It might hold the pole position in two-wheelers, but never in its storied 30-year history have Hero’s mirrors been filled with rivals and challenges like this. Even as Pawan Munjal starts to press new levers of growth and continuity, it will be an uphill ride to stay on top, reports Chanchal Pal Chauhan
On a Sunday night this March, as thousands of youngsters grooved to tracks belted out by popular Dutch DJ Tiesto in a makeshift pavilion in a Noida club, a 59-year-old man with salt and pepper hair waded through the throngs, a silent observer. Pawan Munjal, the pilot of the world’s largest twowheeler maker by volumes, Hero MotoCorp, was there to “feel the pulse of the youth”. The next morning, Munjal closeted himself with 150 young Hero employees, aged 21-35 years, at The Grand in New Delhi. “He deliberately did not call any senior management as he wanted us to be completely open,” says an employee who attended the meeting, on the condition of anonymity. The meeting, scheduled for an hour, stretched to four hours, spilling over to lunch, as Munjal fielded queries ranging from the company’s international business plans to product development. Embedded in those interactions is the way Munjal wants to change Hero, from a maker of two-wheelers that people mostly use to commute to something that is also younger and trendier. Embedded in those interactions are also the hopes and concerns of Hero at the crossroads it finds itself with the departure of its partner of nearly three decades, Honda. It has a lot on its side: the mighty edifice of a Rs 23,768 crore operation, a market leading 48% share in twowheelers in India, the go-to name in commuter bikes, a sales and service reach that equals all its rivals put together. But it was all built with Honda, which went its own way in March 2011, and a fuzzy future is threatening Hero’s storied past. Rivals—led by Honda, whose stated ambition is to be number one in India by 2015-16—are filling Hero’s mirrors. And, lately, Hero has been found wanting. In a market where a launch every six months is the norm, Hero’s last new model was nine months ago, and it has nothing more till the festive season. Sales of Hero Splendor, the largest-selling motorcycle model in India, shrunk about 20% in 2012-13, from 2.5 million to 2 million. Its motorcycle sales are, in fact, struggling to grow and it is scooters that are making the slack. Hero has missed analyst estimates for net profit in seven of the last eight quarters. In the quarter to December 2012, it posted its lowest net margin in 15 years, as sales tapered, costs increased and a re-branding exercise made it to spend a lot more on advertising. In the past year, the Hero stock has fallen 3.4%, in a broad market that has gained 23.5% and one of its two main rivals, Bajaj Auto, has risen 21%. “It is facing perhaps the toughest time of its existence,” says Abdul Majeed, partner, automotive practice, PricewaterhouseCoopers. Earlier this year, when Hero unveiled an unprecedented five-year warranty—the industry norm is three years—on its motorcycles, many said it was desperation masquerading as confidence. “Hero doesn’t carry weight without Honda,” says Mahantesh Sabarad, senior vice-president of equity research at Fortune Securities, a brokerage, on the warranty’s meaning. In this challenging backdrop, Munjal is beginning to unravel his blueprint for Hero’s life after Honda. He doesn’t say so, but his vision for the Hero of tomorrow resembles the Honda of today: known in every part of the worldmaking all kinds of two-wheelers from zippy scooters to thunderous bikes, and self-sufficient in technology. One by one, Munjal is initiating multiple journeys he hopes will see Hero tick all those three boxes in the next 10 years. He has opened a new flank, exports, and is targeting 10% of sales from here by 2018. He is filling the technology hole left by Honda with three partnerships with overseas manufacturers. He is beefing up research and development by setting up the country’s largest R&D centre in Kukas, Rajasthan, to assimilate and create technologies and designs, and make an impression with launches. “The idea is to not just take Brand Hero global, but also to make it more contemporary and youthful,” says Munjal. It’s an endeavour that is taking him to places as diverse as Noida, Guatemala and Kenya, and has his calendar booked for two years.
