Macro-environmental Drivers of Market Attractiveness:

Application to an Indian Joint Venture

Rushi Anandan, SIMSR

How should firms gauge market attractiveness? This case illustrates the use of

STEEPLED analysis, a popular macro-environmental analysis tool, via its application to

the Hero-Honda joint venture for manufacturing two-wheelers in India.

In 1984, Hero Group of India signed a joint venture agreement with Honda Motor

Corporation, forming Hero Honda1. The facility was to be located at Dharuhera in North

India. The shareholding pattern was: Hero Group 26%, Honda Motor 26%, Financial

Institutions 37%, Others 11%.

This strategic alliance, between an Indian firm that got its start making bicycle parts, and

the world’s largest motorcycle manufacturer, signaled Honda’s foray into the Indian

market for motorized two-wheeled transport. Though the market had already attracted the

entry of competitors such as Suzuki, Yamaha, LML and Kinetic, Honda’s top

management team and Hero’s founder and CEO, Brijmohan Lall Munjal, envisioned

substantial promise in the Indian two-wheeler market.

1The JV was terminated in December 2010, primarily due to Honda’s predilection to go it alone in the
fast-growing Indian market, after imbibing market learning from its domestic partner.

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Gauging Market Attractiveness

A cursory overview suggested that the Indian market was attractive on account of its

absolute magnitude and high growth. India could lay claim to a population of roughly

730 million in 1984, growing at a rate of 2.1 per cent per year. Extrapolating that rate of

growth, the Indian population was projected to grow by 160 million people in the 1980s

and to exceed 1 billion people by 2000. Not only was the total population of India

enormous, but the Hero Group also concluded that the adult age group with the highest

propensity to purchase two-wheelers (15–65-year-olds) was expected to increase to more

than 500 million by 1990 and to an approximate 700 million by 2006.

The birth of the Indian two-wheeler industry can be traced to the small beginnings that it

made in the early 1950s when Automobile Products of India (API) started manufacturing

scooters in the country. Although API initially dominated the scooter market with its

Lambrettas, it was soon overtaken by Bajaj Auto Limited. In 1959, they obtained

government approval to manufacture two- and three-wheeled motor vehicles, under

license from Piaggio. The license raj that existed prior to economic liberalization

circa1980s forbade foreign companies to enter the market, making it a protected playing

field for domestic competitors. Local players were subject to a very stringent capacity

licensing process, and imports were tightly controlled. This regulatory labyrinth created a

monopolistic market, with customers often forced to be waitlisted a decade just to buy a

scooter from companies such as Bajaj. The winds of change began to take hold in the

mid-’80s when the Indian government started permitting foreign companies to enter the

Indian market through minority joint ventures with domestic alliance partners.

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Two-wheelers had become the standard mode of transportation in many of India’s large

urban centers. Increasing rural-urban migration, urban population density, and the lack of

four wheeler-ready roads were all factors that increased demand for two-wheelers. The

two-wheeler was typically a prized possession in the average Indian household. It was

normally used to transport both people and goods, substituting for a car that was

prohibitively expensive. While a two-wheeler normally cost around Rs. 40,000, an entry-

level car was priced around Rs. 300,000. Two-wheelers were durable, often used lasting

more than a decade.

However, convincing Honda, a first-world company, to commit investment to a market

where 35 per cent of the population was in penury, was more difficult. An extenuating

factor was growth in the per capita incomes of the population, expected to grow by 5.2

per cent over the next ten years. Importantly, even in the early 1980s, the country was

wealthy enough to support an infrastructure of 1.4 million kilometers of highway.

However, in global terms the market was far from mature. Industry watchers reported

that India had a penetration rate of less than10% as of the mid-1980s (87 two-wheelers

for every 1000 adults), far below the penetration rates of other developing countries.

Obviously, bike manufacturers had substantial scope to grow.

Marshalling the implications derived from these realities, Hero convinced Honda that a

large population coupled with an emerging-market economic situation constituted an

excellent setting for affordable, motorized, two-wheeled scooters. Honda also saw the

potential. With air pollution from industry and vehicle emissions topping India’s

environmental concerns, governmental authorities had become increasingly strict

regarding emissions regulations. These regulations made environmentally friendly

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vehicles more attractive, and two-wheelers with their fuel efficiency and low emissions

fit the bill. Honda also recognized that Asian countries such as India and China, with

their huge populations and relatively low levels of economic development, were likely to

embrace two-wheeled vehicles as a popular means of transport. In short, India offered a

large and growing market for two-wheelers, supported by several favorable macro-trends

that bade well for the future.

Honda’s Entry Strategy

In consonance with FIPB regulations, Honda opted to join hands with the established

bicycle manufacturer Hero Cycles, a company with proven manufacturing, distribution

and management practices. Founded by Brijmohan Lall Munjal and his brothers in 1945,

Hero Cycles was an ideal partner for Honda. In business for four decades, Hero had

manufactured and distributed bicycle parts and bicycles in India for as long as Honda had

produced motorcycles. With strong distribution channels and supplier networks, the Hero

Cycles name was reputable. The Munjal family’s management practices had led to

exceptional results, low employee turnover, and zero industrial unrest in their history.

The company used modern manufacturing concepts such as just-in-time supply chain

management, team-based manufacturing performance evaluation, and rigorous quality

management programs. Most importantly, Hero’s management brought an intimate

familiarity with the Indian economy, government, business culture and people.

