Strains in Hero Honda tech pact

Hero Honda Motors, the country’s largest two-wheeler manufacturer, could face speed bumps down the road as the technology agreement which forms the foundation of the joint venture comes up for renewal. The agreement is renegotiated every ten years between the partners – the Hero group of Munjals and Honda Motor Company of Japan—who hold 26% each in the company. The agreement comes up for review in 2014.

According to industry sources, Honda Motor Company wants Hero Honda to source more components from its wholly-owned spare parts subsidiary Honda Motor India (HMI) to increase revenues. Honda Motor Company is believed to have made this sourcing commitment a precondition to renewing the agreement.

However, sources said that the Munjals are not keen to source from HMI; instead, the Munjals want Hero Honda to opt for engine sharing and platform sharing (as part of other synergies) with Honda Motorcycles and Scooters India (HMSI), a wholly-owned owned subsidiary of Honda.

Hero Honda has contracts to source raw materials and components from several suppliers. A major part of the sourcing is also done through Hero Group’s automotive parts business.

“It seems the Hero Group will not step up sourcing from HMI, especially in the backdrop of rising competition... Sourcing components is key for any auto company and Hero Honda would want independence in the matter,” an industry source said on condition of anonymity.

When contacted, a Hero Honda spokesperson acknowledged that such issues have arisen in the past but ruled out any impact on future relations between the two. “This matter is in the past and outdated, with no relevance today. We have our own component suppliers and it continues as it has been. Beyond this, we do not want to comment on market speculation,” the spokesperson said.

Ever since Honda set up its 100% subsidiary HMSI in India to produce motorcycles and scooters, there have been whispers about a possible end to the relationship. HMSI entered the booming motorcycle segment in 2004, pitting its Honda Unicorn bike against several leading bike brands from Hero Honda. The technology agreement was renewed in 2004, amid speculation that Honda would opt out. HMSI has put in place a reasonably wide network of dealers and channel agents. HMSI now makes a ranges of bikes and scooters.

Auto analyst with Angel Broking, Vaishali Jajoo said that Honda Motor Company, like most companies, would want to step up sourcing from emerging markets like India and China. She said: “As far as Hero Honda is concerned, a large part of sourcing is done through its own captive company apart from other North India based vendors.”

The Hero Group first signed the technical agreement with Honda in 1984, which was renewed in 1994 and 2004.

Jajoo said that following HMSI's entry into the motorcycle segment has caused marginal cannibalisation.
However, she ruled out any major impact on Hero Honda's sales.

Currently, Hero Honda enjoys 59% market share in the two-wheeler segment. In July, the company sold 4,27,686 units, a growth of 16.6% over the corresponding month in 2009, when it had sold 366,808 units.

The company derives over 80% of its revenues from the Splendor-Passion combine in the executive segment—the most crowded section of the motorcycle market.

On Monday, Hero Honda shares closed up 0.55% on the Bombay Stock Exchange at Rs 1,825.40.