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

Buy Now

Case Code : BSTR003
Case Length : 12 Pages
Price: Rs. 200;

Kinetic Honda: The Break-Up | Case Study

ICMR regularly updates the list of free cases. To view more free cases, please visit our site at frequent intervals.

<< Previous

Souring Ties

Reports claimed that right from the beginning there had been differences between Honda and the Firodias over the issue of management of Kinetic Honda. Firodia admitted that there were serious differences over issues like introduction of new models, advertising expenditure, marketing strategies, etc. As a result, the company suffered in terms of growth and profitability.

Under the joint venture agreement, Kinetic Honda manufactured scooters and Kinetic Engineering made mopeds. Both of them could not manufacture each other's products or motorcycles. Because Honda was present in the motorcycle segment with Hero Honda, the Kinetic group remained in mopeds and scooters. This was not in favor of Kinetic because the moped market had declined considerably during the 1990s. Kinetic had ambitions of becoming a full range two-wheeler company as it was strong in operations and also had a large distribution network.

When Kinetic developed indigenous technology for its four-stroke step-through vehicle K400, a competitor to Hero Honda's Street model, Honda saw it as an unfriendly move.

The Firodias were unhappy about the fact that 'Kinetic,' as an umbrella brand was not being promoted. Consumers associated the name Kinetic with scooters and 'Luna' with mopeds, but did not see them as belonging to the same business house. To support the Kinetic brand as an umbrella brand with a number of products under it, the Firodias wanted to advertise heavily and bring out new products. According to Sulajja , "The tie-up with Honda was limiting our competitive capabilities."

Kinetic Honda insiders claimed that Honda had always taken a 'half-hearted approach' towards managing the company. They also said that Honda was too preoccupied with other markets such as Indonesia and Thailand which were growing much faster and where, unlike in India, Honda was doing well. Also, Honda's margins were much higher in these markets - even a 50cc Honda scooter cost more in other parts of the world than the lead model being sold in India. Yet, Honda scooters were considered expensive in India. Industry watchers pointed out that Honda, with all its resources, could have easily engineered a product for the Indian roads, but was simply not interested.

Honda claimed that it had decided to position itself as a niche player at the upper end of the segment and that segment did not grow as much as the company had anticipated. Company sources said, "We miscalculated the purchasing power of the Indian middle class. We thought it would go up, but it didn't. Instead, the economy went into a tailspin and we couldn't grow." However, Honda admitted that having just a single model for several years had worked to the company's disadvantage. But the investment required to develop and introduce new models was very high, rendering the end product uncompetitive and hence an unattractive proposition. Honda claimed that the Firodias did not have the marketing acumen of the Munjals of Hero Honda. Disagreements over advertising expenditure and the interference of the Firodias in the appointment of dealers widened the rift between the partners.

Kinetic wanted Honda to increase the advertising expenditure, but Honda did not agree. Being a large organization with various decision-making layers, Honda wasn't quick enough to react to the demands of the marketplace. The joint managing director, a Honda nominee, was changed every three years. Thus, by the time he understood the demands of the marketplace, it was time for him to be replaced.

Unlike the Hero Honda venture, where the Munjals and Honda showed complete faith in each other and worked together as a team right from the beginning, the Firodias and Honda reportedly never shared a good rapport. In Hero Honda, the partners had equal stakes and this made decision-making easier. Moreover, because of lack of competition for a long time, things were easier for Hero Honda. But Kinetic Honda had to compete with a giant like Bajaj. Also, while the cost of making the Kinetic scooter was higher than the cost of manufacturing a motorcycle, the selling price of the latter was Rs 10,000 more. The profitability of Hero Honda, therefore, was much more and they could afford to spend more on advertising. Also, the Munjals could take their own decisions regarding adspend. Firodia said, "If we could have done the same, it would definitely have increased Kinetic's visibility and volumes would have grown faster."

Honda's exit raised questions about Kinetic's survival. It was thought that the Rs 35 crore the Firodias paid for acquiring the entire stake would put a great strain on their finances and weaken the company. Analysts were quick to comment that Kinetic would have problems regarding the development and induction of new products. Honda's technical support limited to the existing range of products. And as the existing products - Kinetic Honda and Marvel - were not doing very well at that time, the withdrawal was seen as an unwelcome development.

Next >>>