C o n t e m p o r a r y | A c t i o n a b l e | C u t t i n g - E d g e
Theory I Management
Changing Business Environment: Case of Hero & Honda
In 1984, Hero Group of India signed a joint venture agreement with Honda Motor Corporation, forming Hero Honda1. The facility was to be located at Dharuhera in North India. The shareholding pattern was: Hero Group 26%, Honda Motor 26%, Financial Institutions 37%, Others 11%.
This strategic alliance, between an Indian firm that got its start making bicycle parts, and the world’s largest motorcycle manufacturer, signaled Honda’s foray into the Indian market for motorized two-wheeled transport. Though the market had already attracted the entry of competitors such as Suzuki, Yamaha, LML and Kinetic, Honda’s top management team and Hero’s founder and CEO, Brijmohan Lall Munjal, envisioned substantial promise in the Indian two-wheeler market.
GAUGING MARKET ATTRACTIVENESS
A cursory overview suggested that the Indian market was attractive on account of its absolute magnitude and high growth. India could lay claim to a population of roughly 730 million in 1984, growing at a rate of 2.1 per cent per year. Extrapolating that rate of growth, the Indian population was projected to grow by 160 million people in the 1980s and to exceed 1 billion people by 2000. Not only was the total population of India enormous, but the Hero Group also concluded that the adult age group with the highest propensity to purchase two-wheelers (15–65-year-olds) was expected to increase to more than 500 million by 1990 and to an approximate 700 million by 2006.
The birth of the Indian two-wheeler industry can be traced to the small beginnings that it made in the early 1950s when Automobile Products of India (API) started manufacturing scooters in the country. Although API initially dominated the scooter market with its Lambrettas, it was soon overtaken by Bajaj Auto Limited. In 1959, they obtained government approval to manufacture two- and three-wheeled motor vehicles, under license from Piaggio. The license raj that existed prior to economic liberalization circa1980s forbade foreign companies to enter the market, making it a protected playing field for domestic competitors. Local players were subject to a very stringent capacity licensing process, and imports were tightly controlled. This regulatory labyrinth created a monopolistic market, with customers often forced to be waitlisted a decade just to buy a scooter from companies such as Bajaj. The winds of change began to take hold in the mid-’80s when the Indian government started permitting foreign companies to enter the Indian market through minority joint ventures with domestic alliance partners.
Two-wheelers had become the standard mode of transportation in many of India’s large urban centers. Increasing rural-urban migration, urban population density, and the lack of four wheeler-ready roads were all factors that increased demand for two-wheelers. The two-wheeler was typically a prized possession in the average Indian household. It was normally used to transport both people and goods, substituting for a car that was prohibitively expensive. While a two-wheeler normally cost around Rs. 40,000, an entry-level car was priced around Rs. 300,000. Two-wheelers were durable, often used lasting more than a decade. However, convincing Honda, a first-world company, to commit investment to a market where 35 per cent of the population was in penury, was more difficult. An extenuating factor was growth in the per capita incomes of the population, expected to grow by 5.2 per cent over the next ten years. Importantly, even in the early 1980s, the country was wealthy enough to support an infrastructure of 1.4 million kilometers of highway. However, in global terms the market was far from mature. Industry watchers reported that India had a penetration rate of less than10% as of the mid-1980s (87 two-wheelers for every 1000 adults), far below the penetration rates of other developing countries. Obviously, bike manufacturers had substantial scope to grow.
Marshalling the implications derived from these realities, Hero convinced Honda that a large population coupled with an emerging-market economic situation constituted an excellent setting for affordable, motorized, two-wheeled scooters. Honda also saw the potential. With air pollution from industry and vehicle emissions topping India’s environmental concerns, governmental authorities had become increasingly strict regarding emissions regulations. These regulations made environmentally friendly vehicles more attractive, and two-wheelers with their fuel efficiency and low emissions fit the bill. Honda also recognized that Asian countries such as India and China, with their huge populations and relatively low levels of economic development, were likely to embrace two-wheeled vehicles as a popular means of transport. In short, India offered a large and growing market for two-wheelers, supported by several favorable macro-trends that bade well for the future.