Macro-Trends and the Two-Wheeler Market

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In the 1980s, the motorcycle with a four-stroke engine was Hero Honda’s most popular

two-wheeled vehicle, providing inexpensive and reliable transportation to India’s largely

rural population and growing middle class. In two-stroke engines, the fuel–air charge is

drawn through an unlubricated crankcase, and the lube is separately introduced into the

air-fuel mixture to lubricate engine parts. Exhaust and intake processes are conflated, so a

third of the unburned fuel–air charge can be discharged. The fuel economy advantage of

four-strokes derives from the use of crankcase lubrication.

However, four-stroke engines need a camshaft and valve train which impose a volume

and weight penalty over two-strokes, and are also therefore more expensive to purchase.

But four-stroke engines were superior to the incumbent two-stroke engines in multiple

areas. Not only did they produce less pollution than the two-stroke engine, but they also

provided greater fuel-efficiency and were more long-lasting than the more powerful two-

stroke engine. The total cost of ownership diminished considerably due to the

ameliorated fuel efficiency, product durability and lower repair costs. Despite burgeoning

pay packets, frugality and thriftiness were essential values of India’s middle-class

consumer. Hero Honda had the first and for many years only four-stroke vehicle (except

for Royal Enfield’s 346 cc four-stroke). As its early ads said, ‘Fill it, shut it, forget it.’

Hero Honda had seen something that all the motorcycle manufacturers had missed. The

shift in demand was towards the consumers originating from rural areas, Tier 2 and 3

cities, and the middle-class office-goers in Tier 1 cities. For these customers, the fuel

economy of a four-stroke engine was a bigger draw than the looks and the power of two-

stroke bikes.

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Evolution of Two-Wheeler Preferences: From Scooters to Motorcycles

Scooters, on which a 100–150 cc engine is enclosed in a metallic body below the seat,

were the preferred vehicle type amongst two-wheelers, on account of their secure luggage

space, the possibility of carrying two passengers, and the provision for a spare tire.

Besides, women risked getting their garments tangled in the exposed wheel spokes of

motorcycles. In 1988, to understand its market better, Hero Honda conducted an

extensive market survey, collecting some 25,000 responses. The survey told Hero Honda

a surprising story. Scooters were no longer the vehicles of choice. Motorcycles were to

become the two-wheel vehicles of the 1990s. The principal reasons were the combination

of a shift in demographics and increased purchasing power among the youth.

With burgeoning numbers of young professionals with large disposable incomes, and

college students with affluent parents, the need for a family vehicle, with the advantages

discussed earlier, declined, with a corresponding growth in the demand for individual

mobility. With their more rugged appearance and higher road speeds compared to

scooters (because of larger diameter wheels), motorcycles respond to these changing

needs. Also, cultural changes, in terms of women’s clothing, have made motorcycles less

problematic. Bikes were perceived as more stylish. Hitherto, scooters were preferred to

bikes due to a perception of better safety (scooters were estimated to skid less

frequently). The widespread usage of helmets narrowed the safety advantage scooters

possessed over bikes; moreover, the ‘danger’ associated with bikes actually drew the

younger user away from the staid scooter! The development of fuel-efficient bikes also

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reduced the conventional fuel-economy benefit of scooters. Further, iconic scooter

manufacturers (Piaggio, Innocenti) were located in countries like Italy, whose ‘soft

power’ in terms of cultural influence was on the wane. Comparatively, bike

manufacturing majors (Honda, Harley Davidson) hailed from economic powerhouses like

Japan and the US.

By 2000, motorcycles were the choice of 60 per cent of India’s two-wheeled customers,

up from 33 per cent in 1996. By making efforts to gauge and understand its market and

the trends therein, Hero Honda cemented its reputation as a market-driven company, one

that anticipated and acted upon these trends.

The Fruits of Excellent Market Insight

In 2000, Hero Honda’s Splendor model became the world’s largest selling motorcycle. It

now sells more than a million units a year. In 2001, Hero Honda became the largest

selling two-wheeled manufacturer in India, with 50 per cent of India’s motorcycle

market. In 2002, Hero Honda sold 1.4 million motorcycles, becoming the largest two-

wheeler company in the world.

Hero Honda’s dominance cannot be ascribed merely to the size and growth of the market.

In that case, the dice would have been loaded in favor of larger incumbent business

groups like Bajaj. Success can be attributed to a keen understanding of macro-

environmental changes: social, technological, macroeconomic, ecological, political, legal

and demographic. Honda and Hero were confident of significant market potential for

motorized two-wheel vehicles in India, given the sheer size of the Indian market and its

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emerging middle class. At the same time, they understood the limitations in the still-

modest purchasing power of their target customers, so they offered products whose

reliability and overall economy were unmatched by their competitors. By reading the

market correctly, Hero Honda was able to finally topple the formidable scooter king Bajaj

in 2001. To recover lost ground, Bajaj drew on technology from Kawasaki and jazzed up

its portfolio, emphasizing high-end motorcycles. For a while it looked as if a newly

revved-up Bajaj would reclaim the crown.

But the economic recession in 2008 played to Hero Honda's advantage. Bajaj's strategy of

moving away from the lower segment to concentrate on high-end bikes backfired when

the economic cycle turned down and consumer confidence dipped. Hero’s ability to

identify an underserved market – one that was large and would grow – and match its

offering to that market’s needs were the twin attributes that distinguished them from

incumbents who had targeted more upscale urban customers with quite different needs.

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Table 1

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Figure 1: Advertisement

Figure 2: Advertisement

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Figure 3: Indian Auto Industry Segmentation

Figure 4: Industry Sales

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Figure 5

Heromotocorp (formerly Hero Honda) Financials

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Thunderbird Case: A09-03-0012

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