 "Pawan Munjal")
The net profit of Hero MotoCorp, India's biggest two-wheeler maker, nose-dived 14 per cent in the last quarter of what was otherwise a fruitful year. This was especially disappointing for the auto company because in the preceding three quarters of 2014-15, it had recorded a growth of 23 per cent, defying the slowdown in the market. But dependent as it is on the rural market for sales of its bread and butter economy bikes, the erratic weather and the effect of tweaks in the government's employment guarantee schemes left Hero feeling the pinch. In the process, targets that it had defined for itself five years ago look unlikely to be met.
Rural buyers, among whom the Hero Splendor bike is usually the top draw, have been forced by crop losses and income falls to reroute their savings to repay farm loans. As a result, against Hero's projected double digit increase in sales, it could report only a growth of 6 per cent in 2014-15. Society of Indian Automobile Manufacturers (SIAM) data shows Hero sold 5.67 million two wheelers compared with 5.42 million units in 2013-14. And though this represented a higher growth of 4.6 per cent than the industry average of 2.5 per cent, arch rivals Honda did better with a growth of 6.4 per cent.
Five years ago, the Munjal family, promoters of Hero, had decided it wanted to remain the global leader it was in two-wheelers, which meant opening several global factories, making more premium bikes, exploiting the scooter segment and having a world-class product development center. None of these was acceptable to its partner Honda, which saw these as conflicting with its own interests.
After a 26-year marriage, the two companies dissolved their joint venture in December 2010. In mid-2011, Pawan Munjal, the chief executive and MD of Hero, announced a target revenue of $10 billion, sales of 10 million units and 10 per cent export share of total sales by 2016. He also promised to open six factories (manufacturing or assembly) outside India by 2014 to meet its export target.
But five years later, Hero isn't even close to meeting these objectives. With total sales (domestic and exports) closing at 6.63 million units last year, it is unlikely the company can log a 50 per cent jump this financial year to touch the targeted 10 million units. A. Srinivasu, sales head at Hero, has predicted the company's volume growth prospects at 5.5-7 per cent this year. And after posting a turnover of Rs 27,585 crore ($4.3 billion) last year, it seems improbable it can reach the figure of $10 billion by 2016.
Of the six overseas units scheduled to go on stream by 2014, only four have become operational. Naturally, its export targets have been affected and last year, accounted for just 3 per cent of sales, quite a distance from the planned 10 per cent in 2016.
Keeping up with goals
Hero, however, maintains that there is no slowing in its plans. "There is no delay in our global operation plans, except in Nigeria," says a company spokesperson. "We already have four assembly units in Kenya, Uganda, Tanzania and Bangladesh. We started our Kenya assembly unit in 2013, while the ones in Bangladesh, Uganda and Tanzania became operational in 2014. The assembly operations in Nigeria will start this year. This was somewhat delayed due to the political situation in that country." Interestingly, Nigeria continues to be rival Bajaj Auto's biggest export market, where it is also the market leader.
One of Hero's biggest disappointments has been its inability to capitalise on the growth in the premium bike business. It has seven products, including the Karizma, Extreme, Impulse, Hunk and Achiever, in the 150 cc and above segments, but commands a share of just 6 per cent. Bajaj Auto is the leader in this segment with a share of 45 per cent, led by its Pulsar range.
Aswin Kumar P, industry analyst (South Asia and Middle East, automotive and transportation), Frost & Sullivan, explains, "Hero does not sell in the higher segments for the same reasons why Maruti Suzuki has not been good at selling cars priced over Rs 10 lakh." He points out that Hero is known more for its commuter bikes like the Splendor and Passion that are bought for their fuel efficiency and low-cost of ownership.
Hero had actually realised this lacunae and joined hands with US-based Eric Buell Racing (EBR), a racing bike specialist, to develop motorcycles that could take on Bajaj's best-selling Pulsar and others in the premium segment. Hero had bought 49 per cent in EBR, in order to tap the American company's high-end bike technology. However, a few weeks ago, EBR suddenly filed for Chapter 128 (bankruptcy protection), and projects for which technology was being provided by EBR faced a freeze.
The company spokesperson says that "EBR has already completed (and launched) 12 of the projects that it was working on". He adds that other projects, including a sports bike to be called the HX 250R on a new platform with multiple variants, were in an advanced stage of completion. "With our R&D capabilities and external support, we are confident of completing these projects with minimum delay," says the spokesperson.
Through EBR, Hero had been planning a foray into the US market, something no Indian manufacturer has done with the exception of Royal Enfield. Some "niche products", as Munjal puts it, for inter-city commuting in smaller American cities would have been marketed through EBR. Hero took a Rs 155-crore impairment hit on its equity investment in EBR.
In contrast to its setbacks, Honda Motorcycle and Scooter India (HMSI), a subsidiary of Japan's Honda Motor Company, has grown rapidly after its separation from Hero Motocorp. From a share of 13 per cent of the domestic two-wheeler market in 2010-11, HMSI closed 2014-15 at 27 per cent, according to SIAM. This growth is marked by higher sales of scooters, which forms about 60 per cent of Honda's sales and also where it is the market leader.
Hero's share of the scooter market, which stood at 45 per cent in 2010-11 just before the divorce with Honda, was 40 per cent in 2014-15. Though its scooters, the Maestro and Pleasure, enjoy good traction in the market, the production capacity is unable to match the demand.
Amid all this, Hero said in 2013 that it had set a new target of achieving annual sales of 12 million units by 2020. Of this, 10 per cent would come from exports. Though meeting the target set in 2011 seems well nigh impossible, the company spokesperson says that Hero is on track to meet its 2020 goal.
