The inside story of how Hero Honda split in 2010, and the Hero was
re-born soon after, Ravi Sud, Senior Vice President and CFO of Hero
MotoCorp, speaks to CFO Connect|
Who knew in 1984, when Hero Group and Honda
Motors signed a JV agreement to form Hero Honda that
this infant will become the world’s largest two-wheeler
company by 2001. But when this happened it increased
the aspirations of the Indian partner to export its two wheelers,
and develop the products in-house with its own
R&D. This was the main reason for the dissolution of
this enormously successful JV. However, when Honda
sold out to its partner, it did so amicably, recognising that the Indian partner was responsible for creating the
brand equity that Honda enjoyed in India. This holds
lessons for other JVs that will eventually split when the interests
of the partners cease to align. Here we present the
inside story of the split and the birth of Hero MotoCorp,
its plans and aspirations, and how it expects to continue
to hold its number one position without Honda’s powerful
name and technology. Ravi Sud, Senior Vice President
and CFO of Hero MotoCorp, speaks to IMA India.
What compelling reasons forced Hero Motor
Corporation and Honda to part ways?
Let me begin by giving a little background on
the Joint Venture. In 1984, Honda formed two JVs;
one was to manufacture motorcycles with the Hero
Group and the other was with Kinetic Honda to
manufacture scooters. Honda sold its stake in Kinetic
Honda in 1997 and about a year later decided
to set up its own scooter manufacturing subsidiary.
At that time Press Note 1 was in force, which made
it mandatory for it take a No Objection Certificate
(NOC) from its existing JV partner, that is, Hero
Honda. The NOC was given with the understanding
that Honda will not manufacture motorcycles
whereas Hero Honda will not make scooters for
five years. Honda kept its commitment, despite
the fact that scooters was a declining market at that
time. To Honda’s credit, it grew and transformed
the market and today, they have about 55-60 per
cent share of this market.
The other agreement that was made at that
time was to set up a model committee comprising
a representative each from Hero Honda, Honda,
and from Honda’s newly formed Indian subsidiary
Honda Motorcycles and Scooters India Private
Limited (HMSI). The third agreement was that
Honda would manufacture the products based on
the individual specifications of both companies.
The conflict arose when HSMI decided in 2010 to
launch a 110cc motorcycle, the segment that formed
over 70 per cent of Hero Honda’s sales. Honda dismissed
Hero Honda’s apprehensions that HSMI’s
motorcycle will become a direct competitor to its
largest selling bikes – Passion and Splendor.
What were the main reasons for parting?
There were really three constraints on Hero
Honda which it had shared with Honda in 2008.
The first was the issue of exports. According to the
shareholder’s agreement signed in 1984, the joint
venture was only for domestic production and
consumption. Who would have thought then that
one day, this company will become the world’s
biggest player in the motorcycle segment? For
11 years starting 2001, Hero Honda has been the
world’s largest, with volumes growing from 1 million
to 6.2 million in 2011-12. The agreement was
subsequently, modified to allow exports of limited
products to a few countries, namely Sri Lanka,
Bangladesh, Nepal, and Columbia.
However, in 2008, when the issue of exporting
the Indian JV’s products to other countries came
up, Honda said that Hero Honda will have to
compete on its own since it could not influence
its subsidiaries abroad to import the JV’s
products. Honda’s subsidiaries are run very
independently and decide which countries they
want to source their products from. This was a
bitter pill to swallow for Hero Honda.
The second contentious issue was that of board
representation. Of the four Honda representatives
on the board, one executive director was the head
of Honda in India, to whom HSMI reported, and
the other located in Bangkok, represented Honda’s
two-wheeler business in Asia. The other two were
nominated by Honda. As directors on the board
of Hero Honda all of them had access to its plans
and strategies, while Hero Honda had access to
none of Honda’s plans. This, Hero Honda had felt
amounted to a conflict of interests.
In 2008, when the issue of
exporting the Indian JV’s products
to other countries came up,
Honda said that Hero Honda
will have to compete on its own
since it could not influence its
subsidiaries abroad to import the
The third issue was related to Hero Honda wanting
to do its own independent R&D and manufacturing
its own products. When it asked Honda to
be allowed to do so, subject to approval from the
head office in Japan, Honda’s response was ‘R&D
is like its heart and it can’t give its heart to anyone’.
Did you make a mistake in agreeing to some of
the clauses at the time of signing the JV?
As I said, in 1984 who would have thought that
the business that started with equity of Rs 16 crore,
of which Honda contributed only Rs 4 crore, will
become the world’s largest two-wheeler company?
Similarly, who could have imagined that the export
market will have opened up in 30 years, the way it
has? Every partner in the JV has some objectives,
which determine the terms of the agreement. However,
not everyone parts as amicably as Hero Group
and Honda did.
