Experts see Hero’s move to opt for milestone payments as its endeavour to ramp up R&D capability
Two-wheeler maker Hero MotoCorp Ltd will not pay royalty fee to its new technology partners, unlike its arrangement with former partner Honda Motor Co. Ltd, chief financial officer Ravi Sud said.
Instead, Hero has entered into “umbrella arrangements with them. The payments will be made in tranches based on the milestones for the products to be developed”, Sud said.
An umbrella agreement covers all the aspects of a business tie-up between two parties, where an investor gives money to a specialist to work on a project and in return gets complete control over the outcomes of the project.
In 2010, the New Delhi-based Hero and the Japanese auto maker decided to part ways in order to pursue their individual ambitions in the world’s second largest two-wheeler market.
But Hero continues to pay at least 5% of its net sales as royalty fee on models such as Ignitor, Maestro and Impulse that it launched after December 2011, according to the licencing agreement signed in March 2011 between the two parties.
For older models such as Splendor and Passion, Hero will pay a lump sum of Rs.2,350 crore, or at least Rs.180 crore per quarter, as royalty to Honda till June 2014.
In the latest September quarter, the company paid at least Rs.206 crore to its former joint venture partner.
The payment was at least Rs.14 crore less than it paid in the June quarter as the rupee had strengthened against the Japanese currency.
Hero’s net profit for the September quarter fell 27% to Rs.440 crore from a year ago owing to the market slowdown, which forced company to cut production at its plants.
After the break-up with Honda, Hero has signed at least three technology arrangements—with US-based bike maker EBR Racing, Austria-based engine maker AVL, and Italy-based designing and engines expert Engines Engineering.
Sud said EBR Racing will help the company deliver powerful products in the high-end segment, and AVL will work with Hero’s engineers on engines for its existing products. Engines Engineering will help the company design products.
Hero has given letters of intent for certain projects to its new partners and payments for these will be made in tranches, Sud said. “For each project, there will be milestones. The payment will be made in tranches based on the milestones achieved,” he said. “And we will also be having intellectual property rights on the outcomes and we will be free to use and modify them in future.”
Sud did not divulge details on the new projects or the payments.
Industry experts see the new partnerships and the decision to opt for milestone-based rather than royalty payments as Hero’s endeavour to quickly ramp up its own research and development capability as its technology agreement with Honda will end in June 2014.
A consultant, who did not want to be named as Hero is one of his clients, said the difference between royalty and one-time payment is that a royalty arrangement effectively holds a company hostage for a long time in the hands of the technology provider.
“In Hero’s case, it is not clear who dictated the terms. It is possible that its partners may have agreed to take one-time fee rather than having a long-term business association through royalty set-up as Hero’s future is unclear,” he said. “One-time payment may run you into risks. But today, Hero is willing to take risk and thus they are trying (to) show faith in their partners. By doing this, Hero is not putting its future at stake.”
After it announced its separation with Honda, experts raised doubts about Hero’s ability to develop products on its own. The firm is now setting up a research and development centre at Kukas, near Jaipur in Rajasthan, in which it has invested Rs.400 crore. Hero will hire 500 experts and engineers for its research and development team, which it expects will be fully equipped by 2014 and be able to introduce its own product by the end of the next fiscal.
Shares of Hero Motocorp fell 1.9% to Rs.1,796 on BSE on Tuesday, underperforming the benchmark Sensex’s 0.44% drop.