HONDA’S ENTRY STRATEGY
In consonance with FIPB regulations, Honda opted to join hands with the established bicycle manufacturer Hero Cycles, a company with proven manufacturing, distribution and management practices. Founded by Brijmohan Lall Munjal and his brothers in 1945, Hero Cycles was an ideal partner for Honda. In business for four decades, Hero had manufactured and distributed bicycle parts and bicycles in India for as long as Honda had produced motorcycles. With strong distribution channels and supplier networks, the Hero Cycles name was reputable. The Munjal family’s management practices had led to exceptional results, low employee turnover, and zero industrial unrest in their history. The company used modern manufacturing concepts such as just-in-time supply chain management, team-based manufacturing performance evaluation, and rigorous quality management programs. Most importantly, Hero’s management brought an intimate familiarity with the Indian economy, government, business culture and people.
MACRO-TRENDS AND THE TWO-WHEELER MARKET
In the 1980s, the motorcycle with a four-stroke engine was Hero Honda’s most popular two-wheeled vehicle, providing inexpensive and reliable transportation to India’s largely rural population and growing middle class. In two-stroke engines, the fuel–air charge is drawn through an unlubricated crankcase, and the lube is separately introduced into the air-fuel mixture to lubricate engine parts. Exhaust and intake processes are conflated, so a third of the unburned fuel–air charge can be discharged. The fuel economy advantage of four-strokes derives from the use of crankcase lubrication.
However, four-stroke engines need a camshaft and valve train which impose a volume and weight penalty over two-strokes, and are also therefore more expensive to purchase. But four-stroke engines were superior to the incumbent two-stroke engines in multiple areas. Not only did they produce less pollution than the two-stroke engine, but they also provided greater fuel-efficiency and were more long-lasting than the more powerful two-stroke engine. The total cost of ownership diminished considerably due to the ameliorated fuel efficiency, product durability and lower repair costs. Despite burgeoning pay packets, frugality and thriftiness were essential values of India’s middle-class consumer. Hero Honda had the first and for many years only four-stroke vehicle (except for Royal Enfield’s 346 cc four-stroke). As its early ads said, ‘Fill it, shut it, forget it.’
Hero Honda had seen something that all the motorcycle manufacturers had missed. The shift in demand was towards the consumers originating from rural areas, Tier 2 and 3 cities, and the middle-class office-goers in Tier 1 cities. For these customers, the fuel economy of a four-stroke engine was a bigger draw than the looks and the power of two-stroke bikes.
EVOLUTION OF TWO-WHEELER PREFERENCES: FROM SCOOTERS TO MOTORCYCLES
Scooters, on which a 100–150 cc engine is enclosed in a metallic body below the seat, were the preferred vehicle type amongst two-wheelers, on account of their secure luggage space, the possibility of carrying two passengers, and the provision for a spare tire. Besides, women risked getting their garments tangled in the exposed wheel spokes of motorcycles. In 1988, to understand its market better, Hero Honda conducted an extensive market survey, collecting some 25,000 responses. The survey told Hero Honda a surprising story. Scooters were no longer the vehicles of choice. Motorcycles were to become the two-wheel vehicles of the 1990s. The principal reasons were the combination of a shift in demographics and increased purchasing power among the youth.
With burgeoning numbers of young professionals with large disposable incomes, and college students with affluent parents, the need for a family vehicle, with the advantages discussed earlier, declined, with a corresponding growth in the demand for individual mobility. With their more rugged appearance and higher road speeds compared to scooters (because of larger diameter wheels), motorcycles respond to these changing needs. Also, cultural changes, in terms of women’s clothing, have made motorcycles less problematic. Bikes were perceived as more stylish. Hitherto, scooters were preferred to bikes due to a perception of better safety (scooters were estimated to skid less frequently). The widespread usage of helmets narrowed the safety advantage scooters possessed over bikes; moreover, the ‘danger’ associated with bikes actually drew the younger user away from the staid scooter! The development of fuel-efficient bikes also reduced the conventional fuel-economy benefit of scooters. Further, iconic scooter manufacturers (Piaggio, Innocenti) were located in countries like Italy, whose ‘soft power’ in terms of cultural influence was on the wane. Comparatively, bike manufacturing majors (Honda, Harley Davidson) hailed from economic powerhouses like Japan and the US.