Did Honda want to buy out the Indian promoters?
Honda already had a substantial entity in India
- it reported a sales volume of 1.7 million last year
and should hit 2.4 million this year – over which
it exercised 100 per cent control. Besides, it would
have found the JV expensive to acquire where it
had only 26 per cent share.
How was the money raised and the capital share
transfer structured, and how were the private
equity people convinced to provide the funding?
This was not really in my domain but I can share a few things with you. There were two teams
that negotiated independently with Honda. One
was from the shareholders’ side and one from the
company’s side. I represented the company. My
main interest was to protect the company and the
minority shareholders. Let me tell you honestly,
I have no access to the deal that the shareholders
had with Honda, nor did I need to know. There
were a series of discussions between the promoters
and seven PE partners who also asked that the top
management be present at the meeting, so that they
can get an understanding of the company. They met
me, and the heads of marketing, operations, and
HR / Strategy functions. Following this meeting,
what transpired between them and Honda, and
at what price they had agreed to take the shares,
I do not know.
How was the parting with Honda?
When we parted, Honda could have told us
that since the deal was over, it will not share any
new technology with us, though we could continue
to use the existing technology. However, Honda
realised that we could not compete without a
continuous flow of new products and technology
during the 24 to 42 months it takes to bring out a
new product from scratch. It agreed to provide us
the products that were being developed for the joint
venture at the time of the split. These products were
not to be shared with its own subsidiary. People ask
me why did Honda sell its shares at Rs 740, when
the market price was about Rs 1480. This is how the long term 26-year relationship has panned out.
Honda’s gesture reflected its appreciation for
the fact that it was this joint venture that built the
Honda brand in India over 26 years of a win-win
relationship. This sort of appreciation you will not
receive from an Anglo-Saxon partner. For example,
a US company will, one fine day, say let us shake
hands, it is over. You keep on using whatever
technology I have shared, but from now on, do
you own R&D.
Honda’s parting gestures told us that it appreciated
us and it would have liked to continue its
relationship with us, except that we had ambitions
to go global and build our own products. And the
fact that through its directors, Honda had access to
all our strategies, even though they assured us that
strategic information was not shared.
What have you learned from Honda?
We have got tremendous learning from working
with Honda in many areas – the way they
conducted meetings, standard operating processes,
and processes. Our effort will be to continue these
practices. I will not hesitate in saying that if we are
responsible for establishing their brand, they have
given us a lot as well.
Now that you have dropped Honda’s name from
your brand, do you think that a domestically
generated brand will be strong competition in
the export markets?
We started the campaign to establish our new
brand on August 15, and I think it has been very
successful. During a visit to Pehelgam in Srinagar,
some of my colleagues wanted to visit a golf course.
But the caddy there would not allow us entry without
any ID proof, so I handed him my Hero Honda
card. But he rejected it saying that it had the old
name whereas the new name of the company was
Hero Motocorp. I then gave him my new card and
he accepted it. We are in the process of building
the new brand which is the Hero Motorcorp brand,
through an emotive TV advertisement which talks
of 1 billion heroes and a hero in each one of us.
What role did the board play?
Hero Honda had a very large board. As per the
shareholder agreement, the Indian promoters and
Honda had four directors each on the board. Since
we had an executive chairman, we needed half the
board to be independent. Therefore, the board had
16 members, comprising eight independent directors,
four Honda representatives, and four Indian
Around the time that we began to raise our
three contentious issues with Honda in 2008-2009,
we also sensitised the board, and the audit committee
actively discussed the matter as well. The independent directors played a very active role in
questioning Honda as to why the company cannot
grow further and why does it have to always be
dependent on Honda. When Honda said that it
could not give us the three things that we wanted,
the independent directors strongly advised that
Hero Honda should go to the next growth phase,
independent of Honda.
Wasn’t there even one member who said that this
is a risk for the minority shareholder?
A majority of the independent directors felt this,
particularly the chairman of the audit committee
and an independent director who is still on our
board. Their view was that it will be in the interest
of the company to go to the next level, even though
there were risks in going alone. As far as the risk
to the minority shareholder is concerned, we can’t
eliminate it, but we can mitigate it through our
actions and strategies.
Are you facing any distribution challenges after
removing the Honda brand name?
Our parting agreement with Honda is that we
have the right to retain the Hero Honda name on
our products as well as at our distribution outlets,
till March 2014. However, we thought that it was in
our interest to work immediately on strengthening
the new brand. So effective August 15, 2011, the
branding and name changed in all the dealership
and showrooms. This is being complemented by
very strong advertising. The next step is to change
the brand name on the product. From March-end,
2012, we have started changing the branding on
products to Hero, which will be completed in six
The next step is to change
the brand name on the product.
