Saturday, November 3, 2007

Honda in India

Honda’s Shogun

Masahiro Takedagawa is now Honda’s point man in India. Why is he here? And what does it mean for the Munjals?


Hero Honda’s recent decline has been stark. Over the past year, while rivals Bajaj Auto and TVS have captured a higher incremental share of a growing motorcycle market, Hero Honda’s sales have dropped. Though it still continues to be India’s largest motorcycle company, it has yielded 2 per cent market share to Bajaj Auto (see ‘Honda Revenues’ ). And while Bajaj’s valuation rose 92 per cent in the past 12 months — the Sensex rose by 50 per cent — Hero Honda’s market cap rose a dismal 9 per cent. Most analysts see Hero Honda as an ‘underperformer’.

Brijmohan Lall Munjal, chairman, Hero Honda, says they are aware of the problems. “We won’t be sleeping. We will do something about it,” he tells BW. (In early 2005, his son and Hero Honda managing director, Pawan Munjal, had remarked that some sort of a slide was imminent since maintaining a high market share was always difficult.) But the question now uppermost in the minds of Hero Honda watchers is — how much will Honda direct Hero Honda’s fight back?

A year ago, that would have seemed inconceivable. Though Honda Motor Company and the Munjals are equal owners of Hero Honda (they own 26 per cent each), in the past 22 years the Japanese have allowed their partners a free hand in running the company — except where new product launches were concerned, since Hero Honda was entirely dependent on Honda for product development.

But it is now clear that Honda is no longer content with its current role. The Japanese auto major has big plans for India, which necessitates it taking a far more active role in its India joint ventures (JVs) and subsidiaries. India today accounts for barely 4 per cent of Honda’s global sales. But it is one of its fastest growing markets (27 per cent annualised over the past four years), higher than North America (19 per cent), Europe (16 per cent) and Japan, where it has declined by 0.5 per cent.

In the middle ages, shoguns were the all-powerful vassals of Japan’s emperors — with power over life and death in the lands they ruled in the emperor’s name. Sitting in his small and functional office in Greater Noida, Masahiro Takedagawa, with characteristic Japanese humility and courtesy, takes great pains to dispel the notion that Honda is seeking absolute control over its India operations.

He is responding to a question on what his appointment means for Honda’s JV with the Munjals. Other than Hero Honda, Honda’s other operations in India — Honda Motorcycle & Scooter India (HMSI), Honda Siel Power Products and Honda Siel Cars — are wholly owned or almost wholly owned, and, therefore, run entirely by them.

Takedagawa agrees that Hero Honda has slipped up, but never holds the Munjals solely responsible. In fact, he gives them credit for developing Honda’s franchise in India.

While all of this is true, there is also no denying the fact that Honda is indeed tightening its grip over India. The most telling symbol of that is the creation of a special holding company for India — Honda Motor India — with Takedagawa as its chief. (The Honda press release says that this is to bring Honda parts purchase for cars and two-wheelers under one roof.)

Till now, Hero Honda used to report to Honda’s Asia headquarters in Bangkok (Asian Honda Motor Company), which controlled the operations of all Honda companies in Asia, except Japan and China. Takedagawa, as head of Honda Siel, a position he held for a year before becoming head of Honda Motor India, also reported to Bangkok.

But from the middle of this year, all Honda operations have begun reporting into Honda Motor India (read: Takedagawa), which, in turn, will soon report directly to Japan. The inference — the Munjals now have a boss in India.

Takedagawa is also some sort of a star in the Honda system. Technically, there is only one man between him and Honda Motors global CEO, Takeo Fukui. Takedagawa has the distinction of being the youngest director on Honda’s global board — he was elevated this year around the time Honda Motor India was formed. (“I am one of the youngest. Next year someone younger will be there,” he says modestly.)

Takedagawa, somewhat uncharacteristically, also lets slip that Honda wouldn’t place such a ‘responsible’ executive (pointing at himself) in charge of India had it not believed in the country’s growing importance. “By 2015, most of us expect the two-wheeler market in India to double to 15 million [units]. So Tokyo has placed such a responsible person [here].” The creation of Honda Motor India coincided with India being carved out of the Asia Oceania region as a stand-alone market, much like China and Japan.

What remains unsaid is that a person of Takedagawa’s seniority wouldn’t be sitting in India if his responsibilities only included HMSI, Honda Power and Honda Siel, three companies that account for barely 30 per cent of Honda’s India operations. And while neither Takedagawa nor the Munjals say this, it will not be incorrect to infer that Takedagawa’s responsibilities will also include (directly or indirectly) Hero Honda, which brings in 70 per cent of Honda’s India business — and should be a key piece for Honda’s 2015 strategy.