By 2000, motorcycles were the choice of 60 per cent of India’s two-wheeled customers, up from 33 per cent in 1996. By making efforts to gauge and understand its market and the trends therein, Hero Honda cemented its reputation as a market-driven company, one that anticipated and acted upon these trends.
THE FRUITS OF EXCELLENT MARKET INSIGHT
In 2000, Hero Honda’s Splendor model became the world’s largest selling motorcycle. It now sells more than a million units a year. In 2001, Hero Honda became the largest selling two-wheeled manufacturer in India, with 50 per cent of India’s motorcycle market. In 2002, Hero Honda sold 1.4 million motorcycles, becoming the largest two-wheeler company in the world. Hero Honda’s dominance cannot be ascribed merely to the size and growth of the market. In that case, the dice would have been loaded in favor of larger incumbent business groups like Bajaj. Success can be attributed to a keen understanding of macro-environmental changes: social, technological, macroeconomic, ecological, political, legal and demographic. Honda and Hero were confident of significant market potential for motorized two-wheel vehicles in India, given the sheer size of the Indian market and its emerging middle class. At the same time, they understood the limitations in the still-modest purchasing power of their target customers, so they offered products whose reliability and overall economy were unmatched by their competitors. By reading the market correctly, Hero Honda was able to finally topple the formidable scooter king Bajaj in 2001. To recover lost ground, Bajaj drew on technology from Kawasaki and jazzed up its portfolio, emphasizing high-end motorcycles. For a while it looked as if a newly revved-up Bajaj would reclaim the crown.
But the economic recession in 2008 played to Hero Honda’s advantage. Bajaj’s strategy of moving away from the lower segment to concentrate on high-end bikes backfired when the economic cycle turned down and consumer confidence dipped. Hero’s ability to identify an underserved market – one that was large and would grow – and match its offering to that market’s needs were the twin attributes that distinguished them from incumbents who had targeted more upscale urban customers with quite different needs.
Now that Hero has separated from Honda, how do you think it can grow in the market? The same question has to be asked of Honda too? What should their possible strategies can be, more so when there is yet another challenger- Bajaj?
In 1984, Hero Group of India signed a joint venture agreement with Honda Motor Corporation, forming Hero Honda1. The facility was to be located at Dharuhera in North India. The shareholding pattern was: Hero Group 26%, Honda Motor 26%, Financial Institutions 37%, Others 11%.
This strategic alliance, between an Indian firm that got its start making bicycle parts, and the world’s largest motorcycle manufacturer, signaled Honda’s foray into the Indian market for motorized two-wheeled transport. Though the market had already attracted the entry of competitors such as Suzuki, Yamaha, LML and Kinetic, Honda’s top management team and Hero’s founder and CEO, Brijmohan Lall Munjal, envisioned substantial promise in the Indian two-wheeler market.
GAUGING MARKET ATTRACTIVENESS
A cursory overview suggested that the Indian market was attractive on account of its absolute magnitude and high growth. India could lay claim to a population of roughly 730 million in 1984, growing at a rate of 2.1 per cent per year. Extrapolating that rate of growth, the Indian population was projected to grow by 160 million people in the 1980s and to exceed 1 billion people by 2000. Not only was the total population of India enormous, but the Hero Group also concluded that the adult age group with the highest propensity to purchase two-wheelers (15–65-year-olds) was expected to increase to more than 500 million by 1990 and to an approximate 700 million by 2006.
The birth of the Indian two-wheeler industry can be traced to the small beginnings that it made in the early 1950s when Automobile Products of India (API) started manufacturing scooters in the country. Although API initially dominated the scooter market with its Lambrettas, it was soon overtaken by Bajaj Auto Limited. In 1959, they obtained government approval to manufacture two- and three-wheeled motor vehicles, under license from Piaggio. The license raj that existed prior to economic liberalization circa1980s forbade foreign companies to enter the market, making it a protected playing field for domestic competitors. Local players were subject to a very stringent capacity licensing process, and imports were tightly controlled. This regulatory labyrinth created a monopolistic market, with customers often forced to be waitlisted a decade just to buy a scooter from companies such as Bajaj. The winds of change began to take hold in the mid-’80s when the Indian government started permitting foreign companies to enter the Indian market through minority joint ventures with domestic alliance partners.
