KINETIC HONDA – THE BREAK UP:

A Case Study

-by

Rashmi Vasist

Basavaprabhu P Karagi

Munavvar Ahmed

Rounak Mudbhatkal

Kinetic Honda Kinetic & Honda

SUMMARY OF THE CASE

How it all started ? Implications •August 1998: The first chinks in the armor of KHML was reported by Business India Magazine.

•Rumors of a split and Firodias quietly raising resources to buy out Honda’s stake arised.

•Trouble had been brewing since the company recorded a loss of 6 Crores in the first Quarter of 1998.

•Honda eventually decide to end this matter and called Arun Firodia to Japan in December 1998.

•Honda made Firodia an offer: Either Firodia buy their 51% stake or Honda would buy out his 19% stake.

•Firodia negotiated a deal to acquire its stake at Rs 45 per share at a total cost of 35 Crores & an agreement to manufacture and sell the current Kinetic models.

More Implications.

•Honda also agreed to provide technical know-how support in return for royalty and technical fees from Kinetic.

The Pullout came as a surprise for industry observers as Honda being a leading manufacturer pulling out of a whole market segment was quite Uncharacteristic.

STARTING PROBLEM

How it all started ? Implications •1985 : Mr Arun Firodia CEO Kinetic, tied up with Japanese major Honda Motors to form Kinetic Honda Motors Limited, (KHML) with both companies holding 28.56% stake.

•Primary business was manufacturing scooters.

•KH-100 arises as the first ungeared scooter in India.

•KH-100 becomes a huge success.

•Throughout the rest of the 80-90 decade, Kinetic remained India’s largest manufacturer with a 44% market share & 15% 2 wheeler overall market share.

•Decade later, market share drops to 22% and overall share reaches an abyssmal 5%.

How it all started ? Implications •1991, Kinetic with a Turnover of 120 Cr started competing with TVS motors (140 Cr) and Hero Honda (250 Cr).

•1999, TVS and Hero Honda grow upto 7 times at 1018 Cr and 1146 Cr respectively, whereas Kinetic doubled its turnover.

•Reason for this was that Kinetic missed the pulse of the market which was fast moving to motorcycles, Kinetic couldn’t offer a motorcycle due to Honda’s JV stipulations.

•Due to this, sales fell and growth reduced to a high low, Kinetic scrapped plans of a 500 cc 2 cylinder mini car because of this.

How it all started ? Implications •1993, With declining fortunes, Firodia agreed to Honda increasing its stake to 51% hoping that If Honda would control, they could bring in new products more quickly and improve company prospects.

•1997-98, KHML’s sales grew marginally, and coupled with the 6 crore loss in the first quarter, Firodia considered parting ways.

•Competitors were spending 1-1.5% of turnover on R&D, where as Kinetic spent 0.31% turnover for R&D.

•Also Honda spent a mere 20 Cr on Advertising as a result of which market share declined steadily in 96-98.

SOARING TIES

Soaring Ties !Implications•Reports claimed right from the start that there had been differences b/w Honda and the Firodias over the issue of management of KH, ex: introduction of new models, ads expenditure etc. •Under the JV, KH manufactured scooters, and Kinetic manufactured mopeds, they could not manufacture each others motorcycles acc to the JV.

• As a result the company suffered in terms of growth and profitability.

• This was not in favor of Kinetic because the moped market was declining and the motorcycle market had picked up .

Soaring Ties !Implications•Kinetic Honda developed indigenous technology for its 4 stroke step through vehicle KH-400, which was a competitor to Hero Honda Street.•Firodias were unhappy that “Kinetic” as an umbrella brand was not being promoted, & Honda was limiting Kinetics competitive capabilities.

• Honda termed that move as unfriendly.

• Consumers saw Kinetic and Luna as 2 different brands, even when they belonged to the same business house.

Dhishum Dhishum

•Kinetic claimed that Honda always had taken a ‘half hearted approach’ towards managing the company.•They said Honda was preoccupied with other markets such as Indonesia and Thailand.•They also said Honda with its resources could have easily engineered a product for Indian roads, but were simply uninterested to do so.

• Honda blamed Kinetic for being complacent by having only 1 model for several years.

• Honda claimed that Firodias did not have the marketing acumen of Munjals of Hero Honda

• Disagreements widened the rift among the partners.

What Hero Honda gained from all this ?• Hero Honda, where munjals and Honda showed complete faith in each other and worked together as a team right from the beginning, whereas the Firodias and Honda never shared a rapport, lest good.•Hero Honda, partners had equal stakes making decision making easy and lack of competition too made Hero Honda all the more competitive.

• The profitability of Hero Honda was so much that they could afford to spend more on advertising.

• The adspend decision power rested with the Munjals.

• Honda’s exit raised questions about Kinetic’s survival chances in India.

SURVIVOR

SurvivalImplications •After the Split, Firodia denied that dropping the Honda tag would affect sales.

•Company introduced tough measures to facilitate improvements .

•Kinetic realized that Customer and dealer confidence was a key factor of survival without Honda.

•A new Kinetic Logo was coined for improving Kinetic as an Umbrella brand.

•Firodia pushed up sales by getting the groups auto finance companies to offer attractive schemes.

•This move paid rich dividends, it contributed to 20% if Kinetic’s sales in 1999.

•Kinetic took up a CSR with the new motto “Closer to you” , Kinetic care, Kinetic Mileage Advantage and Customer satisfaction camps where more than 18000 customers got free spares.

SurvivalImplications •Kinetic opened more depots around the country, a new credit policy.

•Honda stake came with Rs 400-500 Million as outstanding with dealers.

•Decentralized their distribution network and reduced inventory costs.

•Kinetic approached banks and negotiated deals to reduce its borrowing costs.

•Kinetic consulted experts from around the world and introduced a new technology.

•All these resulted in improved performance.

•Once these costs were recovered, their interest costs came down considerably.

•Kinetic setup a plant at Ahmedabad to reach semi urban areas like Anand and Gandhinagar within 24 hours, whereas it would take 3 days from Pitampur.

•Material costs reduced by reducing unnecessary imports.

•Improved the mileage of their scooters from 30 kmpl to 50 kmpl.

•KMCL wiped off previous year’s loss of 6 Cr and posted profits of 3.69 Cr for the same period, sales increased by 25% in fiscal 2000.

RETURN OF THE PRODIGAL

Honda vs Kinetic

•1999, Honda announced that it was setting up a wholly-owned subsidiary to manufacture scooters in India.

•Cost them $43 million, focus on scooters for 5 years.

•Entered Motorcycle market in late 2004 with “Unicorn”.

•Honda’s decision sparked debates in industry circles over guidelines regarding foreign companies being allowed to setup wholly owned subsidiaries when they had JV’s here.

•CII warned the adverse effect of this on local players.

•Kinetic , obviously was not too perturbed by Honda’s announcement, as they believed they were leaders in ungeared scooters.

•Firodia’s expected this from Honda right from the start of the HJV, that Honda’s announcement would be a possibility.

Unanswered Question… ?

If Honda was serious about its scooter business in India and wanted to grow introducing new models, then why did they not do so during the 12 years they were here in India with a JV with Kinetic ??

THANK YOU