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BE Corporation
 
HERO MOTOCORP: CHALLENGES AHEAD
Honda is out. Hero goes on... but with challenges multiplied! What next?
With Honda, Hero was growing in stature. Now that the Japanese are gone, questions are being raised on how well can Hero master in-house engine technology. Can Pawan Munjal silence his critics?
Issue Date - 15/03/2012
 
I n the Indian two-wheeler market during the 1980s, the closest you could get to being a rockstar was working for Bajaj Auto – the scooter maker. Thirty years later, much has changed. Bajaj no longer rules the minds of commuters in India. From occupying over 80% of the Indian two-wheeler market, the company today has a loose grip over only 18.15% of the category. Two reasons. Competition is the lesser excuse. Hero MotoCorp is the main. The Pawan Munjal-led giant controls 45.46% of the market, and at no hour seems to be losing the elasticity of its youth!

The company’s leader is an introvert. But that is where the shyness ends. Munjal, over the past few years has increasingly started to love sunlight. Today, at every new product launch, you can see the 57 year-old share his excitement with onlookers. Pawan Munjal, MD & CEO of Hero MotoCorp, is the new rock star of the Indian two-wheeler industry. His employees too, perhaps, feel the same. But many critics in the industry don’t feel as upbeat about his company. They are open about it. Some say that there isn’t much happening at Hero MotoCorp – not after Honda decided to abandon ship. Truth is – the Honda-goodbye was an important Munjal-plan that worked.

Those who are familiar with Munjal know this is true. According to him, the JV was proving a deterrent for the Hero Group to expand at a rate that it was capable of. Add to this, Honda’s presence not only meant allowing a future to shape up that had a crippled-for-technology Hero Group struggling with competition but also the fact that it had to play by Honda’s rulebook as far as expansion into international markets was concerned (implying a no-expansion policy for Hero in Asia & Latin America – markets where Honda bikes were sold).

And so it happened in December 2010. Honda was out. Eight months later, Hero Honda became rechristened as Hero MotoCorp, and there was apparently no happier a man in the whole of London (where the unveiling of the new identity was done) than Munjal. The launch of Hero-branded products like Impulse followed and the company ended 2011 on a happy note, with sales of 6.12 million units during CY2011 – a y-o-y growth of 19.2%. The numbers following the ouster of Honda looked encouraging. But questions were still being asked about the company’s future. “What will happen when Honda stops allowing Hero MotoCorp to use its technology in June 2014?” was the most common.

Munjal was silent for months. Then in the fourth week of February 2012, he spoke. He announced his company’s partnership with US-based two-wheeler manufacturing company Erik Buell Racing (EBR). The partnership was the answer to people who wondered what Hero would do after Honda. First, it will begin by borrowing technology to make its machines by paying a royalty that is lower than what it paid Honda (Rs.1.87 billion per quarter). Second, it will invest in R&D to create its own technological platforms to serve the global market starting mid-2014. Looks good on paper, but easier said than done.

Challenges there are aplenty. Gone are the days when Hero’s motorcycles were the only offerings available to the Indian consumer. On one end, while the distant #2 Bajaj Auto has strengthened its position in the Indian market by beefing up the Discover and Pulsar portfolio, it has also added Ninjas and KTMs to its basket. Then there is Honda, which is all set to challenge its erstwhile partner with the planned launch of the 110cc mass motorcycle Dream Yuga. [That the company has already launched an India-specific brand identity, clearly shows the aggressive stance of the Japanese two-wheeler maker.] So what should Hero do? Get into the premium two-wheeler market and improve upon the count and variety of its products. While the company has so far focussed primarily on the 100-125cc commuter segment with products like the Splendor and the Passion, it’s time it got serious in the premium segment too.

 
Technology is the main challenge. Munjal knows this far too well. He holds regular meetings with senior R&D officials of his company, discussing issues like where his pack of 250 engineers are headed and what platform to take to market and when et al. In this regard, the technical tie-up with EBR [as the first step in this direction] is an encouraging sign. But that alone won’t do. Hero needs multiple tie-ups to compete successfully with Bajaj & Honda in the Indian market post mid-2014. As per sources, the company plans to funnel Rs.2.25 billion into its R&D labs. Enough? Perhaps not. Though the monies sidelined for innovation amounts to 625% more than what the company had spent for the same purpose in FY2010-11 (Rs.0.31 billion), it is not to be forgotten that the objective of the company is to work toward developing technology platforms that are captive. And Hero does not have forever to invest in R&D. Post-2014, if the company realises that it is more sensible to pay for royalty (up to a max. of 2.7% of sales, which it paid Honda in the initial years), it might just end up giving up on its in-house engine innovation dream. At present, its R&D bill amounts to just 1.17% of its topline, and given that the company has just started work on developing its own engines, it may be required to top-up that figure by a big margin. Our claim is all the more certified by the fact that Maruti which still relies heavily on Suzuki’s technology (paying up to 5% of its revenues as royalty) spends up to 1.11% of its revenues on R&D (FY2010-11), while Bajaj, which relies heavily on Kawasakhi and KTM, spends 1.17% of its revenues. Ask Munjal and he sounds confident that the music in his labs is not all noise. “There is a lot of positive action going on at our R&D area. We will slowly move up the ladder in terms of engine capacity to become a full-fledged two-wheeler manufacturer,” says he. R&D is a risk. It does not always pay off. But Munjal has taken the plunge.

The next big challenge for Munjal is to immediately diversify geographically. Thankfully, on this front, the picture appears pretty. Hero plans to enter markets like Africa, Latin America and South East Asia in the coming quarters. The division is clear in Munjal’s mind. He plans to generate 10% of the company’s revenues from exports alone. But again, this opportunity comes with strings attached. As it plans to make an impact globally, the company will require a strong technological-backing. And for this, it will be advantageous for the company if it looks at alliances similar to the one with EBR, where it has an option of gaining expertise in a short span of time. Establishing an in-house R&D base is vision. Accepting the truth and living in the present is reality.

Getting Honda out of his way was not a wrong move. But 2014 is barely two years away. Munjal has many unchecked boxes on his things-to-do list. In-house technology, international expansion and premium bikes represent just three of them. Third party tie-ups should make life easier. But knowing Munjal, you know Hero MotoCorp will bet big on the innovation question. Will he make engines before he burns too much cash? We know what Bajaj is hoping for.

Pawan Chabra           

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