Hero Honda insiders say Takedagawa is already being seen and heard. Along with officers from HMSI, Takedagawa has begun taking monthly operational review meetings of Hero Honda. In Hero’s dealings with Honda, this is a first. The Munjals are also present in these interactions.

While it would be premature to script the diminishing role of the Munjals, it is evident that the dynamics of the JV have begun changing.

Honda’s entry into India in the early 1980s was through JVs, partly because of regulation. By the mid-1980s, Honda had three JVs running. But after 1991, when investment rules were relaxed, Honda quickly bought out its partners (Shrirams) in Honda Siel and sold off its 51 per cent share in Kinetic Honda to the Firodias. Honda was no longer willing to operate through partnerships.

With the Munjals, however, Honda’s relationship was different. It was content with the dividends and royalty payments it received from Hero Honda.

Brijmohan Lall Munjal, chairman, Hero Honda
‘We won’t be sleeping. We will do something about it (falling market share)’

Then, in August 1999, Honda announced the formation of HMSI, a 100 per cent subsidiary that would make high-end gearless scooters and 150-cc motorcycles. It is often speculated why Hero Honda gave Honda permission to set up another two-wheeler subsidiary here. (As per Press Note 18, which has only recently been amended, the nod from the local partner was a pre-requisite for the creation of another subsidiary by the overseas JV partner.)

The most obvious answer is that Hero Honda’s products didn’t overlap with what Honda was planning. But insiders add that the Munjals really didn’t have a choice in the matter since they were so dependent on Honda for technology.

While HMSI’s scooter business did well, unfortunately for Hero Honda, the 150-cc motorcycle business didn’t really take off. Compared to Bajaj Auto’s 150-cc Pulsar, which sells 35,000-40,000 units per month, Honda’s Unicorn manages barely 3,500-5,000. So, in March this year, HMSI launched the Shine, a 125-cc bike.

While the logic for entering the 125-cc segment was sound — there are five 125-cc bikes sold for every 150-cc bike — it also meant that Hero Honda and Honda were now competitors. (Observers say that had the Munjals or even Hero Honda been given a stake in HMSI, the relationship wouldn’t have been seen in such stark terms.)

And now there are reports that HMSI is planning to enter the 100-cc market, which accounts for 90 per cent of Hero Honda’s turnover by volume. Both companies deny this.

Takedagawa argues that Honda’s ace is its two-company strategy. Essentially that HMSI straddles some segments and Hero Honda the rest. “In China, we had five JVs, though they have been whittled down to three. Given the size of the Indian market, we’ll need at least two companies,” he says.

That is understandable. India is an integral part of an important geography. In Q1 06-07, Asia’s (Thailand, Indonesia, China and India) contribution to Honda’s global net sales remained at 9 per cent over Q1 2005 and Q1 2006, but its share of operating income rose from 6 to 10 per cent.

Pawan Munjal, managing director,Hero Honda
‘People in Honda know who has been running this company (Hero Honda)’

In the same period, contribution from other bigger markets like North America, Europe and Japan fell. An estimated third of the total volumes in global two-wheeler sales comes from India, with Hero Honda contributing the largest chunk. For every vehicle HMSI sells, Hero Honda sells at least five. While that is perhaps enough reason why Takedagawa may not want to destabilise Hero Honda, there is some ambiguity about how Honda perceives Hero Honda.

In a presentation to the media in July this year, Honda Motors president & CEO Takeo Fukui forecast Hero Honda’s share in Honda’s total revenue in India to fall from 67 per cent in fiscal 2005-06 to 60 per cent in 2007-08. Over the same period, HMSI’s share is expected to rise from 14 per cent to 17 per cent. (The contribution of Honda’s two other subsidiaries are expected to rise marginally.)

Clearly, at Honda’s Tokyo headquarters, the expectations are clear — that HMSI narrow the gap with Hero Honda. And given that there is already some product overlap, competition between the two is bound to intensify.

That brings us back to the moot point — how much will the Munjal-Honda equation change?

Evidence over the past 15-odd years indicates that rarely have equal JVs worked in India. Many (Mahindra-Ford, TVS-Suzuki, Kinetic-Honda, LML-Vespa) ended with one party buying the other out.

Says a Hero Honda competitor: “Look at what happened with other Japanese companies like Suzuki, Panasonic or Sharp. At some point they always go on their own.” But that still doesn’t mean that changing realities of the Hero Honda partnership will lead to a fissure.

Much will actually depend on how Takedagawa chooses to play it from now on.

