New Delhi: After introducing a mass segment motorcycle, the Indian two-wheeler unit of Japan’s Honda Motor Co. is setting off on a fiercely competitive network expansion drive as it bids to catch up with—and eventually overtake —former partner Hero MotoCorp Ltd and Bajaj Auto Ltd in the world’s second largest market for two-wheel vehicles.
For starters, Honda Motorcycles and Scooters India Pvt. Ltd (HMSI) will allot dealerships to only those who have property near a Hero or a Bajaj showroom, according to five people familiar with the plan.
It has also started receiving applications from Hero dealers willing to desert that company to join the Honda network—a move that may go against the “gentleman’s agreement” in place between the former partners.
HMSI wants to set up a network comprising 2,000 dealerships, branches and authorized service centres by the end of this fiscal year, most of them in strategic locations identified by the company. It now has a network of 1,000 so-called touch points for customers.
“There is no such requirement put on paper by HMSI, but it is verbally communicating to prospective dealers that one of the main eligibility criteria to get a Honda dealership is to have land available within 500m of a Hero showroom,” said a top dealer for a two-wheeler maker. The dealer requested anonymity.
Honda and Hero ended their 26-year partnership, called Hero Honda Motors Ltd, last year. The Indian company changed its name to Hero MotoCorp after the parting of ways.
Having recently overtaken TVS Motor Co. Ltd as India’s third largest motorcycle maker, HMSI is taking aim at No. 2 Bajaj before joining the race with Hero in earnest.
With sales of 1.7 million units last year, HMSI has a market share of 15% in India’s 13-million-a-year two-wheeler market. Hero dominates the market with a 45% share, selling 6.4 million units last year, and Bajaj Auto has a 20% share with sales of 2.56 million in the domestic market.
While Hero MotoCorp has the capacity to produce 6.8 million units a year, Bajaj’s capacity is 5.5 million units. The cumulative production capacity at HMSI’s three plants in India will reach four million units by the first half of next year from 2.8 million now.
HMSI has also started publishing advertisements in regional newspapers mentioning locations where it wants a Honda dealership to come up.
These locations already have showrooms of its competition. For example, in a recent advertisement in regional newspapers in Andhra Pradesh, HMSI said it wants a dealership to come up at a location between Bajaj and Hero dealerships in the Gajuwaka area of Visakhapatnam.
Such advertisements have been published in the media in states such as Uttar Pradesh and Rajasthan as well.
“The company has hired marketing agencies to identify such locations and other growth areas in the country,” said another person familiar with the development on condition of anonymity.
“The idea is that if a customer is visiting a Bajaj or a Hero showroom, and if a Honda showroom is next to them, the customer by the virtue of showroom being closer will take a look at Honda products.”
In a response to a detailed questionnaire sent to HMSI on Friday, the company said it was entering the mass segment motorcycle market to increase its brand presence in India. Last week, it introduced a 110cc bike in that segment called the Dream Yuga.
“To support the availability of our product and services close to the customers, Honda is rapidly expanding its network through new dealerships, branches and authorized service centres,” the company said.
“We invite applications for network appointment through newspaper advertisement mentioning the preferred stretch...such locations are further identified by our regional teams based on local surveys and business potential. In some cases, it may so happen the preferred location is in vicinity of the competition, but location is not the only criteria for becoming a Honda dealer.”
A senior member of the Federation of Automobile Dealers Associations of India (Fada), requesting anonymity, called it a fight for market share.
“Honda is clear that whatever it was selling in the country till date was because of their association with the Hero Group,” he said. “Now they want to prove that even without Hero, they can increase their market share. But it appears to be a very competitive technique.”
In another move that may clash with Hero’s business interests, HMSI has also started receiving applications from Hero dealers willing to join the Honda network.
In a report prepared for investors, CLSA wrote that its analysts were on a road show with Honda in Asia recently on which the Japanese company shared its growth strategy.
“Honda has plans to expand its dealer network (1,000-strong currently) in coming years to bridge the gap with Hero (4,000 dealers),” wrote Abhijit Naik, Nitij Mangal and Christopher Richter of CLSA in their report. “As per Honda, they have been observing a ‘gentleman’s agreement’ with Hero and are not pursuing Hero’s dealers, but also said that this does not stop dealers from approaching them. Honda said that some Hero dealers have sent them applications for the same.”
Naik and Mangal declined to comment on the report because they aren’t authorized to talk to the media. Mint couldn’t contact Richter.
However, a Hero dealer joining Honda may affect the principle of “healthy competition”, which both the companies had agreed to pursue when they announced their separation on 16 December 2010.
In the email response, HMSI said that “as per Honda’s mutual understanding with Hero, we do not approach or entertain any applications from their dealers”.
A Hero MotoCorp spokesperson said that as a matter of policy, the company does not comment on the competition.
“It has been more than a year now since we began our solo journey and we have only added more dealers to our network during this time—which is a clear testimony to the level of motivation and dedication of our dealer family,” the spokesperson said in an email. “With close to 5,000 touch points across the country, we have the largest distribution network in the industry, and we will be adding 400 more touch points by the end of this year.”
In its report, CLSA cited the Honda management as saying it had thus far avoided introducing bikes in direct competition to Hero’s offerings, but that will change now. “Honda intends to be very aggressive in the executive bike segment with multiple bike launches over the next two-three years,” the report said.
The company’s aggressive network expansion plan comes after last week’s rollout of a new brand campaign.
HMSI has hired Bollywood actor Akshay Kumar as its brand ambassador. The company has reiterated that it needs to penetrate deeper into the Indian market to power the next phase of growth.
“A capacity of four million at full utilization would imply 2W (two-wheeler) market share of 22% by FY15 (15% in FY12) assuming 10% industry CAGR (compounded annual growth rate) over FY12-15,” the CLSA report to investors said.