The Hero Honda Break-Up

The Hero Honda Break-Up
Case Code: BSTR409
Case Length: 17 Pages
Period: 1984-2011
Pub Date: 2012
Teaching Note: Not Available
Price: Rs.400
Organization: Hero Group, Honda Motor Company, Hero Honda
Industry: Automobile
Countries: India
Themes: Joint Venture, Strategic Alliance
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Abstract Case Intro 1 Case Intro 2 Excerpts

The Hero Honda Joint Venture

The origins of Hero date back to 1944, when four brothers of the Munjal family started a bicycle spare parts business in Amritsar, Punjab, North India. In 1956, Hero Cycles Ltd was established in Ludhiana, Punjab. In the first year, the output was 639 bicycles. They started exporting bicycles in 1963. The Munjals also incorporated several bicycle component manufacturing units, which included Rockman Cycle Industries for manufacturing bicycle hubs and chains, and Highway Cycles for making freewheels. By 1975, Hero had become the largest manufacturer of bicycles in India.

In 1978, Majestic Auto Limited, was incorporated. The first product from this venture was Hero Majestic Moped, a motorized two wheeler. In 1986, Hero became the largest bicycle manufacturer in the world.

In the early 1990s, Japan-based Honda was looking at entering the Indian two wheeler market (both scooters and motorcycles) through joint ventures7. Honda had been the largest manufacturer of motorcycles in the world since 1959. In terms of automobile manufacturing, it was the sixth largest in the world. Initially, Honda intended to partner with the then market leader Bajaj Auto Ltd. (Bajaj). But the venture did not work out, and Honda partnered with Kinetic Engineering Ltd. (Kinetic), which manufactured the Luna brand of mopeds. Both the companies entered into a joint venture, with each company holding 28.56% of the equity. The venture, Kinetic Honda Motors Ltd. (Kinetic Honda) opted to produce scooters through the joint venture, as the scooters were highly popular at that time.

Then for the motorcycle venture, Honda approached Hero. Hero's bicycle business, mopeds, and wide distribution network attracted Honda. Both the companies started negotiating in 1983 and entered into a joint venture in 1984. The joint venture agreement was for a period of ten years. As per the deal, Honda agreed to provide the technical know-how, set up manufacturing facilities, and carry out Research and Development activities. Hero Honda had to pay a royalty of 4% on the ex-factory price of each vehicle for these services. Hero also paid a lump sum fee of US$ 500,000. In the venture, both the partners held 26% of the equity, 26% was sold to the public, and the remaining was held by financial institutions...

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