Truth Of Hero-Honda Split | Reason Behind Hero Honda Partnership Failure

Hero Honda is the name that still comes to mind when we see these bikes and why not because from early 90s Hiro Honda was known for making one of the best bikes in the Indian market and also in the year 2010 Hero Honda had an 82 percent market share in the 75 to 125 CC motorcycle category and for the outside world Hero Honda was an immensely successful and profitable company but internally the company was on the verge of collapse so in today’s case study we will discuss how Honda backstabbed the Indian company hero and how this immensely successful collaboration of Hero Honda came to an end

Journey of Hero Honda

It all started in the year 1956 when Bridge Mohan Lal munjal and his brothers took a loan of 50000 rupees and started a bicycle manufacturing company and they named this bicycle company as hero and hero became immensely successful and in the year 1966 they even started producing one lakh bicycles per year but the munjal brothers didn’t stop there they kept growing the company and it came to a point where in the year 1986 hero Cycles had created history by producing 22 lakh bicycles in a single year and for this achievement hero’s name was recorded in the Guinness Book of World Records by this time hero was not only one of the biggest companies in India but it was also one of the biggest bicycle manufacturers in the entire world where hero exported its bicycles to more than 89 countries including Middle East Africa Asia Europe and many more and hero had a market share of around 48 in the bicycle market and for anyone creating a largest bicycle Manufacturing Company would have been enough but not for munjal brothers because their dream was much bigger because the munjal brother saw that in the foreign market The Craze for motorcycles was increasing and they saw it as the next Revolution in the two-wheeler automobile industry and at that point of a time in India you could either buy mopeds or scooters and none of the company was making motorcycles so Munjal Brothers saw a huge opportunity to bring this foreign concept of motorcycles to India but the problem was that they had no experience in making engines for motorcycles nor did they have the technology for making those Motors so hero started looking for a foreign partner who could make these engines for their motorcycles in India and as a part of this initiative Hero also sent a proposal to Honda which is a Japanese company and back then it was one of the biggest motorcycle manufacturers in the entire world and at that point of the time India was a closed economy which means foreign businesses and foreign companies were not allowed to enter the Indian market but Indian companies were allowed to partner with foreign companies and launch products in the Indian market through joint ventures and because of this government regulation Honda could not directly enter the Indian market and if they had to enter the Indian market then they had to find an Indian partner to form a joint venture and when hero sent a proposal to Honda they found it to be a perfect opportunity to enter the Indian market

The Joint Venture

In 1984 they started their joint venture of manufacturing motorcycles in India under the brand name Hero Honda and for this joint venture both the companies agreed that hero would make bodies for these motorcycles and Honda would provide engines for these motorcycles and these two companies also signed an NOC and agreed that they would not launch any products which would directly compete with each other so with this joint venture in the year 1985 they launched their first motorcycle which was Hero Honda cd100 and this motorcycle was a big hit in the Indian market because the motorcycle Was A New Concept in the Indian market so people loved it the price of cd100 was also very affordable and most importantly it was giving a great mileage which mattered the most for the Indian customers and to Showcase this Hero Honda also came up with a great marketing tagline ” fuel it shut it forget it” and this tagline was perfect for CD 100 because it was giving a mileage of 80 kilometers per liter making it the most fuel efficient bike in the entire world but later because of a sudden spike in the Japanese currency importing motorcycle parts and engine became expensive and also by that time companies like Suzuki Yamaha TVs and Bajaj had also entered the motorcycle market and because of these additional expenses the cost of manufacturing the motorcycles became expensive for Hero Honda but still the company didn’t increase the price of bikes and even though the company was facing huge losses they continued to sell their bikes at lower prices and the company took loss intentionally because they knew that the new companies like Suzuki Yamaha TVs and Bajaj they were catering to premium customers who were mainly living in urban India but Hero Honda is a unique selling point was they were making affordable bikes with great mileage and for this reason their bikes were not only famous in urban India but also in the smaller towns and most importantly in rural India and for that reason if they had increased the prices then they would have lost a huge chunk of their market share but very soon the currency price is stabilized and with that the cost of making motorcycles also went down and because of which Hero Honda started making profits once again and the company posted a profit of 10 million which was a big profit back then in the motorcycle industry so on the surface everything was looking good for Hero Honda because their sales and profits were increasing every year and the company was a market leader but internally the company was facing a serious management conflict between hero and Honda

