Hero after the end of its immensely successful 27-year marriage with Honda

The host city for the 2012 Olympics was burning on the night of August 9. London was convulsed by the worst rioting in Britain in living memory. The morning papers were emblazoned with the silhouette of a woman jumping from a building in flames. Policemen moved through apocalyptic streets, hunting thugs and looters to the rise and fall of sirens. But in a surreal scene only Bollywood could have conjured up, a different kind of pyrotechnics was exploding on the south bank of the Thames, in the massive Millennium Dome, now called the O2 Arena.

There, amidst fireworks, a laser show, prancing heroes and heroines, and the obligatory ode from A.R. Rahman, the main item descended from the rafters - Hero MotoCorp's new logo, three geometric chunks forming an isometric "H" - to the hoarse cheers of 1,300 dealers, vendors and employees led by Pawan Kant Munjal. Less than eight months earlier, Hero had announced the end of its immensely successful 27-year marriage with Honda . Munjal and his merry men were there to celebrate Hero MotoCorp, the company born out of the divorce.

PERSPECTIVE: Hero relaunches itself, sans Japanese major

As divorce parties go, this one too, was a bit over the top, brimming with optimism about the future. But no one badmouthed the erstwhile spouse. Instead, Honda was fondly remembered. That may be because Hero got a true sweetheart deal; it got to keep the house, the car and the kids. The Munjal family, the promoters of Hero, who held 26 per cent, the same as Honda, got to buy out the partner at a price significantly lower than the market price - rumours put the confidential price at half the market value. Hero can launch products with Honda technology till June 2014 and can continue to sell them for as long as it wants. Hero Honda's exports were confined to some minor markets abroad since Honda did not want a clash with its exports from Japan; Hero MotoCorp can go anywhere.

Not surprisingly, it was with palpable ebullience that Pawan Kant Munjal, who was just 30 years old when his father Brij Mohan Lall forged the venture with Honda in 1984, walked on to the O2 stage and said the company held the event in London to showcase "our new global ambitions as well as to highlight both our legacy and modernity, like London does". That's a long journey for a group that started with a small cycle repair shop in Old Delhi's Chandni Chowk a year after the Independence and later moved to Ludhiana to set up Hero Cycles. Until the tie-up with Honda, the Munjals, who came from Pakistan in the aftermath of the dreaded Partition, were known just for their Ludhiana-made cycles.

Twenty-seven years later, the Munjals once again need to invoke the Ludhiana spirit - the town in Punjab is known to spawn entrepreneurs, including the country's telecom czar Sunil Mittal - to face life after Honda.

They have begun on a good note, but a good divorce settlement can ensure only short-term happiness; it does not guarantee the proverbial happily-ever-after. That is what Hero Honda's shareholder family of 67,000 would be sweating over. A part of the 30-share Sensitive index of the Bombay Stock Exchange, the Hero stock is one large cap which is actively traded and is among the top 25 stocks by trading volume.

As many of you might know, responsibilities get shared when you live as a couple. When you are single, there is always something that causes a headache. It could be the plumbing, the cooking, or the electrician may not turn up. And then there is the fine print of the divorce: Hero is paying Honda Rs 2,479 crore as licence and exports fees. That is 14 per cent of Hero's 2010/11 revenues.

Ravi Sud, Hero's Chief Financial Officer, says the figure will go down to just 2.2 per cent of 2013/14 revenues on a pro-rata basis. However, this is about more than just money. This shows how dependent Hero was - and is - on Honda for technology.

Among Indian two-wheeler companies, only Bajaj Auto, which morphed under Rajiv Bajaj from a scooter maker into a motorcycle company in the late 1990s, has done well on its own. It has had a technology tie-up - no equity partnership - with Kawasaki of Japan, but its biggest success of the recent years, the Pulsar, was developed inhouse.

Bajaj does not even share the badge with Kawasaki any more, though it sells some high-end motorcycles imported from Kawasaki under its premium 'Probiking' network.

