At a time, when its major rivals are diversifying into three-wheelers and cars to shore up sagging margins and falling two-wheeler sales, Hero Honda Motors Ltd, which makes half the two-wheelers in the country, is concentrating on boosting its market share. While it has had no blockbuster product after the decade-old Splendor, the largest selling bike marquee in the world, the company plans to introduce as many as 12 new models, including tweaked versions, in the next two years to retain and increase its customer base. In an interview with Mint,Pawan Munjal, managing director of Hero Honda, talks about how he will like to export more motorcycles, the importance of market share for his company and the relationship with Honda Motor Co., its joint venture partner. Edited excerpts:
While rival companies have reported a dip in sales, you have managed to avoid that and posted an increase in volumes in 2007. How have you managed to do it?
Well I am not going to give away all the secrets. But I think one or two big ones - you’re right. The market in the calendar year has seen about a 6% dip. But Hero Honda in this period has grown by almost close to 2%. So there is a swing of about 8%, I would attribute this to two main reasons. One is the equity of the company, the reputation, the performance of the brands, the products, the faith the customers repose in both the company and the products, and number two, I think we, on a very regular basis, have gone on refreshing our products, we’ve gone on putting in new products, not in just any one segment, but we’ve gone and done that in all three segments because we believe that all three segments are important to us, all these segments are… two of them are large, the third one will grow faster than the other two, because the base is smaller and some of us in the industry are putting a lot of focus in that third segment, which is the premium segment. And also we believe the customer also would like to upgrade, there are a lot of those young, discerning customers who want to get into that segment, who want more and more sporty and smarter bikes.
But still if you look at your competition, they’ve also been doing the same thing, coming up with refreshes, new products… but still we’re not able to get a sense of how you’ve been able to succeed
Well the obvious difference I can see is that the customer has, for reasons best known to the customer, has chosen our products. The new ones I’m saying. Let’s say look at the volume, the Hunk has been a big hit. Maybe what we’ve done differently, let’s say with the Hunk is that we’ve seen success, yet we’ve not gone out there and flooded the market. We’re doing this gradually. Let the market take it in, gradually absorb it all and then we keep on increasing volumes, which we are.
Top priority: Managing director Pawan Munjal says Hero Honda aims to not just defend, but increase its market share with new models.
What sort of volumes do you have in the Hunk?
Right now? I wouldn’t know the exact numbers, but the fact here is that the premium segment... in our terminology, the premium segment really is 150 cc and above. Of late, in ads you see, the competition has started calling 125 cc the premium segment because their one new product which has come out in the 125 cc, they call it a premium product. It was almost stagnating, not really growing. With the Hunk coming in, and with us putting in a lot of focus in this segment, we’ve increased, doubled our market share in this segment. And also this segment has grown – the premium segment.
So what kind of market share do you have in the premium segment right now?
Well, we’re still not where we want to be because the leader still is the competition in this segment. But as I said, we’re slowly gradually getting there.
Hero Honda has one blockbuster product – the Splendor, which you launched in 1995 and there is a feeling that you’ve not been able to launch another blockbuster product that matches the Splendor. What do you have to say to that?
What I think is that you get these blockbusters one off in years and decades. This is not something which happens every other year. Because it’s a blockbuster it is lasting so long. Because it’s a blockbuster, a superstar. But what we’ve gone out and done is that we’ve widened the range. We’ve widened it so much and so effectively that we’re able to service whole lot of different niches with every product. There’s a CD Dawn, there’s a CD Deluxe, so everything is doing something different for the customer. If we had three blockbusters, we wouldn’t need this whole range. Right? So we’re doing that with this very this very wide range, very vast range.
Does that sum up your strategy to defend market share?
Grow our market share, not defend. Grow our market share. Which we’ve done. In this declining two wheeler market, Hero Honda has grown its market share to over 50%. And you might remember it had come down to the lower 40’s. 46-47. It’s also come to 43-44. There was a time when there was a talk that probably Hero Honda will become number 2.