Honda Disregarded NOC

so the main reason for the conflict between hero and Honda was the export of motorcycles so Honda was already selling their motorcycles in the American and European markets but Hiro Honda was allowed only to sell their bikes in the Indian market which was further expanded to smaller markets like Nepal Bhutan and Bangladesh so at one end Honda was growing exponentially but on the other end Hero’s growth was restricted led to a smaller domestic market and this was not acceptable to hero and its Founders munjal brothers because they always dreamed bigger and because of that dream they became one of the largest bicycle manufacturers in the entire world and in the motorcycle business as well they wanted to be one of the best and biggest in the entire world but their joint venture with Honda had left them restricted to a small domestic market and even if Hiro wanted they couldn’t exit this joint venture because at that point of a Time hero was only capable of making body for the motorcycles and they were totally dependent on Honda for the motorcycle engines so it was very clear for hero and the munjal brothers that if Hero wanted to be one of the best and biggest motorcycle manufacturers in the world then they need to learn how to make engines and that is why hero started investing a lot of money in research and development to make their own engines by using the profits they were getting from Hero Honda and when Honda came to know about this it only further accelerated the conflict between hero and Honda because didn’t like the efforts Hero was putting in to make its own engine and by that time Indian economy was liberalized and foreign companies were allowed to set up their own business in Indian market and Honda took advantage of this and responded back at Hero by launching its own subsidiary Honda motorcycles and scooters private Limited in the year 1999 and they even launched Honda Activa in the two-wheeler category in the year 2001 and there is no point of explaining how successful Honda Activa was in the Indian scooter market and with this. Honda had disregarded the NOC which was signed between hero and Honda during the formation of the joint venture that they would not launch products to compete with each other and this NOC made sense for Honda in the year 1984 when they formed the joint venture because at that point of a Time foreign companies were not allowed to enter the Indian market directly

Hero-Honda Split

After the LPG policy was introduced in the year 1991. now foreign companies were free to enter the Indian market so now Honda did not need hero for anything because Honda was capable of launching its own motorcycles and Honda even had a strong brand name and for that reason disregarding the NOC signed in the year 1984 was practically very favorable and profitable for Honda but morally some people think it was like backstabbing hero and some people think it’s a Tit for Tat because hero tried to develop its own engine and because of all these reasons finally in the year 2010 hero and Honda broke their partnership and hero bought a 26 percent stake held by Honda for around 3842 crore rupees and the promoter of hero Bridge Mohan Lal munjal further continued their business under the name of hero motocorp and after the split many said that hero would fail to survive without Honda but Bridge Mohan Lal munjal proved everybody wrong because after the split hero was free to expand its business globally and today they have presence in more than 40 countries including Central America and today hero is one of the biggest motor cycle manufacturers in the entire world and now if you are a shareholder of hero motor cop then you might ask that if the company is really performing that great then why the stock price of the company is not performing because if you see in the last five years Hero motocorp has delivered minus 32 percent of negative returns to its investors so there are two main reasons for this 

1.  Heavy competition in the two wheeler segment because today players like TVs Bajaj Honda and many more are competing with hero in its core Market category of 100 to 125 CC motorbikes where they have also successfully established affordable and economy category Brands and because of which hero was able to keep its existing market share but still this Market was growing and hero failed to increase its market share in this growing market and as a result the sales growth of hero over the last five years had only been one percent
2.  Electric vehicles are the next phase of growth in the two wheeler industry 

It looks like hero might miss this opportunity because according to the 2010 family settlement Pawan munjal and the company hero motocorp cannot use the popular brand name hero for its electric vehicle Venture and it is applicable for two wheeler three-wheeler and also on four wheelers and now some might say that isn’t it funny the company hero motocop can’t use its own brand name hero on its electric vehicles and let me tell you it is not funny and why it is not funny because the global rights for the brand hero in the category of Green Technology in which electric vehicles is also included has been given to Naveen munjal and his company hero electric and Naveen munjal is the nephew of Pawan munjal so now there are two separate companies the first company is hero motocorp which is listed in the stock market and the second company is hero electric which is an independent company and it is not listed in the stock market which means hero Moto cop and hero electric are two different and other related companies as simple as that and hero electric is the company which own owns the global rights for the brand name hero for Green Technology as I mentioned which also includes electric vehicles so right now if you see hero electric has launched many electric vehicles but hero motocorp is lagging behind because they cannot use the brand name hero on their electric vehicles but then comes a massive twist and that twist is recently hero motocorp also launched their electric vehicles under the brand name hero Veda and this violated the family settlement that was done in the year 2010 and now both hero motor cop and hero electric are fighting in the court for the brand name hero for their electric vehicles but recently it was reported that hero electric has withdrawn the application against Hero motocorp on the use of brand name which has given hero motocorp and interim relief but still many business experts believe that this fight for brand name is far from over and if it surfaces again in the future and if hero motocorp is forced to yield then it can be a big blow to the company’s business and also to its investors and because of these reasons even though hero Moto cop is one of the biggest motorcycle manufacturers in the entire world but still the stock price of the company is struggling from last five years to deliver positive returns to its investors.

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