Haridwar, Uttarakhand: Two-wheeler maker Hero Honda Motors Ltd, which sells half the motorcycles made in India, opened its third factory here and said it would invest an additional Rs150 crore ($37.5 million) amid concerns of overcapacity in a market where sales are declining.
The company added 500,000 units to its capacity of making 3.9 million units a year and said it would use the new investment in doubling its capacity to one million units by the end of 2008 and tripling it to 1.5 million units by 2010.
Riding high: Hero Honda executive chairman Brijmohan Lall Munjal (left), managing director Pawan Munjal (right), and chief operating officer (Asia and Oceania) Fumihiko Ike at the Haridwar plant.
Under a Central government law, companies that build factories in the hill states of Himachal Pradesh, Uttarakhand and Sikkim get an excise tax holiday for 10 years, income-tax exemption for five years, and other incentives, as part of a plan to encourage manufacturing in these states that have typically been laggards.
This has prompted a host of companies to put in money in these states in the recent past, including Hero Honda’s rival Bajaj Auto Ltd and Tata Motors Ltd, India’s largest truckmaker. “The fiscal benefits will help” its margins, said Hero Honda’s managing director Pawan Munjal. “That’s why we are here and ramping up capacity fast.”
When asked if it would create excess capacity, Munjal said, “Until a year ago, we were catching up with demand. Now the situation has reversed,” adding that “if the present situation (of inflation and higher lending rates) continues, then it’s a challenging time for all of us.”
Two-wheeler sales have been declining in the country. February, for instance, marked the steepest monthly decline in two-wheeler sales in eight years, as buyers kept away from the market ahead of the cut in excise duties in the Budget, and as banks were reluctant to lend. Sales fell 14% in February from a year ago, and while they didn’t do as badly in March, bike makers are bracing for a slowdown in an economy where inflation is high and consumption is cooling.
Hero Honda, the market leader, has started a “Project Samadhan”, loosely translated as “Project Solution”, to figure out ways to utilize the capacities of existing plants, including making auto components.
Munjal also said higher raw material prices were squeezing the company’s profits. Prices of commodities ranging from steel to rubber have risen in the past few months, but given a tepid market, two-wheeler makers have not yet passed on that cost. In February, the government tried its hand at propping up consumption by slashing duties on bikes by 4%.
Munjal said the company “will look at its complete range of bikes and take a view on rationalizing prices” in view of the “adverse effect of raw material prices and taking a view of the excise benefits.”