But going forward, competition is coming in, some of them are small, but others are some of the larger firms in the world market…
We never dismiss or discount all this, what’s going on. It’s not that it’s going to happen now. It’s been happening for the last many many years. They’ve been there in the market, they’ve existed. Some are new, some have been here in the form of alliances, joint ventures etc., some are totally new. We’re going on expanding our complete portfolio. We’re going on refreshing and adding new products to the portfolio. See what I’ve been saying during expo also that… I don’t know what the media has written about this but if you look at our stand at the expo, you don’t see any brand new products which are going to be launched. But you’ve never seen that at Hero Honda. Because Hero Honda as a policy so far has always shown its new products to the media, to the dealers only at the time of the launch, the real launch. Which is why we’ve only tried to showcase what the company’s strengths are. And made a, we believe, a very nice looking stall. In the last two years, 24 months between the expo 2006 and expo 2008 in Jan, we’ve had 18 different launches. And going forward, in the next 18 months, we’re going to have another 12.
Would these include variants as well?
Of course. These are not just new launches. There will be a combination of new launches, refereshes and variants. And this is going to be in all the three segments. Before you ask me, we will continue with our stand and focus on the 100 cc the entry segment.
The competition says you’re the only player who’s able to make money in that segment. How’s it possible?
What I’ve been saying is that at Hero Honda, we are looking at a consolidated bottomline. Some products make good money for us, some don’t make that much money, and sometimes, considering the market, considering the competition, considering the customer, we don’t make any money. So with a combination of all of this, what you look at is the consolidated bottomline. Because it is generally said and felt that the premium products are expected to make very high margins. It’s possible that in some cases, even the premium products are not making that much money. But maybe the product in the executive segment is making money.
So for you, market share is paramount?
Sometime back, I think little over a year back, it was being said that someone else would become number 1 and we would be left behind. And that somebody else was coming very close to comfort, but that’s the time, in the company, the senior team met and discussed that we will go for the market share. That’s what we did and achieved the results. And now that we’ve reached a certain situation of the market share, when in the next 3 months we sit down and deliberate for FY 08-09 when we prepare our business plans, our budgets, we would sit down and once again review this.
Don’t you think that this increase in market share has come at a cost of margins?
It may have. As I said, as a company we took a decision that our number 1 priority will be market share. And which I’m saying will be reviewed now.
So this year we might see Hero Honda concentrate on something else totally?
We’ll be starting to sit down and look at our business plans for next year, let’s see what comes up.
But what was the thought behind this market share improvement thing. You decided that was your priority. Why did you decide it was your priority?
Well we wanted to remain the leader for sure. That was the priority.
The latest industrial production numbers are showing a dip actually. So how is Hero Honda preparing for this? Because you also have a third plant which is near ready to roll but you had to hold it back for sometime last year..
The third plant is not near ready, it is absolutely ready to roll and we’ve decided that come April, we’ll start regular production there. Not only that, we’ve already put in half a million installed capacity there and the plan is that out of Haridwar to roll out that number
So does it mean that you might scale back production in your existing plants or you’ll be operating at full capacity in all plants?
Well I hope the market is able to take in all of this. In case it doesn’t, then we’ll come up with solutions to some how try and utilize the capacities in Dharuhera and Gurgaon also.
What I’m saying is that if the demand out there is not so much, the team is sitting together and thinking of what/ how these machines can be used to produce what. I don’t have something to give you now that we’ll be producing such and such thing over there, but I’m saying that we have a whole lot of flexible machinery.
Flexible machine means ultimately it will produce only motorcycles, isn’t it?
So you’re speaking of components?
We’re open to look at anything. Idea is not to keep the equipment and manpower idle, utilize capacities somehow or the other.
But I mean I’m still not getting clarity on what you’re trying to say.
Because I’m not clearly telling you what we’ll produce there. The team is actually working on ideas. What can be produced out of this plant. What else can be produced which can be marketed
But the new plant will be then the priority plan that will produce the full capacity.
It must. We’ve already said that we’ve gone to Haridwar Uttarakhand with the objective of utilizing the fiscal benefits. And if we’re starting production and the benefits are maximum for the first ten years; next five years full income tax, then 30% etc, we must get the best out of there, which is why along with us, we are taking a whole lot of ancillaries to get the maximum amount of value add in the state.