Going Global
One of the clauses in Hero’s erstwhile partnership with Honda was that the Indian entity would not go to markets where its Japanese partner was present. Which was, well, everywhere—about 150 countries. Even Bajaj Auto, the third spoke of the two-wheeler troika in India, diversified into exports in 2005-06, and exported 1.2 million units in 2012-13. Making up for lost time and opportunity, Hero is planning a big push in exports, with 100-125cc bikes. With the objective of taking its annual sales in foreign markets from zero to 1 million units in five years, the company has short-listed about 30 countries. “We are going to markets where we have the best hope of quick entry and quick gains,” says Munjal. Hero’s first foreign subsidiary was set up in Netherlands in April, and similar arms are to be formed in more European countries and the US in the near future. According to a company official in the know, who did not want to be named, Hero is likely to also open an office in China for sourcing. At present, Munjal is on a three-country jaunt to Central America— Guatemala, El Salvador and Honduras—where he will be launching the Hero brand, in partnership with the local Indy Motos Group, and the ‘hum mein hai Hero’ campaign in Spanish. A few weeks later, it will be Africa, with similar launches in Kenya, Burkina Faso and Ivory Coast, followed by Peru in South America. “Hero is known as a value-for-money brand that can be leveraged in markets having a demography similar to India for exports,” says Surjit Arora, analyst with Prabhudas Lilladhar, a brokerage. Sabarad of Fortune Securities feels the challenge of this foreign drive will be distribution, which changes from market to market. “We are being very careful in selecting global partners—distributors and channel partners—who know the local markets and customers better than anybody,” responds Munjal. In both Central America and Africa, he adds, Hero is considering setting up assembly units. According to an industry executive who did not want to be named, Hero’s performance in exports will “depend on how its pricing strategy is and also how Honda is placed in that export market”. Even two years after their separation, many sentences on Hero’s future contain a Honda in them.
The Honda Factor
Honda is the leader in virtually every country it operates in, except China. In Brazil, its share is 80% and it controls half the pie in Indonesia. That’s the challenge Hero is riding into outside India. Even in India, the world’s largest market for petrol two-wheelers with annual sales of 14 million units, Honda is on a tear. The Japanese company has been in India since 2001, as Honda Motorcycle and Scooter India (HMSI). While its original pact with Hero prohibited HMSI from competing against it in motorcycles, it was free to launch scooters, where Hero wasn’t present then. In the little over two years since the termination of its joint venture with Hero, HMSI has grown faster than all rivals, overtaking TVS Motor and Bajaj Auto to become the second-largest twowheeler company in India. In 2012-13, Honda had a market share of 19%, against Hero’s 48%, according to data from the Society of Indian Automobile Manufacturers (SIAM). Honda executives pull no punches about where they want to go. “Given the current scenario in India, I believe, it will not be 2020, but 2016 or even 2015 by when we will attain number one position here,” Shinji Aoyama, the Japan-based operating officer of Honda Corporation’s motorcycle business, told ET in March. Honda, which is operating at capacity, is currently working to increase its annual capacity by 40%, from 2.8 million units to 4 million units. As it expands, the higher base effect will make it progressively harder for Honda to keep growing at 30% a year. But it has a few tricks up its sleeves, especially in the commuter segment, which is Hero’s bastion and accounts for about threefourths of sales. The market widely expects Honda to go head on against Hero next year, with a new bike that competes against Splendor—the 100cc bike that brings in about 30% of Hero’s sales—and is about Rs 4,000 cheaper. Even Bajaj, whose stated positioning is in the premium space, has launched a 100cc Discover and has another launch in the segment scheduled this year. “Some combination of brand, segmentation and product innovation is the only way Hero can fend off the hungry, Japanese invader,” says Zia Patel, head of strategy, India, Wolff Olins, the marquee brand consulting firm, which has done work for Hero. In contrast to Honda, Hero’s sales seem to be plateauing at 6 million units a year. It has ample cash, and has initiated an expansion from 6.7 million to 9 million in three years, with new plants in Rajasthan and Gujarat. “Hero has been talking capacity expansion for almost two years now,” says a senior company official in the know, on the condition of anonymity. “I think they do it to give shareholders, suppliers and dealers confidence. The reality is that their existing monthly capacity is 6 lakh and current sales around 4.8 lakh.”