Two-wheelers had become the standard mode of transportation in many of India’s large urban centers. Increasing rural-urban migration, urban population density, and the lack of four wheeler-ready roads were all factors that increased demand for two-wheelers. The two-wheeler was typically a prized possession in the average Indian household. It was normally used to transport both people and goods, substituting for a car that was prohibitively expensive. While a two-wheeler normally cost around Rs. 40,000, an entry-level car was priced around Rs. 300,000. Two-wheelers were durable, often used lasting more than a decade. However, convincing Honda, a first-world company, to commit investment to a market where 35 per cent of the population was in penury, was more difficult. An extenuating factor was growth in the per capita incomes of the population, expected to grow by 5.2 per cent over the next ten years. Importantly, even in the early 1980s, the country was wealthy enough to support an infrastructure of 1.4 million kilometers of highway. However, in global terms the market was far from mature. Industry watchers reported that India had a penetration rate of less than10% as of the mid-1980s (87 two-wheelers for every 1000 adults), far below the penetration rates of other developing countries. Obviously, bike manufacturers had substantial scope to grow.
Marshalling the implications derived from these realities, Hero convinced Honda that a large population coupled with an emerging-market economic situation constituted an excellent setting for affordable, motorized, two-wheeled scooters. Honda also saw the potential. With air pollution from industry and vehicle emissions topping India’s environmental concerns, governmental authorities had become increasingly strict regarding emissions regulations. These regulations made environmentally friendly vehicles more attractive, and two-wheelers with their fuel efficiency and low emissions fit the bill. Honda also recognized that Asian countries such as India and China, with their huge populations and relatively low levels of economic development, were likely to embrace two-wheeled vehicles as a popular means of transport. In short, India offered a large and growing market for two-wheelers, supported by several favorable macro-trends that bade well for the future.
HONDA’S ENTRY STRATEGY
In consonance with FIPB regulations, Honda opted to join hands with the established bicycle manufacturer Hero Cycles, a company with proven manufacturing, distribution and management practices. Founded by Brijmohan Lall Munjal and his brothers in 1945, Hero Cycles was an ideal partner for Honda. In business for four decades, Hero had manufactured and distributed bicycle parts and bicycles in India for as long as Honda had produced motorcycles. With strong distribution channels and supplier networks, the Hero Cycles name was reputable. The Munjal family’s management practices had led to exceptional results, low employee turnover, and zero industrial unrest in their history. The company used modern manufacturing concepts such as just-in-time supply chain management, team-based manufacturing performance evaluation, and rigorous quality management programs. Most importantly, Hero’s management brought an intimate familiarity with the Indian economy, government, business culture and people.
MACRO-TRENDS AND THE TWO-WHEELER MARKET
In the 1980s, the motorcycle with a four-stroke engine was Hero Honda’s most popular two-wheeled vehicle, providing inexpensive and reliable transportation to India’s largely rural population and growing middle class. In two-stroke engines, the fuel–air charge is drawn through an unlubricated crankcase, and the lube is separately introduced into the air-fuel mixture to lubricate engine parts. Exhaust and intake processes are conflated, so a third of the unburned fuel–air charge can be discharged. The fuel economy advantage of four-strokes derives from the use of crankcase lubrication.
However, four-stroke engines need a camshaft and valve train which impose a volume and weight penalty over two-strokes, and are also therefore more expensive to purchase. But four-stroke engines were superior to the incumbent two-stroke engines in multiple areas. Not only did they produce less pollution than the two-stroke engine, but they also provided greater fuel-efficiency and were more long-lasting than the more powerful two-stroke engine. The total cost of ownership diminished considerably due to the ameliorated fuel efficiency, product durability and lower repair costs. Despite burgeoning pay packets, frugality and thriftiness were essential values of India’s middle-class consumer. Hero Honda had the first and for many years only four-stroke vehicle (except for Royal Enfield’s 346 cc four-stroke). As its early ads said, ‘Fill it, shut it, forget it.’