In hindsight do you think the appreciating rupee has benefited you, and maybe given you more leverage to offer steeper discounts?
Well on the exports front, very frankly it’s part of our agreement between Hero Honda and Honda, the technology partner, that we’re not completely open to export to all over the world, wherever we want to. Our partner has manufacturing establishments all across the world, the partner has let’s say distribution network all across the world and if like us, every Honda company or every Honda venture wanted to export all across the world, there would be chaos. Obviously from their point of view, they have to look at the territories, how it’s being handled. We keep talking to them, trying our best to get into newer markets where we believe that there is good scope good volumes and where India as a manufacturing base we do believe that we are an economical manufacturing base yet giving the kind of quality that they would want. So as and when that happens, we’ll be happy to take on more volumes on exports.
This year, you’re not being sure how the domestic market will respond to your whole capacity, aren’t you aggressively pursuing opportunities in overseas markets?
Well we of course are. But as I said that region is looking at the manufacturing facilities in that region.
Would you be exporting kits or something? Your machinery would also be operating at full…
What is being now discussed is some of these ideas as well. When you say components, we could possibly look at the export of components, possibly components into the after market here. There’s going to be a whole host of ideas which will be examined.
As a country’s largest two wheeler maker, what’s your outlook for 2008?
Well sitting here in the present environment, especially of the prevailing interest rate regime and the prevailing situation with the financing of loans for two wheelers which has still not changed for the last so many months. Which is the cause of which the industry has declined. Number 1, as an industry we are on a continuous basis, requesting the government to do something there. Post that meeting, there was some small --- done during Diwali. Once again, we believe that FM has told the banks, some does read about stuff, but it has not really happened. But personally I believe that something would happen. I’m not expecting the interest rate to come down to those levels, but some support would happen. After all it’s a huge market and it’s a huge revenue for the government as well. They also lose. So we are hoping that interest rate…We’re also requesting government should somehow support the micro financing in rural areas, smaller towns where people should be able to easily avail financing. Then again in the last two budgets, we’ve seen the thrust and focus on the rural sector, on the agri sector, and I personally think that would continue, and I’m also hoping and wishing that they would also reach the funds there. Once the true implementation takes place; that’s when one starts seeing results. Infrastructure has to... It’s happening but it’s happening at a slower pace than I’d want it to.
This lack of finance which people have been talking about, which has effected the whole industry and people say it has effected the rural areas more than urban areas, so would it be naïve to conclude that most of your sales are in urban areas because despite the lack of financing, you have posted a two per cent increase in sales?
Not most of our sales, but a lot of our sales are in rural areas. And we are putting even more thrust in the rural areas at this moment. Within the company, we’ve created a separate vertical which looks after the rural marketing because we believe that more and more sales will be coming from small towns and rural areas.
Right now, what’s the rough divide?
It’s very difficult. You could say it could be 45-55% roughly around the same. Because a lot of times people buy from urban areas but actually the bike goes into rural areas…
But are you tying up with local financiers because they…
We have tied up with local financiers also. While at the top we have so called preferred financers - the banks who we’ve tied up with, who are supporting our dealerships, people are sitting there and financing instantly, but then they’re not doing it in all cities, all small towns, all dealerships so we have to get hold of local financiers, banks in that particular state… or even grameen banks and all that…we’re using those facilities.
I’m still trying to figure out lack of accessibility of finance is common but you seem to have overcome that problem somehow because you’re still selling a whole lot of bikes?
Yes in fact some of the banks have also withdrawn from a lot of places. Delinquencies. Because they just went out left right and centre, kept on financing and suddenly this delinquency has hit a lot of these banks.
So are you as a company doing anything about that, as in…?
No, actually we’re directly not involved with financing at all. While we have a finance company called Hero Honda FinLease but even that company is not directly involved in financing. Hero Honda Finlease appoints the preferred financiers, who in turn takes…
Your immediate rivals are diversifying into three wheelers, LCVs and four wheelers. What about Hero Honda? As a company, as a group, what after two wheelers for you?
Hero Honda will stay with 2wheelers.
Because you believe that this segment will continue to grow in the country?