People close to Takedagawa say he is a nationalist. “He strongly believes in Japan and more so in Honda,” says an associate. Takedagawa thinks the ‘nationalist’ tag is hardly a compliment. But Honda, he believes in. When he was still at school, Honda won its first Grand Prix. “I am not sure if it was 1964 or 1965. But I remember entire Japan celebrating.” That is when Takedagawa first fell in love with Honda. After college, he took the campus interview with Honda and has never looked back.

But however much of a Honda man Takedagawa may be, he has a track record of making JVs work. He did so in Italy, and a few other European countries.

Pawan has no doubt about their (Munjals’) status in the Honda world, at least in India. “People in Honda know who has been running this company,” he asserts unwaveringly.

Actually, one interpretation could be that having such a senior manager in India will actually be a boon for Hero Honda — it will no longer have to run to Bangkok or even Japan every time it needs something done.

In fact, Hero Honda seems to be aware of the circumstance in which it is operating. B.M. Munjal while stating that all is okay with the JV, doesn’t shy away from saying that Honda is in the position of control. Hero Honda may control finance, distribution and manufacturing, but it is still dependent on its partners for product development and new launches.

In fact, Bajaj’s ability to eat into Hero Honda’s market share has been purely on the back of its product portfolio. Says Rahul Bajaj, chairman, Bajaj Auto: “While Hero Honda is ahead of us in two wheelers, it’s just a matter of time before we emerge as leaders.”

Adds S. Sridhar, head (marketing and sales) for Bajaj Auto’s two-wheeler business: “Customers want more in design, looks, technology and sophistication, and not just price.”

In recent years, Bajaj Auto has accurately predicted what customers want. In October 2004, it rolled out the 125-cc motorcycle, Discover DTSi, which has dual spark plugs. Earlier, in 2001 it launched the 150-cc and 180-cc twins within the Pulsar brand. Discover and Pulsar have been runaway successes, selling close to 900,000 units in 2005-06.

What Bajaj did with Discover was correctly read the shift towards the 125-cc segment from 100 cc. The 100-cc, better known as the commuter segment, dropped in its overall contribution to the motorcycle market from 86 per cent in 2003-2004 to 72 per cent in 2005-06. Around the same time, the 125-cc segment’s share improved from 9 per cent to 17 per cent.

B.M. Munjal retorts that all these new segments that are in vogue today were creations of his own company. “We had products in this segment ahead of others.”

It is perhaps a foregone conclusion that the Munjals will expect Takedagawa’s local presence to ensure Hero Honda can freely dip into Honda store of motorcycles. And given that Honda is, after all, an equal owner, why should it mind?

But what will Honda expect in return? One theory is that it will want HMSI to ride the Hero Honda distribution network. (Currently, its distribution is separate.) For, if HMSI has any weakness, it is distribution. Consider that while Hero Honda has close to 650 dealers, HMSI has barely 250. (Honda had originally partnered Hero because it was impressed with its distribution, thanks to its bicycle business.)

If that happens, a customer in a Hero Honda showroom will choose between a Hero Honda label and an HMSI label. Honda gains either way, but Hero Honda doesn’t.

Rahul Bajaj,
chairman, Bajaj Auto
‘While Hero Honda is ahead of us in two wheelers, it’s just a matter of time before we emerge as leaders’

The point, really, is this. JVs work as long as either party brings something of equal significance to the table. Here, Honda brings technology and product development, and Hero, market access. So far, the arrangement worked because Honda didn’t have a presence in India and was dependent on its partner. But through HMSI (and perhaps through shared distribution with Hero Honda in the future), that may change. And since Hero Honda doesn’t have its own product development, the balance of power could shift away from it.

In this context, a few analysts in Mumbai say that Honda will try and take control of Hero Honda soon.

Of course, all those who dare predict Honda moving in for the kill are quick to add that given how valuable Hero Honda still is, Honda will not risk a flare up in its relationship with the Munjals. Notwithstanding its recent woes, almost 48 per cent of the Indian motorcycles market is still with Hero Honda. Most of its dealers swear by the company and have been loyal to Hero Honda over decades, sometimes over generations.

“There is too much at stake for Honda. The change in the ownership pattern might happen slowly, if at all it happens,” says an analyst.

Takedagawa is uncomfortable discussing the future of the Honda-Munjal partnership. “Why do you insist on characterising the relationship as ‘us’ and ‘them’?” he asks somewhat testily. He emphasises that Hero Honda will continue to be run by the Munjals. “Pawan san will have to take his father’s place, whether he likes it or not,” he says. B.M. Munjal adds that when their contract was renewed (2004), “Honda executives had said our grandchildren will work together”.

No comments: