Resource

Based
Strategy
Hero Honda Motors
Ltd.

GMP 2010-11
Section A

Group Members
 Hussein H. (20)
 Nisha (34)
 Sumit Kejriwal (54)

January 2011

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Table of Contents

1. INTRODUCTION ..................................................................................................................................... 1
1.1 About the Company ...................................................................................................................... 1
1.2 Mission & Vision............................................................................................................................ 1
1.3 Key Milestone of Hero Honda ....................................................................................................... 2
2. AUTOMOBILE INDUSTY TRENDS ........................................................................................................... 4
2.1 Two-wheeler Industry ................................................................................................................... 4
2.2 Market Share: Sales of Indian 2 Wheeler Manufacturers ............................................................ 5
3. Value Chain Analysis ............................................................................................................................. 6
4. Resource Analysis.................................................................................................................................. 8
4.1 Financial Resources ....................................................................................................................... 8
4.2 Technological Resources ............................................................................................................. 10
4.3 Human Resources ....................................................................................................................... 10
4.4 Physical Resources ...................................................................................................................... 11
4.5 Reputation .................................................................................................................................. 12
4.6 Leadership ................................................................................................................................... 13
5. Stretch & Leverage of Resources ........................................................................................................ 14
6. Impact on Resources: Post 26% Stake Acquisition ............................................................................. 15
6.1 Prima Facie impact ...................................................................................................................... 15
6.2 Some challenges persist .............................................................................................................. 16

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 Hero Honda Motor Ltd.
1. INTRODUCTION

1.1 About the Company

Hero Honda Motors Ltd. is the world's largest manufacturer of two – wheelers, based in India. This was a
joint venture between India's Hero Group and Honda Motor Company, Japan till Dec 2010 when Hero
Group purchased Honda’s 26% stake in the company.

In 2001, the company achieved the coveted position of being the largest two-wheeler manufacturing
company in India and the ‘World No.1’ two-wheeler company in terms of unit volume sales in a calendar
year by a single company. Hero Honda has retained that coveted position till date.

Today, every second motorcycle sold in the country is a Hero Honda bike. Every 30 seconds, someone in

Like every success story, Hero's saga contains an element of spirit and enterprise; of achievement
through grit and determination, coupled with vision and meticulous planning. Throughout its success
trail, the Hero Group and its members have displayed unwavering passion of setting higher standards
for themselves and delivering simply the best to their customers.

"Engineering Satisfaction" was the prime motive of the Hero Group and it has become a way of life and a
part of the work culture of the Group. This is what drives the Group to seek newer vistas, adopt faster
technology and create quality driven products to the utmost satisfaction of customers, partners, dealers
and vendors.

1.2 Mission & Vision

HERO HONDA'S MISSION

Hero Honda’s mission is to strive for synergy between technology, systems and human resources, to
produce products and services that meet the quality, performance and price aspirations of its customers.
At the same time maintain the highest standards of ethics and social responsibilities.

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This mission is what drives Hero Honda to new heights in excellence and helps the organization forge a
unique and mutually beneficial relationship with all its stake holders.

HERO HONDA'S MANDATE

Hero Honda is a world leader because of its excellent manpower, proven management,
extensive dealer network, efficient supply chain and world-class products with cutting edge
technology from Honda Motor Company, Japan. The teamwork and commitment are
manifested in the highest level of customer satisfaction, and this goes a long way towards
reinforcing its leadership status.

