Kinetic Honda: The Break-Up



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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Kinetic Honda: The Break-Up | Case Study

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Starting Problem!

In 2001, the Kinetic Group had two automobile companies - Kinetic Engineering Ltd and Kinetic Motor Company Ltd. After the December 1998 deal, Kinetic Honda Motor Ltd was renamed Kinetic Motor Company Ltd. Kinetic's story began in 1972 with the founder H.K.Firodia buying the 'Luna' moped's design from a foreign company. The moped, which aimed at capturing the bicycle market, went on to become such a huge success, that Luna became a generic name for mopeds.

In 1985, under Arun Firodia's (H.K.Firodia's son) leadership, Kinetic tied up with Japanese auto major Honda Motor2 to form Kinetic Honda Motors Ltd. (KHML) with both the partners holding an equal stake of 28.56%. The company's primary business was manufacturing scooters. Sales of spare parts formed a minor part of the turnover. The 'KH-100,' the first ungeared scooter in India, proved to be a huge success in the initial stages.

Throughout the 1980s, Kinetic remained India's largest moped manufacturer with a 44% market share and a 15% share3 of the overall two-wheeler market. A decade later, the company's moped market share halved to 22% and the overall market share figure reached an abysmal 5%. Also, in 1991, Kinetic, with a turnover of Rs 121 crore, was competing on an equal turf with the Rs 140 crore TVS Suzuki and the Rs 150 core Hero Honda4. But by 1999, while TVS and Hero Honda grew seven times over to Rs 1,018 crore and Rs 1,146 crore respectively, Kinetic just managed to double its turnover.

A major reason for this was the fact that Kinetic seemed to have missed the pulse of the market, which was fast moving towards motorcycles. Kinetic had no motorcycles to offer - mainly due to the Honda joint venture stipulations. (Kinetic could not make motorcycles because that meant competing with Hero Honda.) Kinetic's financial position also took a beating in the late 1990s. While sales grew slowly, compared to its competitors, its operating margin was the lowest in the industry because of the high import content of raw materials. Kinetic also had to shelve its plans to launch a small, 500cc, 2-cyclinder car after a substantial sum was spent on the project5.

With Kinetic Honda's fortunes declining, Firodia agreed to let Honda increase its stake to 51% in 1993, perhaps hoping that if Honda were in control, it would bring in new products more quickly and thereby improve the company's prospects. But Firodia soon realized that this was not to be. At a time when its competitors were spending 1-1.5% of the turnover on R&D, Kinetic Honda did not move beyond 0.31%. On advertising, Honda spent just Rs 20 crore during 1993-98. As a result, Kinetic Honda's market share declined steadily during 1996-98.

In 1997-98, Kinetic Honda's sales grew marginally to Rs 353 crore over the previous year, but profit after tax dipped to Rs 2.16 crore from Rs 2.30 crore. This, coupled with the Rs 6 crore loss for the first quarter of 1998 made the Firodias give serious thought to parting ways with Honda. Firodia said, "There was no growth, so we decided to review the contract." The new agreement involving the Honda stake sell-off and the technical collaboration arrangement was signed after this. Commenting on this, Firodia claimed, "It's a win-win scheme for everybody."

Though Firodia claimed that Honda's equity sale decision was taken jointly by both partners, media reports had a different story to tell.

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2] Established in 1948, Honda Motor Co. Ltd., was one of the world's leading automobile manufacturers. Globally renowned for its light and utilitarian motorcycles, Honda had over 77 production facilities in 40 countries and sold its products in over 150 countries.
3] 1981 figures.
4] Hero Honda Motors Ltd. was a 50:50 joint venture between the Hero Group of India and Japanese automobile giant Honda Motors. Formed in 1984, the company was India's biggest player in the motorcycle segment.
5] The vehicle named CityCar was to be priced at around Rs 1 lakh, provided Kinetic was able to get some excise concessions. However, these concessions were not forthcoming and the project had to be shelved.