On the other hand, Kinetic, promoted by the Pune-based Firodia family, collapsed after Honda walked out of their scooter making joint venture. LML, promoted by Kanpur-based Deepak Singhania, is making a feeble comeback with electric scooters after its Vespas disappeared in the aftermath of its breakup with Italy's Piaggio. TVS, which split with Suzuki, carries on and develops new products in house, but it has always been, despite the thrust provided by stepthroughs, a distant third in the two-wheeler market - making little of Chairman Venu Srinivasan's avowed ambition to overtake Bajaj.

While Hero has done "significant" work on styling and design of its products for a few years now, Munjal admits that the company has little know-how of its own in the crucial engine and gearbox departments (see box: Cracking the Bajaj Code). Hero MotoCorp unveiled two new products in London, a scooter named Maestro and a motorcycle named Impulse. The two will wear the Hero badge - no Honda there - but have been developed in association with the Japanese company.

Munjal, for his part, is not taking chances and is in advanced stages of talks for technology with a "group of Japanese companies" he wouldn't name. Ashok Taneja, Managing Director, Shriram Rings and Pistons, a long-time vendor to Hero, says that motorcycle technology is not rocket science. "Technology is not that much of a factor in motorcycle sales any longer." If you have the money, you can buy it off the shelf in Japan, South Korea, and elsewhere. Kinetic, after splitting with Honda, tied up with Hyosung of South Korea and rolled out motorcycles, including a high-end cruiser, the Aquila, priced at Rs 1.5 lakh. The same experts would also tell you that success in twowheelers is not about technology alone, sales and distribution are vital.

Every village, household
In the last financial year, four million motorcycles were sold outside the metros and big cities, giving 45 per cent of the total sales to rural and semi-urban areas. These are markets where it is not easy to outpace a company which made its bones in cycles. If this outlet does not get you, the next one will. Hero has more than 4,500 touch points across the country, almost double the 2,300 it had in early 2006, and expects to have 5,000 by March next year, including over 800 full-fledged dealers (several dealers own multiple outlets).

Bajaj has 589 dealers, according to its latest annual report. "Small towns, villages… we are everywhere," says Anil Dua, Senior Vice President, Marketing and Sales, Hero MotoCorp. Add to this Hero's focus on rural sales, which have increased from 45 per cent of the total in 2007 to 47 per cent, and you begin to understand why Hero Honda's share of the motorcycle market stands at 56.5 per cent, well ahead of Bajaj's 25 per cent and the below seven per cent share of Honda's fully owned subsidiary, Honda Motorcycles and Scooters India, or HMSI.

Rajiv Bajaj outside Bajajs Pune plant Cracking the Bajaj Code Around the turn of the century, scooters lost their appeal. It soon became apparent that Honda's fully owned subsidiary, Honda Motorcycles and Scooters India, would be the only major votary of the stolid vehicle that had carried Indian families for decades. The others would, at best, look at scooters as supporting cast to the protagonist: the agile, sturdy motorcycle, whose utility on Indian terrain could not be matched by scooters. Bajaj Auto, which had risen to the top on the back of its scooters - in the 1980s, it was common for buyers to wait for a decade to get a Bajaj - embraced motorcycles with the zeal of the new convert. Going the whole hog, the company, which was converted into an out-and-out motorcycle maker by Rajiv Bajaj, the elder of the two sons of Chairman Rahul Bajaj, also wanted to be self-reliant in technology. It invested heavily in research and development, not only in the simpler frame and aesthetics department but also in engines. The result was the Dual Twin Spark, or DTS, engine, which went into that boyracer's dream, the Pulsar, which continues to dominate the 150cc segment. While Hero and Honda have managed to chip away at its lead, Bajaj is still reaping the dividends of its R&D efforts. Can Hero match that? Managing Director Pawan Kant Munjal says he has had a "large R&D team working mainly on the frame and looks of our products", but he concedes that they are a bit thin on the "engine side of things". Hero's success in the Indian market has been on the back of Honda's reliable 100cc engine, which has surprised many with its longevity. Barring a few tweaks, the same engine has been driving products for two decades. Until June 2014, Hero's fortunes remain tied to Honda, as the Japanese company will continue to provide technology (read engines). New products after that will have to be developed without Honda. Munjal talks about a group of "Japanese people" with whom Hero will jointly develop products. This, while boosting inhouse R&D at the factory in Dharuhera, Haryana. "I am quite sure we can do this," says Munjal.