1.3 Key Milestone of Hero Honda

Year Event
2000 4,000,000th motorcycle produced

Environment Management System of Gurgaon Plant certified ISO-14001 by DNV Holland

Splendor declared 'World No. 1' - largest selling single two-wheeler model

"Hero Honda Passport Programme" - CRM Programme launched

2001 New motorcycle model - "Passion" introduced

One million production in one single year

New motorcycle model - "Joy" introduced

5,000,000th motorcycle produced

2002 New motorcycle model - "Dawn, Ambition introduced

Appointed Virender Sehwag, Mohammad Kaif, Yuvraj Singh, Harbhajan Singh and Zaheer Khan as
Brand Ambassadors
2003 Becomes the first Indian Company to cross the cumulative 7 million sales mark

Splendor has emerged as the World's largest selling model for the third calendar year in a row
(2000, 2001, 2002)

New motorcycle model - CD Dawn , Splendor +, Passion Plus, Karizma introduced

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2004 New motorcycle model - "Ambition 135" introduced

Hero Honda became the World No. 1 Company for the third consecutive year.

Crossed sales of over 2 million units in a single year, a global record.

Splendor - World's largest selling motorcycle crossed the 5 million mark

New motorcycle model - "CBZ*" introduced

Joint Technical Agreement renewed

Total sales crossed a record of 10 million motorcycles

2005 Hero Honda is the World No. 1 for the 4th year in a row

New motorcycle model - "Super Splendor" introduced

New motorcycle model - "CD Deluxe, Glamour, Achiever introduced

First Scooter model from Hero Honda - "Pleasure" introduced

2006 Hero Honda is the World No. 1 for the 5th year in a row

15 million production milestone achieved

2007 Hero Honda is the World No. 1 for the 6th year in a row

New 'Splendor NXG, CD Deluxe', Passion Plus, Hunk launched

20 million production milestone achieved

2008 Hero Honda Haridwar Plant inauguration

New 'Pleasure, CBZ Xtreme ched with power start feature

25 million production milestone achieved

CD Deluxe lauched with power start feature

New 'Glamour Fi' launched

2009 Hero Honda GoodLife Program launched

Hunk' (Limited Edition) launched

Splendor completed 11 million production landmark

New motorcycle model 'Karizma - ZMR' launched

Silver jubilee celebrations

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2. AUTOMOBILE INDUSTY TRENDS

2.1 Two-wheeler Industry

The two-wheeler market in India is the biggest

contributor to the automobile industry with a size of
Rs.100,000 million. The two-wheeler market in India
comprises of 3 types of vehicles, namely motorcycles,
scooters, and mopeds. India is ranked as the second
largest two-wheeler market in the world.

Among the 3 segments of the Indian two wheeler

market, major growth trends have been seen in the
motorcycle segment over the last four to five years.

Major players: - Hero Honda, Bajaj, TVS, Honda, Suzuki, Yamaha.

The graphic above shows the breakup of production of automobile in India. In 2008-2009, more than 76
million two wheelers were manufactured in India. Domestic sales of two-wheelers form a major chunk
at 76% of total sales. Hero Honda and Bajaj Auto are the leaders in the two wheeler market in India. In
India, the two wheeler segment was the first to secure export orders.

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2.2 Market Share: Sales of Indian 2 Wheeler Manufacturers

Source: 2WheelsIndia.com

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3. Value Chain Analysis

It is quite obvious that Hero Honda possesses some competitive advantages over competition,
enabling them to be the largest two-wheeler maker in the world. We attempt to ascertain the
competitive advantages that HHML has by analyzing its value chain.

Primary Activities

 Inbound Logistics

From early days, HHML tried to have close integration with suppliers as vendor management is
critical for its operation, for the simple fact that 73% of production cost is due to material
components. Thus it is essential for HHML to ensure tight control & reduction of logistical cost
and/or transaction cost when procuring components. Additionally, reduction of inventory will be
an added boon so that working capital requirement will be less.

With these aims, HHML adopted “Just In Time” (JIT) manufacturing philosophy which demanded
close coordination between its manufacturing facilities and the vendors and ancillary units.

 Operations

As was being described above, HHML is probably the only Indian company to have truly mastered
the art of JIT manufacturing. HHML also follows Lean Manufacturing, uses high degree of
automation levels (full automatic robotic operation in welding and some other specific areas) to
ensure high efficiency, low inventory production, with usual benefits like increased cash flow,
reduced cash & operating cycles and thus improved working capital conditions. These fully
equipped plants where these manufacturing concepts have been applied during plant layout, design
& commissioning phases are the unique tangible assets that HHML has.

 Outbound Logistics

HHML feeds the demand in India & exports bikes through its well established delivery channels
from the 3 plants. The effort is to provide for minimum waiting period or rather filling the regions
as per the demand forecasts and market trends.

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  Marketing & Sales

Marketing arm of HHML started the hugely successful “Fill it, Shut it, Forget it” campaign to pitch
for its better fuel efficiency and thus lower owning cost. It has been a constant strive for HHML’s
marketing efforts (in advertisements, in promos) to focus the value for money and reliability of its
products and thus attracting new customers and retaining customers as well. To ensure customer
loyalty, HHML has come up with Hero Honda Passport Program which gives special privileges to its
customers. HHML does not indulge in price wars in an effort to maintain the perception of enduring
quality among present & potential customers. Of late, there were complaints from customers that

HHML has roped in popular heartthrob Hrithik Roshan as its brand ambassador to give impetus to
its marketing efforts.

 Service

HHML has constituted one the best after-sales service network in the industry. Apart from
improving the quality of service and easy availability of spare parts, HHML has also focused on
cleanliness and other aesthetics of the service stations and added amenities such as air-conditioned
waiting area, internet browsing and coffee shops etc. to enhance the in-house experience of the
consumers at those “customer touch-points”.

To ensure that millions of customers in the rural areas are not left waiting for adequate service as it
is impossible for HHML to introduce service stations at every nook & corner of the country, mobile
service stations are regularly arranged with prior intimation to public about the route that the
mobile workshop would take when passing through that region, so that consumers can come and
get their two-wheelers serviced. All these activities are aimed to increase the customer loyalty and
thus retaining customers.

Note: The details on the support activities pertaining to Value Chain have been detailed in the next
section on Resource Analysis

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4. Resource Analysis

4.1 Financial Resources

The break-up of the equity shareholders is as follows:

Recent acquisition of
26% of Honda by Hero,
resulting in majority
ownership

Following are financial statements of Hero Honda and other competitors.

Balance Sheet ------------------- in Rs. Cr. -------------------

Hero Bajaj TVS Mah Kinetic Eng
Honda Auto Motor Scooters

Mar '10 Mar '10 Mar '10 Mar '10 Mar '10
Total Share Capital 39.94 144.68 23.75 11.43 31.96
Reserves 3,425.08 2,783.66 841.63 189.12 43.65
Secured Loans 0.00 12.98 829.98 0.00 25.61
Unsecured Loans 66.03 1,325.60 173.31 0.00 104.84
Total Debt 66.03 1,338.58 1,003.29 0.00 130.45
Total Liabilities 3,531.05 4,266.92 1,868.67 200.55 206.06
Fixed Assets 2,750.98 3,379.25 1,909.14 27.25 279.25
Total Current Assets 2,408.27 819.25 549.78 2.26 46.93
Current Liabilities 3,965.69 2,218.06 838.62 15.25 47.23

By looking into Balance Sheet it can be deduced that Net worth of Hero Honda is the highest in
compare to competitors. Also, Total Liabilities of Hero Honda is less in compare to its nearest
rival. However the Hero Group plans to buy out Honda’s 26% stake in the company by raising debt
initially

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Profit & Loss account ------------------- in Rs. Cr. -------------------
Hero Bajaj TVS Mah Kinetic
Honda Auto Motor Scooters Eng
Mar '10 Mar '10 Mar '10 Mar '10 Mar '10
Net Sales 15,839.58 11,813.25 4,363.11 4.15 48.98
Other Income 290.69 38.76 46.65 20.14 23.10
Total Income 16,118.73 11,899.61 4,407.81 24.11 72.85
Total Expenses 13,084.39 9,373.16 4,151.80 16.69 62.44
Operating Profit 2,743.65 2,487.69 209.36 -12.72 -12.69
Profit Before Tax 2,831.73 2,384.02 76.17 6.38 -2.00
Profit After Tax 2,231.83 1,702.73 88.01 8.41 2.35
Total Value Addition 2,261.40 1,186.05 982.04 15.10 27.22

Hero Honda has highest income in compare to its all rivals. It has also highest operating profit in 2
wheeler industry segment.

