New Delhi: Hero group’s announcement that it is buying Honda Motor Co. Ltd’s entire stake in their joint venture, Hero Honda Motors Ltd, at a hefty discount had analysts asking if there was an increase in royalty payment in the fine print. Hero Honda’s chief financial officer Ravi Sud said in an interview the royalty payments will remain about the same. Edited excerpts:
Can you bring some clarity on the royalty issue?
If you look at financial year 2009-10, our royalty-to-net sales was 2.7%. In the current year, it is likely to be anything between 2.8% and 2.85%.
Payment pattern: Hero Honda CFO Ravi Sud.
Now, if we continue to grow between 8 and 9% every year, which according to me is a very very fair assumption... the royalty, irrespective of the volume, will be 2.7-2.9%. This is as far as total existing products are concerned. So, royalty will remain the same till June 2014. After June 2014, royalty becomes zero on all the existing products.
Honda will continue to supply us new products even in the future, for which there are two types of payments. One is the model fee, that we call the fee for the development of the model. This is a lump sum payment. It varies depending upon the quantum of work involved in the development of the product. If the product is on a new platform, it could be as high as $5 million. And if it is a small modification of an existing product, this could be $100,000-250,000.
The second payment is the royalty. Now, the highest royalty which we have paid in the last 27 years has never exceeded 5%. Even on new products, royalty will not increase more than 5%. I am saying we have not paid more than 5% royalty to Honda on a single product ever.
Does Hero group have its own research and development capability?
The basic designing of the products used to be with Honda. The process is we will do the market survey in India, we will identify customers’ requirements and try to give broad specifications to Honda. They will develop the prototype and once the product is tested and successful, then they will send us the drawings. Based on those drawings, we will develop the components, identify the vendors and make the product suitable for mass production here. In a nutshell, as far as capabilities beyond designing are concerned, they do exist in the company because we have been converting those drawings into components, testing and doing some value engineering. But as far as designing a new product is concerned, those capabilities don’t exist.
What is the development as far as acquisition of technology is concerned?
The activity has already started. But I think it is too premature to say anything at this time. What is the most important part in an automobile? That is the engine. And you know who are the global peers for engines: AVL in Austria and Ricardo in the UK. That could be one option. Other than that, there are a lot of small companies and design houses. One can tie up with them. You have some experts who have retired from their organizations... we are looking at getting them for the development of a new product. So, all the options are open at this point of time.
What are your plans for exports?
We have formed some teams in the company to study and understand the markets... understand the customers and the types of products which they will be needing and the amount of investment. That study will take at least 8-10 weeks.
Branding will have a very important role.
Rebranding exercise is extremely important, on which...work has started. It will be decided in four-six months.