From March-end, 2012, we have
started changing the branding on
products to Hero, which will be
completed in six months
How did you handle the employee morale issue?
Did you have a non-poaching agreement with
Yes, we have a non-poaching clause, unless the
employee joins some other place before joining
Honda. For morale boosting the key was communication.
We announced the split on December 16,
2010 at 4 pm, and from that moment on, we held a
series of meetings that day and over the next couple
of days just to ensure that the news of the split went
out correctly and in the right manner. I headed the
communication committee that also included the
heads of IT and PR and we planned it minute by
minute. On December 16, the board meeting was
held at 2.30 pm, and at 3.16 pm the MD went live
on PCs of employees, dealers, and vendors. Then
between 4.00-5.30 pm we held a press conference,
and at 6.30 we met key vendors at the Taj Mahal
hotel. The next day on December 17, there was a
meeting with 200 dealers, and on December 21, 222
vendors attended a briefing.
What steps have you taken to beef up your R&D?
We have a transition period of three-and-a-half
years and we intend to use it well and be ready at
the end of it. Over the last one year, the number of
engineers in our R&D has increased from 175 to
about 280. Second, we have hired advisors and consultants
who are modifying the existing products.
Third, we are working with some design houses in
Japan and other parts of the world for new product
development. Fourth, the engine is the heart
of our products and we have tied up with world
leader Erik Buell who designs high-end bikes going
up from 250 cc to modify existing engines and
develop new platforms. We are targeting FY14 to
have our own products from our R&D. There are
newer entrants coming in like Harley Davidson
and this is why Erik Buell makes sense for us as
it is very futuristic and it is promising us our first
product in 2014.
What have been your competitive strengths?
In this market we always have to think ahead.
In 2008-09, the market tanked but we did well
because we invested in developing the rural markets.
Today, just under half our sales come from
During a slowdown, usually, advertising receives
the biggest cut and the pace of new product
introduction slows down. However, we kept on
launching new products and refreshing existing
products to keep the customer interest alive. When
the markets bounced back, we had a disproportionate
growth. We have also continued to invest in
increasing our distribution channel from just 2000
in 2006 to around 5000 now. The key is to do something
that differentiates you from competition.
What is the vision for the company post the split?
Our vision is that by FY 16, we should be a 10
million volume company, of which 10 per cent
should come from exports. Today, exports is
And what are the challenges in achieving this
If I have to focus on what are our red flags or
risk areas, there are many, but the following are the most challenging in my view. First, is the transition
of our brand from Hero Honda to Hero MotoCorp.
Our assessment after the first six months is that it
has happened very successfully. The next challenge
is to successfully change the name on the bikes. The
challenge is how can I stop a dealer of a competitor
telling a customer that the bike is not Honda, and
the quality has gone down? We are partly mitigating
the risk by launching new Hero products in
September. We also launched a new unisex Hero
scooter a couple of months ago. Third, the success
in this industry lies in continuously launching
products, including refreshed existing products
modified by R&D. If a company cannot deliver it,
then it risks failure. Fourth, one of the main reasons
for the split revolved around exports and to my
mind, after listening to analysts and consultants, it
will not be an easy job. In any market that we enter,
we will be anywhere from the fourth to the sixth
player as the big boys - TVS, Bajaj, the Japanese,
and the Chinese brands – are already present there.
Fifth, is managing our costs. Many people have
commented that with Honda gone, we will save on
material costs. I feel that at best, we can save only 3
per cent, which works out to Rs 1250. But in trying
to get this saving we may compromise on three
things that we are known for - quality, durability,
and after sales. Just to save Rs 10, if we replace a
component in our brand, I wonder what the impact
of this will be on our reputation.
How successful have you been in addressing
We have completed more than one year of transformation
and in the first year our sales volume grew by 20 per cent. In the previous year, we were
well ahead of the industry and our market share
went up. We could not source technology from
anyone other than Honda, so we could not even
set up a separate company to export.
What progress have you made on the exports
front? Have you launched your new brand identify
Rebranding in the overseas markets will happen
only when we start our exports. I feel we have to
manage the environment in our own country, and
then see how to manage outside. Doing business is
to manage the environment. For exports we have
shortlisted markets, and have started appointing
or recruiting distributors. The next step will be to
arrive at an arrangement with the distributors, and
to decide whether to ship completely built units
(CBUs), or set up an assembly plant. Before we commence
our operations overseas, branding will also
have to be done. There may be some rub-off from
Hero Cycles, which we export to about 75 countries,
but they are two separate products. Right now we
are 98 per cent focussed on the domestic market.
The only advantage of being late in the game is that
you can avoid the mistakes of others and we want
to make sure that even if we are late by another
six months, at least we do not make any mistakes.