Key Financial Ratios of Hero Honda Motors

in Rs. Cr.
Current Ratio 0.58
Quick Ratio 0.49
Debt Equity Ratio 0.02
Long Term Debt Equity Ratio 0.02

Debt Coverage Ratios: -

in Rs. Cr.
Interest Cover 1,262.36
Total Debt to Owners Fund 0.02
Financial Charges Coverage 255.15
Ratio
Financial Charges Coverage 218.53
Ratio Post Tax

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4.2 Technological Resources

The company believes in the concept called World Class Manufacturing which includes  quality, zero
inventory concept, integrated value chain, lean & flexible manufacturing, 5S system, TPM and direct
online systems. In order to remove bottlenecks & improve quality of work fully integrated robotic lines
are used such as in Aluminium phase (for manufacturing cylinder heads, crankcase etc.) and in weld &
paint shops.

Flexible production techniques have been implemented across plants that helps in reducing changeover
time and increase overall efficiency. It also uses a slew of cost control and process improvement
projects, thus reducing, manufacturing costs per vehicle.

Hero Honda has an online vendor connectivity program that helps in creating vendor network for real
time exchange of information. It also introduced finished goods dispatch automation (FNGD) system,
which enabled real time inventory management with use of bar codes.

4.3 Human Resources

Hero Honda has introduced selective education and in-house talent development courses and e-learning
modules to support the company’s mandate of being a world class manufacturer. It’s “On-the-job”
learning program through implementation, review and “Gemba-consulting” is highly effective in creating
continuous shop floor improvements. The program is being conducted under the guidance of
international TPM Sensei. There is a strong induction process for entry –level workers. Training
programs for junior and mid-level management emphasize on function wise proficiency modules. There
are specific programs for development of leadership, interface management, strategic thinking, people
development and positive attitude. There is an emphasis on emotional intelligence.

Some unique practices at Hero Honda are:

 Joint prayers & exercises – The employees start their shift by saying joint common prayers
followed by physical exercises and discussion on a theme for that day. As part of this, the
employees get together at the atrium. One of them acts as a leader of the gathering. All of them

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 recite a prayer wherein they pray for the well – being of the world and freedom from pain, fear
& misery. They pray for the success of their work. This helps them in affirmation towards
achievement of the company’s targets. Another leader leads the gathering for undertaking
physical exercises which propel them toward better physical & mental efforts in achieving the
company’s targets.
 Self managed team members – The operator on the assembly line also undertakes quality
checks and maintenance activities apart from operation related activities. As a part of this, the
operator identifies using prescribed systems, the quality check points maintenance check points.
These check – points help him in improving quality and reducing break downs. This results in
having post – production quality checks and scheduled overhauls, which considerably results in
saving time, material & manpower.
 Quality Circles – Cross functional teams work together to solve factory related problems using
quality control techniques. As a part of this, the employees voluntarily form their teams after
trained by the qualified trainers in applying the above. The team identifies and selects problems.
The solutions are presented to the senior management for approval.

4.4 Physical Resources

Hero Honda has a production capacity of 5.5 mn two wheelers at its two manufacturing facilities at
Gurgaon and Dharuhera in Haryana and one at Uttaranchal. The company offers motorcycles in all the
three major segments—CD Dawn and CD Deluxe in entry; Splendour, Passion, and Glamour in executive;
and Hunk, Achiever, CBZ and Karizma in premium. It also sells Pleasure in the ungeared scooter
segment.

