

Total debt 1,750 2,020 1,860 1,650 1,320Net fixed assets 5,890 7,150 994 13,550 15,490Total assets (net) 13,140 16,950 21,950 26,350 31,180

Market capitalization 97,970 109,430 177,810 137,530 138,690Economic Value Added (EVA) 5,690 5,640 64,100 4,850 5,750

Source: http://www.herohonda.com.

Exhibit V

Market Share of Hero Honda (2004-08)

Market Share in the Indian

Two Wheeler Market (%)

Market Share in the

Indian Motorcycle

Market (%)

Financial Year ended March 31,2004

37.0 48.0


40.0 50.0


40.0 Less than 50.0


39.4 45.7


44.78 More than 54.0

Compiled from Annual Reports of Hero Honda, 2004-08.


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Exhibit VI

Comparison of Financial Results of Hero Honda and Bajaj Auto

(Q3 FY 2008-09)

(In Rs. Billion)

Hero Honda Bajaj Auto

Number of two wheelers sold (In Units) 857,806 417,111

Net sales/income from operations 2874.04 2141.00

Profit from operations before other income, interest and tax 369.53 335.00

Net profit 300.42 166.00

Basic and diluted earnings per share (Rs.) 15.04 11.40

Source: Hero Honda Q3 Shows Encouraging Growth, http://www.domain-b.com, January 21, 2009.

Exhibit VII

Market Share of Leading Players in the Indian Two Wheeler Industry (FY 2008-09)

Companies Two Wheeler Market Share (%)

Hero Honda Motors Limited 48.95

Bajaj Auto Limited 17.29

TVS Motor Company 15.28

Honda Motorcycles and Scooters India Pvt. Ltd. 13.66

Source: Hero Honda & Hyundai Gains, Bajaj Loses Market Share In 2008-09, http://autos.sify.com, April

17, 2009.


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References and Suggested Readings:

1. Naazneen Karmali, Indias Motors On,http://www.forbes.com, May 14, 2009.2. Hero Honda Looking to Gain Market Share, http://in.reuters.com, May 8, 2009.3. Sindhu Bhattacharya, Hero Honda Working On A Nano Bike,

http://www.dnaindia.com, April 23, 2009.4. Hero Honda & Hyundai Gains, Bajaj Loses Market Share In 2008-09,

http://autos.sify.com, April 17, 2009.5. Hero Honda Expects Record Sales as India Demand Gains,

http://www.bloomberg.com, April 17, 2009.6. Hero Honda Leads Rise in Two-Wheeler Sales, http://www.business-standard.com,

April 02, 2009.7. Hero Honda Posts Highest Ever March Sales of 10%, http;//www.infibeam.com,

April 01, 2009.8. Samar Srivastava, Hero Hondas Motorcycle Diary, http://www.livemint.com, March

26, 2009.9. No impact of Nano on two-wheeler industry, http://www.livemint.com, March 26,

2009.10. Hero Honda Expects to Sell 3.72 Million Vehicles, http://www.online.wsj.com, March

26, 2009.11. Chanchal Pal Chauhan Hero Honda Beats Rivals by a Mile, Sales up 12%,

http://economictimes.indiatimes.com, March 17, 2009.12. Hero Honda Jan Sales up, Bajaj Dips, http://www.business-standard.com, February 03,

2009.13. Hero Honda Sees Growth in Tough 2009/10, http://economictimes.indiatimes.com,

January 31, 2009.14. Hero Honda Q3 Shows Encouraging Growth, http://www.domain-b.com, January 21,

2009.15. Growth Story Continues at Hero Honda With EBIDTA at 14.47 Per Cent in Q3, 2008-

09, http://www.herohonda.com, January 20, 2009.16. Priyanka Vyas, Hero Honda Boost Production at Haridwar,

http://www.thehindubusinessline.com, January 18, 2009.

17. Binal Shroff, Hetal Gandhi and Sachin Mathur, Two Wheelers-Annual Review,http://crisilonline.com, January, 2009.

18. Hero Honda Net Profit Rise 49.90% in Q2, http://economictimes.indiatimes.com,October 21, 2008.

19. Fullerton India and Hero Honda Signs MoU, http://economictimes.indiatimes.com,July 29, 2008.

20. S Kalyana Ramanathan, Hero Honda Takes Rural Road to up Sales,http://www.business-standard.com, July 18, 2008.

21. Hero Honda Eyes Rural India to Step up Sales , http://www.automotive-business-review.com, April 29, 2008.

22. Neha Kaushik, Ungearedfor Growth, http://www.blonnet.com, February 09, 2006.23. S. Muralidhar, Riding into a New Market with Pleasure, http://www.blonnet.com,

February 05, 2006.

24. Honda and Hero Honda Renew Technical Collaboration Agreement,http://www.herogroup.com, June 02, 2004.

25. Gaurav Choudhury, Innovative Scooter Models on Cards, www.tribuneindia.com,September 21, 2003.

26. Driven by Passion-Annual Report, 07-08, http://www.herohonda.com.27.

www.herohonda.com.

Hero Honda Case for Rural

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