Technology Travails
“The next two to three years are very crucial for Hero,” says Arora of Prabhudas Lilladher. The company —which has a consistent history of breakout models with Honda, like CD100 in 1984, Splendor in 1994 and Passion in 2001 —has an aging portfolio and it needs new launches. “In spite of being the largest player, there are signs of stagnation that can only be dispelled by some innovate products in the pipeline that will keep it ahead of its rivals,” adds Majeed of PwC. A glaring weakness for Hero after the break-up with Honda was technology. Hero has the right to use Honda technology till June 2014. But it is moving beyond. In the last two years, it has inked technology tie-ups with three overseas companies: Engines Engineering of Italy for new designs, AVL of Austria for engines, and Erik Buell Racing of the US for premium bikes. “Our objective is not to look for a replacement for our erstwhile technology partner,” says Munjal. “The idea is to have multiple partners to build our own R&D capabilities, the quickest we can. A lot of work is going on with all our technology partners and we will be ready to roll out new products on our current platforms in calendar 2013 itself.” If Honda was a one-stop shop for technology needs, which gave it market-defining products, Hero will now be working with multiple partners. This can work both ways. “Unless they are very clear—which partner for what product, in terms of cubic capacity and segment—it would be a arduous task to get a successful product,” says a senior executive from a rival, not wanting to be named. “Hero can blend and marry the strength of its three partners into platforms, though the commercial success of these vehicles would be the real challenge,” adds Majeed of PwC. Jai Sharda, managing partner at Equitorials, a Mumbaibased research consultancy, points out that engineering firms from Europe and America have failed to launch a successful product in the mileage-obsessed Indian market. For example, Engines Engineering was Mahindra’s partner for its debut motorcycle Stallio, which was recalled and phased out due to gearbox problems.
Premium Shift
Hero wants to be a bigger player in the premium segment (150cc and above), which is projected to grow from 2 million units in 2010 to 4.5 million units in 2015. This segment is ruled by Bajaj, which has a 43% share, led by Pulsar, and is completely focused on it. “I believe that one day everybody will buy powerful bikes; it may take five years or 15 years, but you have to direct the whole organisation in that direction,” Rajiv Bajaj, MD and CEO of Bajaj Auto had told ET in March. Hero, by comparison, has a 13% share in the premium segment. So, on the one hand, Hero is under attack from Honda is the entry-level segment. On the other, in the premium segment, it is yet to mark itself out as a serious challenger to Bajaj’s dominance. “Hero is vulnerable to increased competition both in commuter bikes and a relatively weak franchise in the premium segment,” says a recent Bank of America-Merrill Lynch report. Majeed of PwC feels the technology partnerships are the only hope for Hero. “Hero is not known as a premium bike maker,” he says. “The only hope for the company could be its evolving R&D and global technology partners spruce up some high-end bikes to grab some instant attention of youth and aspirational customers.” That objective is what is making Munjal observe young customers and interact with young employees. “I’m giving them complete freedom to think out of the box and come up with fresh, path-breaking ideas,” he says. At no point has Hero needed a reboot more than it does now. And the road to one will be anything but smooth.
5 Challenges For Hero
BROADER IDENTITY
Challenge: Shed its image of a commuteronly two-wheeler company
Strategy: Launch products, across the board, endowed with great design and R&D
FIRE UP DOMESTIC SALES
Challenge: Honda & Bajaj are eating into Hero’s share with competitive products
Strategy: Unprecedented 5-year warranty on bikes; resume launches, in festive season
CRACK OVERSEAS MARKETS
Challenge: A new area for Hero; Honda, Bajaj and TVS have a headstart
Strategy: Mix of partnerships and own assembly. Target: exports at 10% of sales by 2018
SEEDING R&D
Challenge: Transition from one-stop shop partner (Honda) to three partners
Strategy: Work closely with partners; beef up R&D with new centre and twice the people
BEYOND HONDA
Challenge: Create its own identity -- Honda overhang on processes, practices and brand
Strategy: Wolff Olins creating new brand identity; new partners for exports
