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HERO HONDA

DEMERGER

H ERO

CYCLE AN INTRODUCTION

Established in 1956 at Ludhiana. Production capacity has increased from the initial 15 bicycles per day to 18500 bicycles per day. In 1986 entered the Guinness Books of World Records as the largest bicycle manufacturer in the world. has diversified into newer segments like Information Technology, IT Enabled Services and Financial Services.

S OME FACTS A BOUT H ONDA


HMC initial plans called for both two-wheeler market and the electric generator market. HMC first chose Kinetic Engineering Ltd. And formed Kinetic Honda Motors Ltd. But this JV would work in field of Scooters Manufacturing. HMC came to Hero Group as the Last compromise choice for its motorcycle venture.

REASONS FOR HONDA SELECTING THE HERO GROUP


Its engineering capability Relevance and salience of HERO brand. Distribution network. Commitment to Quality. Know-how and experience in handling large volume production and distribution. Tight focus on financial and raw material processes. Cordial Industrial Relations.

T HE D EAL (J UNE 1984)


Honda agreed to provide tech. know-how to HHM and setting up manufacturing facilities. This included the future R & D efforts. Honda agreed for a lump sum fee of $500,000 & 4% royalty on SP. Both Partners held 26% of the equity with other 26% sold to the public and the rest held to financial institutions.

R EASONS

FOR SUCCESS

The deep penetration network of hero largely benefited the sales. Absence of major competitors in initial years. Sound and proven technical capabilities of Honda and the reliability of Hero. Increased market for motorcycles:

Better Fuel efficiency. Change in people s perception. Decrease in price difference with scooters

D EMERGER
Relaxed govt. norms Enough knowledge of Indian market for honda Indian 2 wheeler market soon to grow in double digits and carrying a partner could be a burden Honda would want to go on its own because the 9.3million two-wheeler market will grow to 16 million by 2015 A minority stake in Hero Honda also yields limited profits for Honda compared with a fully consolidated 100 percent unit.

T HE PROCESS OF DEMERGER
To buy out Honda s 26 per cent share, first Hero has to find bankers who can finance this deal worth Rs 9,300 crore. Then it will create a special purpose vehicle (SPV), where shares will be sold to investors, who will indirectly get dividends from Hero Motors, once it uses the funds to pay back the loans. these investors will get board seats in return. All the dividends will then be paid to these investors and will flow into the SPV.

T HE IMPACT OF DEMERGER
the Hero group to lose market share, currently around 40-50 percent, in the long term as Honda becomes more aggressive. A rise in royalty payments, would hit profits at Hero Honda ( currently at around 2-3 percent of sales) the Hero Honda brand name will be changed over time the company can now establish distribution networks across the globe.

C ONTINUE

It would take time for Hero to develop its own technological capabilities, and it remains to be seen whether the partners' technology licensing would continue through 2014 as agreed under the current contract. For Honda, with a wholly owned unit already in place and expanding fast, a pull-out from the joint venture would be positive for its growth over the long term, although it would have to make sure its sales network is sufficiently robust to compete with Hero

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