On its pricing strategy and incentives to dealers…
This company’s philosophy of doing business
is slightly different; every associate becomes a part
of the company and we take moral responsibility
for their profitability. Of course, if an associate
commits fraud, it is a different matter. So people
feel connected and engaged with the company.
As a result, from December 2010, when the split
happened to January 2012, only two dealers have
At the top, what was the relationship and how did
it influence the final outcome of the company?
Honda is very hierarchical and accessing its
President is very difficult, but access to the Asia
Pac head, who holds the rank of the senior MD,
is 100 per cent. Communication at the operations’
level, such as, at the CFO’s and marketing level is
very high. I am sure the Asia Pac head had taken
the blessings of the President or some Executive
Committee that Honda has, before saying yes, to
What makes for a successful JV in your view?
I will say there are three or four principles that
can make or break a JV. First, the Indian promoter
has to be willing to accept the JV partner as an
equal. Second, the JV partner should have an
adequate say in the operations of the company. Third, the foreign partner should have adequate
representation on the board and must have a say
in the way it functions. In my experience the Indian
partners just expect the foreign partner representative
to just have a good life and leave the running
of the company to local promoters. Ultimately, this
is what creates frustration and then it all begins
You have to not just be fair, but also be perceived
to be fair by the JV partner. Whenever the operating
team made an important decision, say price
increase, we first informed the Joint Managing
Director, who was from Honda, and then the MD.
This assured Honda that its interest in the company
is being protected.
What is the CFO’s ‘dharma’ in a JV, based on
The CFO has to be totally non-partisan and
has to look after the interest of both the sets of
promoters. There were many instances when the
Asia-Pacific head was in one room, and the Indian
shareholder in another, and I, as CFO mediated
between them. The Japanese representatives always
felt that I was non-partisan and I did not take sides
with any party.
For example, Honda had four directors on the
board, who could not attend the meetings. I advised
Honda to have an alternate director who would attend
the meetings. Just before the deal, I asked the
Joint MD, who was a Japanese to tell Honda to ask
for a dividend before the deal since Hero Honda
was cash rich. The response from Tokyo was that
it did not need cash, and that they are Samurai
fighters and will generate their own cash. You have
to come across as fair and you will gain people’s
trust. When there are two parties, you have to find
Also, one has to be always correct. On December
16, 2010 when the separation was announced an
Aberdeen representative in Singapore, which held
over 9.5 per cent stake in the company, called and
said that Aberdeen did not wish to be an insider. I
told him I will share with him only what is already
in the public domain. Today, it owns =12.0 per cent
of the company.
On bankers and lenders’ consent to Hero postsplit,
and who is the winner 15 months after the
split, Hero or Honda?
We are cash surplus so we did not need anyone’s
consent. If you are talking of our promoters,
they have taken independent ratings from Crisil
on companies that they wanted to raise money in.
They raised money for the short term, and in the
meantime, they brought in private equity players
and retired most of the debt. It has been absolutely
win-win for both parties.
How has the labour conditions been at your
The Gurgaon-Manesar belt is seeing a lot of
labour problems, but our company is not affected.
The labour issues also boil down to how well do you
communicate with your people, and how fair you
are? For example, the minimum wage is Rs 5000,
but we pay our contractor much higher. I think the
last problem that we faced was in April 2006, when
some contract labourers stopped working. The fact
is that the differential between a permanent and a
contractual labourer in our industry, is very high.
My biggest satisfaction is that
I have seen the company grow
from less than half a million, to
nearly 7 million now, and that I
have played a role in it
What will be biggest challenges for you as CFO
over the next few years?
The biggest challenge will be to allocate resources.
There is unprecedented demand for capital
for initiatives ranging from R&D, spare parts capacity
enhancement, developing exports markets,
manufacturing capacity expansion, tying up with
technology vendors and re-branding, among others.
We are working with each function head to
understand what is his wish-list, what is essential
and what can be deferred. Though Hero Honda is
a cash-surplus company, the need to raise money
cannot be ruled out.
I suspect that these costs will put pressure on our
profitability as initiatives such as R&D and exports
do not yield results immediately. To offset these
pressures, our focus will be on costs, particularly
through value engineering. We now have flexibility
to change our vendors and re-negotiate prices with
them. It is showing results.
What have been your key achievements as CFO
of Hero Honda?
I think my biggest contribution was to convince
the board and management to pursue market share
in 2006-07 when the pricing war started in the market
putting pressure on margins of every player.
My argument was that if you lose market share, it
will be very difficult to win it back. I said even if we
sacrificed the bottom line for three to four quarters,
it will be worthwhile. I have been proven right by
later developments. My biggest satisfaction is that
I have seen the company grow from less than half
a million, to nearly 7 million now, and that I have
played a role in it.