Hero Honda had seen something that all the motorcycle manufacturers had missed. The shift in demand was towards the consumers originating from rural areas, Tier 2 and 3 cities, and the middle-class office-goers in Tier 1 cities. For these customers, the fuel economy of a four-stroke engine was a bigger draw than the looks and the power of two-stroke bikes.
EVOLUTION OF TWO-WHEELER PREFERENCES: FROM SCOOTERS TO MOTORCYCLES
Scooters, on which a 100–150 cc engine is enclosed in a metallic body below the seat, were the preferred vehicle type amongst two-wheelers, on account of their secure luggage space, the possibility of carrying two passengers, and the provision for a spare tire. Besides, women risked getting their garments tangled in the exposed wheel spokes of motorcycles. In 1988, to understand its market better, Hero Honda conducted an extensive market survey, collecting some 25,000 responses. The survey told Hero Honda a surprising story. Scooters were no longer the vehicles of choice. Motorcycles were to become the two-wheel vehicles of the 1990s. The principal reasons were the combination of a shift in demographics and increased purchasing power among the youth.
With burgeoning numbers of young professionals with large disposable incomes, and college students with affluent parents, the need for a family vehicle, with the advantages discussed earlier, declined, with a corresponding growth in the demand for individual mobility. With their more rugged appearance and higher road speeds compared to scooters (because of larger diameter wheels), motorcycles respond to these changing needs. Also, cultural changes, in terms of women’s clothing, have made motorcycles less problematic. Bikes were perceived as more stylish. Hitherto, scooters were preferred to bikes due to a perception of better safety (scooters were estimated to skid less frequently). The widespread usage of helmets narrowed the safety advantage scooters possessed over bikes; moreover, the ‘danger’ associated with bikes actually drew the younger user away from the staid scooter! The development of fuel-efficient bikes also reduced the conventional fuel-economy benefit of scooters. Further, iconic scooter manufacturers (Piaggio, Innocenti) were located in countries like Italy, whose ‘soft power’ in terms of cultural influence was on the wane. Comparatively, bike manufacturing majors (Honda, Harley Davidson) hailed from economic powerhouses like Japan and the US.
By 2000, motorcycles were the choice of 60 per cent of India’s two-wheeled customers, up from 33 per cent in 1996. By making efforts to gauge and understand its market and the trends therein, Hero Honda cemented its reputation as a market-driven company, one that anticipated and acted upon these trends.
THE FRUITS OF EXCELLENT MARKET INSIGHT
In 2000, Hero Honda’s Splendor model became the world’s largest selling motorcycle. It now sells more than a million units a year. In 2001, Hero Honda became the largest selling two-wheeled manufacturer in India, with 50 per cent of India’s motorcycle market. In 2002, Hero Honda sold 1.4 million motorcycles, becoming the largest two-wheeler company in the world. Hero Honda’s dominance cannot be ascribed merely to the size and growth of the market. In that case, the dice would have been loaded in favor of larger incumbent business groups like Bajaj. Success can be attributed to a keen understanding of macro-environmental changes: social, technological, macroeconomic, ecological, political, legal and demographic. Honda and Hero were confident of significant market potential for motorized two-wheel vehicles in India, given the sheer size of the Indian market and its emerging middle class. At the same time, they understood the limitations in the still-modest purchasing power of their target customers, so they offered products whose reliability and overall economy were unmatched by their competitors. By reading the market correctly, Hero Honda was able to finally topple the formidable scooter king Bajaj in 2001. To recover lost ground, Bajaj drew on technology from Kawasaki and jazzed up its portfolio, emphasizing high-end motorcycles. For a while it looked as if a newly revved-up Bajaj would reclaim the crown.
But the economic recession in 2008 played to Hero Honda’s advantage. Bajaj’s strategy of moving away from the lower segment to concentrate on high-end bikes backfired when the economic cycle turned down and consumer confidence dipped. Hero’s ability to identify an underserved market – one that was large and would grow – and match its offering to that market’s needs were the twin attributes that distinguished them from incumbents who had targeted more upscale urban customers with quite different needs.
Now that Hero has separated from Honda, how do you think it can grow in the market? The same question has to be asked of Honda too? What should their possible strategies can be, more so when there is yet another challenger- Bajaj?