In villages where Hero does not have direct presence, it has authorised representatives of dealers - Dua calls them opinion makers - who travel from place to place extolling the virtues of its motorcycles. "Our aim is Har Gaon, Har Aangan (every village, every household)," he says.

Hero dealers even send mechanics every month to repair and service motorcycles in far-flung villages. Vivek Goyal, owner of Autoneeds, a Hero dealer for 22 years with outlets in Delhi's middle-class borough of Patparganj and in Gurgaon, says word of mouth is always positive for Hero. "If we can sell a bike to one major household in a village, we can crack the village," he says.

Even in cities, Hero is not about to slow down. Says Nikki Seghal, owner of Auto Riders, a dealership in Pune: "Was I apprehensive when I walked into that huge hall in London? Yes, I was, and so were several hundreds of other dealers. But when we saw the direction the company is taking and the new brand and the campaign, I felt quite relieved and many of the others were thrilled. I believe the problem may be one of supply in the near future."

You see, it was not for nothing that Honda agreed to share its India profits with Hero for 27 long years. However, over those years, Munjal's ambition grew bigger than the Indian landscape. He wanted a piece of the overseas pie, which Bajaj had been devouring alone.
 
As far back as 2001, Honda made its intentions clear when it decided to set up its wholly owned subsidiary. Despite the protection given by the government's Press Note 18, which did not allow a foreign company to set up another unit if it already had a joint venture with an Indian company in the same area, Honda managed to walk out of Kinetic and obtained a no-objection certificate from the Munjals.

Confined to scooters in the first few years, HMSI started making motorcycles from 2004, coming in direct competition with Hero Honda. Bets were being placed in the market on how long it would be before Honda walked out of Hero.
 
Eyes abroad
The process was catalysed three years ago, when Munjal, his father Brijmohan Lall and brother Sunil decided it was time to take Hero to the next level. They looked at their main rivals in the Indian market and saw Bajaj's rapid strides overseas. From almost nothing in 2002/03, Bajaj was exporting 972,000 motorcycles in 2010/11, or 29 per cent of its sales volume. Throw in threewheelers and Bajaj was raking in Rs 4,552 crore from overseas, a fivefold jump from 2005/06. Hero Honda's exports, stymied by Honda, stood at 133,000 units last financial year, or under 2.5 per cent of sales.

"They (Honda) have a fully owned company, which has been around for a decade. As our joint venture was doing so well, they could not focus on it totally. We wanted to grow and they wanted to focus more on HMSI. So, after several rounds of talks in Delhi and Tokyo, we felt it would be best if we went separate ways," says Munjal.

The negotiations were long and hard. Only a core group of Hero executives were in the loop. The public domain only had stray leaks in the newspapers, which added an edge to the discussions in the joint family. "Let me just say that it made family meetings rather interesting, especially when my children, nephews and nieces asked questions based on what they had read. It was not easy keeping a straight face, because some of the reports were fairly accurate," says Munjal, no longer trying to keep his face straight.

Finally, in the full bloom of the Delhi winter on December 16 last year, during a rooftop banquet of The Taj Mahal Hotel on Mansingh Road, a sombre Munjal sent a shiver down the spines of unsuspecting stakeholders by announcing an end to the joint venture.

Intense speculation about the future of the company followed, although the stock markets largely ignored it. On the first day of trading, December 20, after the announcement was made (the announcement took place after market hours ahead of a long weekend), the Hero stock climbed 18 per cent.

