Hero Honda Case Study Solution

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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.

On the board of Hero Honda, Honda appointed four members and the Munjal family had four representatives. Employees from Honda, Japan, were brought to take care of the quality and engineering functions. Other functions like marketing, finance, HR, and daily operations were managed by the local staff.

Hero Honda announced that it would launch a 100 cc motorcycle the next year. At that time, industry observers were of the view that consumers would reject motorcycles as they were more used to and preferred scooters. Hero Honda set up a factory in Haryana, North India. The company launched its first bike - the Hero Honda CD 100 - in 1985. The CD 100 was designed completely by Honda. The four stroke motorcycle was equipped with an electronic ignition system, illuminated speedometer, and 4-speed gear box. The bike set very high standards of fuel efficiency, promising a mileage of 80 km per liter. The Hero Honda CD 100 was launched with the campaign - 'Fill it, shut it, forget it' that highlighted the mileage that it provided. The motorcycle became highly popular owing to its mileage and the fact that it was the only four stroke engine motorcycle at that time in India.

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