Honda to Quit Indian Venture - Analyst Blog

Honda Motor Co. (HMC) will possibly exit from its 26-year old motorcycle joint venture (JV) in India, Hero Honda Motors Ltd. with Hero Group. The Nikkei Business Daily reported that Honda will sell its 26% stake in the JV in order to focus on its fully owned two-wheeler venture in the country, Honda Motorcycle & Scooter India Pvt. Ltd.

The Delhi-based Hero Honda was established in 1984 and offers 15 motorcycle models, including the Splendor, Karizma, Passion, Hunk and Glamour. It has three plants in northern India.

Honda is primarily responsible for lending technology to the JV while Hero Group has been entrusted with marketing and distribution of the motorcycles. The partners have a 10-year joint technical agreement that will be renewed in 2014.

Hero Honda manufactures more than half the country's motorcycles. Rural areas account for about 40% of Hero Honda's sales. According to an executive in Hero Honda, this share is expected to rise steadily to more than 50% in the future as rural incomes increase.

At current market prices, Honda's stake in the JV is valued at nearly $2 billion. Besides, the Hero Group may need to make additional payments to Honda in the form of royalty.

After the buyout of Honda's stake, Hero Honda will be able to export its motorcycles and scooters anywhere in the world. So far, its export was restricted to India's neighboring countries in order to protect Honda's global presence.

On the other hand, Honda will benefit from the ever-expanding motorcycle market in India by operating its 9-year old fully owned venture. During April-November 2010, motorcycle sales in India went up 24% while scooter sales surged 49%.

Honda Motorcycle & Scooter sells three scooter and four motorcycle models in India. Presently, it is the country's largest scooter maker by sales.

The company supplies its products from its Manesar plant, located in the north Indian state of Haryana. It now plans to build a second plant in Alwar in the northwestern state of Rajasthan that will raise its annual production capacity to 2.2 million units from 1.6 million units.                         

After its break-up with Hero Group, Honda will face tough competition from other domestic bike manufacturers including its own partner and Bajaj Auto, despite benefiting from the expanding motorcycle market in India. Bajaj Auto is the second largest motorcycle maker in the country with a market share of about 27%.

Last year, Harley-Davidson Inc. (HOG) also forayed into the Indian market by offering 12 motorcycle models including Fat Boy, Roadster and Road King. Recently, the company announced its plan to roll out two new motorcycles assembled at its factory in the northern state of Haryana, India to lure Indian buyers by offering lower prices for its premium “hogs”.

 
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