In August 1999, Honda announced that it was setting up a wholly-owned subsidiary to manufacture scooters in India with an initial capacity of one lakh units per year. The company set up an independent distribution network for the new venture. Through this $ 43 million subsidiary, Honda planned to focus on scooters for a period of five years. Later, Hero Honda and the Honda subsidiary were to be free to expand the range to include all two/three wheelers. Honda's first scooter model was launched in mid-2001. Around one-third of the total proposed outlay of Rs 150 crore had already been invested by that time. Though the contract with the Firodias prevented Honda from manufacturing the same scooter through a subsidiary or a joint venture, Honda got around the clause by introducing scooters in a different range. A Honda official said, "This is an extremely important market for us and there is no question of giving up the scooter business - we never give up."
Honda's decision sparked off debates in industry circles over guidelines regarding foreign companies being allowed to set up wholly owned subsidiaries in India, when they already had joint ventures here. The Confederation of Indian Industry (CII) expressed fears that this could develop into a trend that would adversely afect the local partners in these joint ventures.
Kinetic claimed they were not perturbed by Honda's announcement, as the group believed they were the de-facto leaders in ungeared scooters. Also, they had the exclusive rights to manufacture the 100cc and 110cc, Marvel, DX and ZX scooters. The Firodias were not really surprised by Honda's announcement, because at the time Honda was negotiating with them for the Kinetic Honda stake, such a possibility had been discussed. However, many felt that Honda could eventually enter the motorcycle segment as well - something which seemed strategically wrong given the success of the Hero Honda venture. Sulajja said, "If Honda was serious about its scooter business in India and wanted to grow in the market by introducing new models, then why did they not do so during the 12 years that it was present in India, through its JV with us? After all, it had a majority stake and full management control. Yes, its true that Honda has said that it will start by manufacturing a 4-stroke scooter first through the new company. But what one fails to understand is why Honda should reenter a business by setting up a greenfield project at a whopping investment of over Rs.200 crore, when it has barely 10 months ago exited that market, unless it has a larger gameplan of manufacturing motorcycles too."
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