Also when you talk of three wheelers, actually now in the country today or two years later, you will have a number of companies who will be producing and selling three wheelers and I don’t know how much demand there really is. And one of the areas that the Nano car could impact, could take away from, is the three wheelers segment.
But for Hero Honda as a company, it is strictly two wheelers?
You’re not thinking of diversifying at all?
As of now, No.
Which means I’ve to call you every 6 months and ask the same question
You’ve seen that we have as a group, the Hero group, we’ve got into a JV with Daimler for LCV business. Because of the nature of our agreement, we can’t be doing whole lot of things in Hero Honda.
But will there be sort of synergies between Hero Honda and the trucking venture. It seems a little bizarre – two wheelers and trucks, but could that be possible?
I’ve said this actually, it’s also been reported in the media, already quite a few of our dealers have diversified into different kinds of automotive products – it could be a car, could be a LCV or even trucks - so that we will surely take that forward. From our dealers’ perspective, they also look at us always for new businesses, new opportunities, diversifications, so when the group has now gone into diversification, I am sure many of them would want to take on the franchisee.
We’ve not had many details of the deal…
Yes, details are not available; actually the details are being worked out right now. I think it is going to take 2 to 3 months before we actually anything can be given out…
Any guidance on what the Hero Group’s stakeholding will be..
I think it’s between the two partners – agreement to stay quiet, till such time that the final project plan is frozen.
Not even if it’s going to be a listed company?
Beyond what has already been said, nothing. Even the products, the location, the size of the project, investment everything. It’s not that it hasn’t been worked out, because the FIPB application was made with Daimler but the final business plans is now being written down.
But the objectives of both the partners (Hero and Honda) at times seem to be a little bit divergent. On one hand, you’re talking of 50% while Honda has been saying that it’ll be happy if Hero Honda and HMSI can together have a combined 50% share by 2010.
That used to be…even I used to say that. Before this kind of steep growth that Hero Honda saw, we’ve already crossed that figure. Now obviously we have to look at a higher target, higher benchmark, or we say we don’t increase our capacities, we just produce this much, and somehow grab that market share and stay there. No, we are ambitious. We would like to go for higher market share. I know of Honda themselves – in some countries, they have 70-80-% market share.
But given the fact that they are more into scooters and you are more into motorcycles and everybody is talking of congestion and about how scooters are going to make a comeback and dominate the urban traffic and the rural people will need more sturdier motorcycles. So do you think that’s a possibility too?
Even in the urban areas today, the bigger seller is still the motorcycles. You’ve seen at the Expo, you’ve seen the trend… people have tried to show which direction they are going. All those products are not for the urban market. We clearly are going to stay focused. Like I said, today the market is almost 50-50 rural urban. We’re not going to go in for only 50% of the market, we are going to go for full market
Given the fact that they control all the R&D, and the new models, do you think that you’re playing this game with one hand tied behind your back, you’ve been at a little bit of a disadvantage?
As I’ve been saying this in the past also, we’ve so far not seen any indications where any type of technology is not being given to us, new products that we want are not being given to us. It’s all coming in and we have an agreement on till 2014. Which is why things like the Fuel Injection - the idea was to showcase technology. Technology is there with us. It is coming in, with the Hunk, with the new products..
So the only drawback we can talk of is the restrictions on exports?
You can talk about it if you like to, but clearly on exports, the competition is far ahead of us, there’s no denying that. When I say that if I had the full freedom, like here, I’d have liked the leadership there also, in the exports markets also. And I’m saying that if I had the freedom I’d have done that.
Don’t you think this restriction will hamper the company’s bottomline?
Well actually, I don’t know how much the exports are helping the bottomlines. Because in the exports markets, in a lot of cases, you’re competing with the Chinese as well. If you want to export a few hundreds, it’s fine. But if you really want to get into the number game like some of the other people have been talking about - they’re going out there, competing with very established players, the Hondas and the Yamahas, who are major major players, well entrenched in those markets for years and years. It’s a great thing if our friends can actually grab a good market share, because they can surely with inputs from here, and parts coming in from here, they can surely produce at lower costs. And also in some of those countries, people have been enjoying very high margins. There are possibilities but then going into those countries, establishing yourself, there are a lot of costs also.