A prominent Indian industrialist, who has had several joint ventures of his own in the past, puts it in perspective: "Every joint venture has a half-life, some last longer than expected and some shorter, but a good joint venture is one where both partners can leave with their pride intact and having gained a lot. Could Hero have reached where it has without Honda? I think not. And I believe the experience will leave Honda a stronger player in the Indian market."

Arun Firodia, Chairman, Kinetic Group  Avoiding the Kinetic road The Munjals of Hero will not like it but the story of the Firodias of Kinetic Motors sounds eerily similar to theirs. Kinetic Honda was set up in 1985 - a year after Hero Honda - to make modern, gearless scooters. Both partners held equal equity in the venture, which went on to get listed. All went well till 1998/99, when motorcycles for the first time outsold scooters: 1.36 million to 1.29 million. As this crack threatened to widen into a chasm, Honda decided to ditch Kinetic, even though a lack of new products may have been the cause for the fall in sales. The Firodias bought Honda's stake at a significant discount to the existing market price and were allowed to use Honda's technology in their existing products in return for licence and royalty fees. In 1999/2000, Kinetic actually improved its sales and managed to make a profit after a year of loss. A new energy seemed to emanate from the company as it made a foray into motorcycles based on technology from South Korea's Hyosung. Things changed for the worse when Honda's fully owned subsidiary, HMSI, launched its scooters and quickly took hold of the market, nudging Bajaj Auto to stop making scooters and completely cannibalising the Kinetic models. Kinetic tried hard to stay afloat, but eventually sold the twowheeler company to Mahindra & Mahindra, paving the way for the Mumbai-based conglomerate's entry into the segment. Can the same fate befall Hero? Unlikely, says analysts. Hero's volume, pervasive sales and distribution network, and marketing acumen are much more formidable than Kinetic's ever were. HMSI even after the announced expansion will be less than half the size of Hero five years down the line. Most importantly, Hero's pristine books with healthy margins and zero debt can withstand many a shock. But Hero's managers do have the Kinetc story at the back of their mind. "It is useful to have a cautionary tale," says one.

Hero continues in the London spirit of ebullience. The announcement of the split has not doused demand for its motorcycles. From April to July this year, it sold nearly two million motorcycles, a 21.7 per cent rise over the same period last year, outpacing the two-wheeler market which grew 15.8 per cent. It is closing in on TVS Motor, the number two in scooters. It expects to cross six million units this financial year, a 15 per cent rise over the last. Munjal hopes exports will bring in 10 per cent of the total sales in 2015/16 - a meagre figure but one which will look huge once you hear the total number Munjal hopes to sell that year: 10 million.

The first big target in exports is Nigeria. "Wherever we have exported, we have seen decent sales. In Bangladesh, Nepal and Sri Lanka, we have stood our ground against cheap Chinese imports," says Munjal. The choice of Nigeria may have something to do with Bajaj's success in Africa, which gives the Pune-based company 45 per cent of its export volumes. "Africa's motorcycle market was at two million last year, of which a million were sold in Nigeria," says Dua. Adds Munjal: "It will take some time to build up our international operations, but we are beefing up our management in international sales."

Can Hero make it big abroad like Bajaj? A long-time associate of the company has a theory. "There are four factors: the quality of management, sales people on the ground, technology, and the brand. As far as the first two are concerned, Hero sets the standards. I do not believe technology is a problem. The big problem is the brand. The brand is very strong in India, but the vital question is if consumers in Africa and South America will be able to relate to it. But, it does help that the name is so easy on the tongue."

Back home, the company plans to invest Rs 4,500 crore over the next five years in two new factories in Southern and Western India and a global parts centre in Rajasthan. None of Hero's competitors is planning even half as much. Only its erstwhile partner, Honda, has elucidated its immediate expansion plans, which involve a third factory, to be set up in Karnataka, taking its installed capacity to four million a year - less than half of Munjal's 10 million.

The new logo seeks to reflect Hero's legacy as well as its ambition. Munjal may need to dip into the first to realise the second.

(This correspondent travelled to London at Hero MotoCorp's invitation for this story)