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4.5 Reputation

Hero Honda has built a repute of a responsible and environmentally conscious company. This has been
achieved not only by the continued excellence of its products & services, but also due to the several
of the following social & environmental initiatives that it has under taken –

 Safety, Health & Environment Policy

It has remained committed to clean environment friendly products and use of clean
manufacturing processes. It extensively uses incinerators, effluent treatment plants, sold
waste disposable systems. It has also been awarded ISO 9001, ISO 14001, OHSAS 18001
certifications.
 Hero Honda Traffic Park & Ride Safe Program –
This was initiated to teach people traffic rules & riding their vehicles in the most appropriate
manner to avoid accidents.
 Rainwater harvesting system
Through a multilayer ground water recharge program at the factories, Hero Honda has
successfully created a rain water harvesting project. It’s plants have achieved a drastic reduction
in water consumption for manufacturing purpose over the years.
 Energy Management
The company has introduced an Energy Management System (EMS) which captures data from
machines for monitoring energy consumption. The system helps in strategizing to adapt to new
age energy norms and improves speed and accuracy of processes. The Haridwar plant has a
green roof covering an approx area of 45,000s which conserves energy by moderating the
roof temperature.
 CSR Initiatives
The company invests in considerably in community relationships. It has played a pivotal role in
bringing an economically and socially backward regions of Haryana. Hero Honda has opened
“The Raman Munjal Memorial Hospital”. The hospital also caters to the needs of the people
of the rural areas of Haryana through mobile dispensaries etc. “The Raman Munjal Vidya
Mandir” was opened to provide quality education to the poor & needy. It also invests in
various other initiatives.

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4.6 Leadership

Dr. Brijmohan Lall Munjal, patriarch of the US$ 4.2 billion Hero Group, was born in 1923, in Kamalia,
now in Pakistan. Born into a simple, God fearing family, his early stint at Gurukul at the age of five gave
him the priceless set of values – simplicity, honesty, highest integrity, sense of fairness – all the credos
which have been an inseparable part of his life. After completing formal education, he had the
opportunity of working with top Army brass in Ordinance where he gained the confidence of working in
a systematic, disciplined organization – this experience was to prove invaluable throughout his working
life.

In 1984, Hero signed a joint venture with Honda of Japan to launch Hero Honda Motors Ltd. This
company heralded the 2-wheeler revolution in India, became world’s largest 2-wheeler company in
2001 and continues to hold that position. Today, more than 15 million satisfied Hero Honda customers
bear testimony to Dr. Brijmohan Lall Munjal’s philosophy – create a judicious world class blend of
performance, quality, cost and service, reinforce it with mutually beneficial relationships and you will
always come up with a winner.

Today, Hero Group straddles Indian industrial landscape, recording benchmark growth rates, 20
companies in diverse fields including auto parts, bicycles, motorcycles, education, BPO, IT software etc.
Two companies, Hero Cycles and Hero Honda are world leaders. The Group excels in business practices,
and Hero Honda is rated highest in corporate governance – all under the careful eye of Dr. Brijmohan
Lall Munjal who, in his capacity as Chairman, Hero Group, lends his humane touch to mentor and guide
the associates towards greater achievements and success.

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5. Stretch & Leverage of Resources

When Hero Honda entered the two-wheeler market in ‘80s, it was shaped very much by the regulatory
& bureaucratic forces and has been dominated by 2-stroke scooters & bikes manufactured by Bajaj Auto
and some other companies. The 4-stroke technology taken up by Hero Honda was looked at with
skepticism, even though it promised higher power-to-weight ratio, higher efficiency (and thus better
mileage) and less pollution. But Hero Honda aspired to be the largest player in the industry, the gap
between the aspiration & reality being huge.