You find it easier to play in the home market and be the king?
No, like I said, if I had the complete opportunity and freedom. I would like to go out. But as a company out of India, yes, I would like to go out and become a global player, and not remain just a domestic player. All said and done I also feel very very proud that an Indian company has gone out and done what it has, with the Tata Nano car.
Tata Nano has sparked a whole lot of talk about frugal engineering and low cost products, suddenly people are giving old examples about air conditioners. Voltas….Nokia… Can motorcycles can go more and more deeper and deeper, cut costs more and more further?
All I can say is that we are forever working on these things. Whoever thought that in today’s times, you could’ve had a motorcycle for 30,000 rupees, and with the kind of specs and performance that we give? That’s important. You can produce a product in any size but it must come with a set of quality and certain minimum specifications and a certain minimum performance. Today you have a requirement of emission norms, you have requirement of very high fuel efficiencies that people want, and as you go forward, you have every 3 years, 5 years, you have new norms coming in, which are tougher, stricter, you’ve got to put in more devices like Fuel Injection, other stuff, everything costs money. There’s no legislation but 2 or 3 years ago, we’ve gone out and taken out all asbestos from our motorcycles and scooters. There’s no asbestos in our brake lining and clutch lining. While we’ve done that and replaced it with some other stuff – let’s say the brake, we’ve had to increase the size of the brake to get the same breaking strength – our cost has gone up. Same way with the clutch. So while you’re doing everything else, you’re also having to increase your costs because of other stuff. Safety, environment. Everyday there are new safety legislations coming in. Which is fine. We’re very much for all of these things. As I said, nobody asked us to do this asbestos thing, we did it ourselves. Because we care. Because we believe that we have this moral responsibility to the society, to the customer.
Is Splendor still the largest selling model in the world?
Yes, it still continues to be the single largest two wheeler product.
So that plus the niches – that’s the way for you forward? Isn’t it?
And more and more focus on the youth. The penetration is very low. Even the urban market penetration, as per the NSS study - apparently it’s very low. Even in urban market less than 25%.
But again you know analysts are saying that the Tata Nano and Bajaj small car - the urban markets might move towards these small new cars, the rural markets will become the main markets for two wheelers. Is this how you see it too?
No. I don’t know. I don’t see it that way. Between the car - the Tata Nano and the two wheeler, there will always remain a huge differential in the operational cost. The fuel efficiency will always remain a huge factor. Then there are maintenance costs. You have more and more issues of parking your car and congestion on the road. I had to go to the NDTV function the other day… just from my office (in Delhi suburb Vasant Vihar) to Taj Palace, just imagine how far it is... it took me more than one hour. So all of these things also impact. People think about these things. Fine, the first reaction of everyone on the road if you put a mike in front of them … this is a one lakh car, would you want it… Well why not? Why wouldn’t he want it? Plus the space in the house… where are people going to put all this stuff?
Hero Honda has always been associated with cricket in India and I’m told that you’re one of the 88 bidders for the Indian Premier League. What are your plans for that?
We’re one of the 88 who have bought the document. I don’t think all 88 are going to come back and bid. To know what it is, to learn more and also not to be left out of the bid, you need to buy the document. But beyond that, frankly I’ve been so very tied up and (with) traveling that only after this I’m going to be sitting down and taking (stock)… I have interest. Let me say that. With the kind of interest the company has, I have in sports, cricket, etc., surely there is interest. But we are still looking at the business model, looking at all of the stuff that’s going to happen there, what is the revenue, what is the expenditure, etc, does it make business sense. Post that, we’ll take a final call.
But what benefits do you hope to gain from it? Is it purely branding?
These are two different things. The franchisee and branding are two different things. You can’t combine these things. You can’t expect branding out of franchising. Branding one would have to buy from the franchisee, so at the moment one is only looking at the franchisee and what is the business model per se, what can it do?
They haven’t told it to you clearly?
It’s not clear from them… everyone has to work it out themselves
But you’re sure it has to be profitable for you by the end of the day?
It can’t be a money losing proposition, not in the long run. But (what) I understand is that, (in the) first couple of years, in all probability, one would see money going out. But then one really needs to see far into the future what’s going to happen.