How often do we come across the news of companies ending a successful joint venture, very rare! Hero will now have to sweat a lot to maintain the market share of 44%. As a result, newspapers are anticipating two wheelers prices to fall in times to come. None, other than time can enlighten us.
With both companies deciding to end their 26-year old partnership, the question being asked is what may have caused the split? There are two likely reasons. One, the increasing cost of royalty and technology (R&T) and second, the growing presence and market share of Honda Motorcycle & Scooter India (HMSI), a 100% subsidiary of Honda.
While people are wondering about how Hero will sustain their profits, market share and brand image; I would like to congratulate the Indian giant for the divorce with Japanese company which will only bring exhilaration into the market.
The questions are open to Hero but the management is smart, experienced and veteran. They not only got their 26% share from Honda at 40% discount to the market rate, but also have gained expertise over the Japanese technology during their operations of 26 years.
There was out rightly no need to piggyback the brand name Honda anymore which came with a huge royalty fee. The technology shared by Honda has now been learned and mastered by Hero during their long 26 years of marriage. The profits were now merely shared for customers’ sake for they love to see the two names HERO and HONDA together on their bikes. Although, the guild of the two names was giving maximum sales however was of limited value to the company.
Do we buy Karizma, CBZ, Splendor, Hunk because they are Honda technology? Or because of the way they are positioned in the market?
Benefits
New Markets: The Hero Group will gain from dissolving the partnership with Honda Motor by being able to export more motorcycles and scooters around the world. Hero Honda, which has a 44 percent domestic market share, is currently limited to exporting motorcycles only to India’s neighbouring countries due to Honda’s global presence. "We will be able to make our own global presence felt in global markets," Hero Honda managing director Pawan Munjal told a news conference.
New segments: Motor cycles have been surging in line with the rising incomes of India’s middle class, who number up to 350 million, which has been aiming at high-end customers, now will target the large entry-level segment.
The Hero Group has been responsible for marketing and distributing Hero Honda’s motorbikes while Honda mainly provided technology. Hero will now leverage the plus.
Hero Honda said that the royalty costs for Honda technology would either remain steady or fall as a result of the deal, in contrast to media reports and the technology would be shared till 2014 to fill the gaps, if any.
Challenges
After the exit of Suzuki from a joint venture, TVS Motors took many years to find its bearings. Will this be the case with Hero too?
"One big differentiation between Hero Honda and other automobile companies is the scale and strong brand recall," said Deepak Jain, assistant vice president and research analyst, Sharekhan. "Hero Honda’s Splendor is a decade-old motorcycle brand. However, automobile divorces are very challenging. Retaining core customer group will be the incremental challenge for the Hero group apart from cut-throat competition."
R&T payments are the third biggest expenses for Hero Honda after raw materials and employee cost. It’s another challenge to optimize the savings to rebranding activity.
The Hero group has two options, either to go for in-house R&D or choose a domestic/foreign partner for technical collaboration. However, analysts do not see the group going in for a partnership with anyone.
It will be a challenge for Honda to compete with robust Hero’s marketing and distribution team and a challenge to Hero will be to live up to the expectations of customers at technical level.