The promoters of the JV, both Hero Group & Honda of Japan, had a lot of faith & confidence on the
eventual success of this strategic alliance, even though it faced a lot of challenges like a violent strike
which affected its production facilities in 1987. Even Splendor when it was launched initially had many
technical problems. But it stretched & leveraged its resources – the supplier & distribution network
(initially based on the reliable & loyal distribution channel of Hero Cycles, which is a group resource) and
technological superiority of Honda engines & design to bridge the gap between its aspiration levels &
current reality and eventually succeeding & becoming the largest player in the industry.

The Hero Group, as a whole, has firm beliefs in its capability of successfully borrowing & extracting
knowledge from numerous technical/strategic alliances & JVs that it has formed over the years as means
of resource accumulation in its pursuit of leveraging resources. Apart from the most celebrated JV with
Honda, it has established such alliances with numerous other companies. As an underlying theme in all
these activities, we can see a general trend emerging – (i) Vertical Integration - this is common for most
related diversifications, (ii) Diversification – importance is given here for risk mitigation & opportunity
grabbing by moving in unrelated but high growth areas.

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6. Impact on Resources: Post 26% Stake Acquisition

6.1 Prima Facie impact

While the complete details of the agreement between Honda and the Hero group are not known, the
initial implications have been assessed on various resources namely financial, technological, etc.

 Royalty rates to decline in future

The management indicated that the royalty for existing products (including Splendor and
Passion) would remain in the current range of ~2.5%. In addition, beyond 2014, the existing
products will not be charged any royalty with HH gaining long-term rights to these products.

 New products to be made available

Honda will provide HHML three new products/variants over 2011-14 under a new licensing
agreement. These new products, along with existing models, will be available to HHML even
beyond 2014.

 Exports permitted across the board

HH will be permitted to access all markets across the globe with its current product range, the
only caveat being - HHML cannot use the Honda brand name in the markets where Honda is
currently absent.

 Ease of component sourcing

The management stated that it could now source components from even non–Honda approved
vendors. This, we believe, could reduce costs substantially, benefiting HHML in the medium
term.

 Hero Honda has three years to develop its R&D capabilities—not a very long time, but enough
to come up with decent models at least in the entry-level segment from where it gets 70% of its
sales.

 Even if Honda reserves its good models for Honda Motorcycle & Scooter India (HMSI), its wholly-
owned subsidiary, Hero’s old ‘Splendour’ and ‘Passion’ models constitute 70% of its sales; all

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 new bikes in the last few years add up to only 8% of its sales—so this should not be a huge
problem.

 Branding to continue beyond 2014

Barring two exceptions – (a) indigenously developed new products and (b) products being sold
in new export markets – HHML can use the Honda brand name even beyond 2014.

6.2 Some challenges persist

 Developing new technology

There will be concerns on whether the Hero group can develop new products in three-year
period (while players such as BAL have developed credible products timely, we note that their
failure rate has been extremely high). In fact, in the motorcycle segment, Bajaj Automobile
Limited (BAL) initially had high warranty costs, which it still continues to struggle with.

BAL has R&D expenditure between 1.1% and 1.5% of sales. While HH’s royalty payout is
currently higher (2.64% as of FY10) than the R&D expenditure, we note that post merger; HMHL
will spend on R&D in addition to the royalty payouts. This could impact profitability during the
transition period.

 A new aggressive competitor

Honda Motorcycle and Scooters India (HMSI) have cautiously avoided the executive motorcycle
segment that has been HMHL’s forte. The lowest priced motorcycle from HMSI (CB Twister) is
~7% above the Splendor Plus and ~30% above CD Dawn. HMSI would tend to be more
aggressive within the space now.

 Although Honda needs to provide new models to Hero Honda under the new agreement, there
is a possibility it will reserve all the good ones for HMSI. Also Hero will have to pay new model
fees, which could be hefty.

 Exports may not rise as fast as expected because it takes time to understand local markets and
to build supply chains. Additionally, they cannot use the Honda name for exports. Branding will
be a challenge

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