Kinetic Honda: The Break-Up

Details

Themes: Joint ventures strategic alliances
Period : 1998-2001
Organization : Kinetic Motor Limited / Honda Motors Ltd.
Pub Date : 2002
Countries : India
Industry : Auto and Ancillaries

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Case Code : BSTR003
Case Length : 12 Pages
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"We are proud that we have set an unprecedented example, of a small Indian company, Kinetic Engineering Limited, buying out the majority stake of a multinational giant like Honda."

- Arun Firodia, Chairman, Kinetic Group, in 1998.

Kinetic Honda - The Break-Up: Break-Up Blues

It was in August 1998 that the first chinks in the Kinetic Honda Motors Ltd. (Kinetic Honda) armor were reported by Business India. Both Honda and the Firodias of Kinetic were quick to deny rumors of a split, though reports of the Firodias quietly raising resources to buy out Honda's stake kept surfacing. The Firodias were even reported to have securitised the assets of their two-wheeler finance company - 20th Century Kinetic Finance (TCKF) - to raise this money.

Trouble had been brewing since the company recorded a loss of Rs. 6 crore in the first quarter of 1998. Eventually Honda decided to put the matter to rest and called Arun Firodia (Firodia) to Japan in December 1998.

Honda made Firodia an offer - either he buy their 51% stake or Honda would buy out his 19% stake. Analysts remarked that it was difficult for Firodia to let go of the company that he had nurtured for the best part of his life. Eventually, Firodia negotiated a deal with Honda, to acquire its stake at Rs 45 per share, (when the market price was almost double), at a total cost of Rs 35 crore. He also signed an agreement with them for continuing to manufacture and sell the existing Kinetic Honda models. Honda also agreed to continue providing technical know-how support in return for royalty and technical fees from Kinetic.

Considering the fact that Honda was the world's biggest and most successful scooter manufacturer, the pullout came as a surprise to industry observers, as it was quite unlcharacteristic of Honda Motor to give up a segment. More so, as just a couple of months earlier, Honda had been reported to be planning to make further investments in Kinetic Honda¹. This was seen as a major setback for the company. It was also perhaps the only instance of a Honda failure anywhere in the world.

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1] In June 1998, Honda was reported to be contemplating further investments in KHML, despite the Japanese sanctions imposed on India during that period. Honda was also expected to launch a new range of four-stroke scooters. This was however not confirmed by either party.