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Honda, Hero prepare for final showdown

It took Honda a decade to scale up production at its lone plant in Haryana to 1.6 million two-wheelers a year after starting production in 2001. Then, in the next three years, it added 3 million to its capacity at two new plants in Rajasthan and Karnataka. And by the end of this year, a fourth plant will come on stream in Gujarat that will take Honda's capacity to 5.8 million.

Such growth has doubled Honda's market share in five years to 26 per cent. At 4.2 million units, Honda generated 25 per cent of its total global two-wheeler volumes in India, which has made the country its single largest market in the world.

Its next target is to overtake Hero MotoCorp as India's largest maker of two-wheelers. In 2014-15 Honda dethroned Hero MotoCorp in eight markets, which helped it emerge as the top seller in at least seven of them including premium markets like Maharashtra and Delhi. These eight markets generated 55 per cent of two-wheeler sales of 16 million last year in the country, according to a Macquarie Research report.

If Honda's growth continues at the current pace, analysts expect it to overtake Hero MotoCorp before the turn of the decade, given the focus it has put on the rural market from where it generates 25-30 per cent of sales. The rural market has been Hero MotoCorp's bastion for long - it draws almost half its sales from small towns and villages.

"Our network presence is still around 75 per cent of other two-wheeler makers in the rural market. The first step we have taken to increase rural market share is to expand our rural network. Our approach is to target one authorised outlet in every tehsil headquarters and then expand to block levels if needed," Y S Guleria, senior vice-president (sales and marketing), Honda Motorcycle & Scooters India, says.

Honda aims to strengthen its network in states with large rural markets like Uttar Pradesh and Bihar where Hero is stronger than others. It can also leverage the equity of Hero Honda, the brand which it co-owned with the Munjal family of Hero MototCorp till 2010, to push sales in these areas.

"We are confident that we are on track and with our aggressive spread of network, strategic tie-ups with NBFCs/rural banks, right products, brand Honda shall create top-of-mind recall amongst customers in this segment and this will translate into increased sales momentum," Guleria says.

Where does this leave Hero?
Ever since it ended its 26-year-old partnership with Honda, it has been on the back foot. Its market share in motorcycles, its bread and butter business, has slipped 4 per cent in the last five years, thanks to limited success in brands beyond Splendor and Passion .

In fact, Hero MotoCorp has been under pressure on two fronts. While Honda has taken control of the scooter segment, Pune-based Bajaj Auto has created a similar space for itself in the premium bike (150cc and above) segment. While scooters are high volume and in-demand products, premium bikes are high margin and help build brand recall.

The economy bike (100cc) segment, which is Hero MotoCorp's mainstay, is shrinking as consumers are either gradually upgrading to bikes that offer more power or are switching to unisex gearless scooters - many first-time buyers are now happy to make a gearless scooter, like the Honda Activa, the first two-wheeler in the family. This is hurting Hero because as much as 75 per cent of its two-wheeler sales of 6.43 million come from the economy bike segment.

One way out of this two-pronged attack could have been exports, something Bajaj Auto has done effectively in the last several quarters. Though Hero MotoCorp seems to be aware of this, its plans are behind schedule.

Of its six overseas units scheduled to go on stream by 2014, only four have become operational: Kenya, Uganda, Tanzania and Bangladesh. Naturally, this has impacted its overseas sales projections. Last year, exports accounted for just 3 per cent of sales, quite a distance from the planned 10 per cent in 2016.

Today, despite fierce competition in the domestic market, Bajaj Auto generates 47 per cent of its revenue from international markets where profit margins are far higher than those in India. Its export revenue jumped 17 per cent in the quarter ended March 31, which helped it post its best quarterly performance ever, even though its domestic revenues grew only 6 per cent.

Nigeria, where Hero Motocorp is slated to begin assembly operations later this year, is one of the six markets which were to come on stream before the start of 2014. It is also the market where rival Bajaj Auto is already the market leader. Hero MotoCorp, however, maintains that there is no change in its plans. "There is no delay in our global plans, except in Nigeria, This was somewhat delayed due to the political situation in that country," says a company spokesperson.

Hero MotoCorp's global ambitions got a jolt when earlier this year its US-based technology partner, Eric Buell Racing, filed for bankruptcy protection. All projects the two companies were working on were frozen, except a couple of projects which Hero MotoCorp hopes to complete on its own or through external support.

Through Eric Buell, Hero MotoCorp was planning a foray into the US market, something no Indian manufacturer has done with the exception of Royal Enfield. Some "niche products", as Hero Motocorp Chairman Pawan Munjal put it, for inter-city commuting in American cities would have been marketed through Eric Buell.

Still, the spokesperson says, in 2014-15, Hero MotoCorp's overseas volumes grew over 50 per cent and it emerged as the largest exporter of scooters from India. "We have similar growth plans for this year too, which puts us well on track to achieve the goal of 1.2 million sales from global business by 2020," adds the spokesperson.

In addition, Hero MotoCorp is readying to fight it out in the scooter segment back home. After the Pleasure and Maestro, it wants to launch two new scooter platforms this year, which it hopes will strengthen its position in the segment. As of June, the company had market share of 14 per cent (a drop from 18 per cent) in scooters, while Honda enjoyed a share of 59 per cent (an increase from 52 per cent), according to data by the Society of Indian Automobile Manufacturers' Association.