Venture with Honda not ending: Munjals

For all intent and purposes, the Munjal family maintains that Hero Group’s two-wheeler joint venture with Honda Motor Co of Japan is not ending as of now.

In an assurance to shareholders at the Hero Honda Motors’ annual general meeting this morning, the family members (who own 26% in the world’s largest two-wheeler maker where Honda holds another 26% equity) denied reports of the joint venture breaking off, saying all such reports “are baseless”.

Dealers DNA spoke with also echoed these thoughts, saying they have received assurances just about three days back that technology supply from the Honda stable and long term product plans remain intact and there was no reason for them to panic at reports of the JV contours being changed.

Almost 65-70% of the components Hero Honda uses in its bikes are sourced from Munjal family-owned companies.

But some of the key, non-family vendors of Hero Honda we spoke to also asserted that they have not been told anything about the parting of ways between Hero Group and the HMC and the bike maker continues to have concrete product plans for the long term.

“Hero Honda is gearing up for record production this month and the next and according to estimates provided to us, production in October would be the highest in the company’s history. Long term product plans are with us not only for Hero Honda but also for Honda’s 100% arm, Honda Motorcycle & Scooter India,” some of the non-family vendors said.

They also pointed out that with the joint venture agreement being valid till 2014, any talks of the two promoters altering the structure should ideally begin only two years before the partnership comes up for renewal or in 2012.

“The contract is for 10 years and normally, open discussions begin only two years before the joint venture comes up for renewal”.

So what’s the truth? Private equity players have been confirming the intention of Honda to pull out of the joint venture and the Munjals looking for funding options to buy out their partners’ stake in the world’s most successful two-wheeler joint venture.

There were unconfirmed reports today about the board of directors of Hero Honda being apprised of the necessity to restructure the joint venture in the company’s “long term” interests.

A spokesperson for HMC had confirmed to Bloomberg in Japan last week that the company was in talks about the “capital relationship”.

But all this while, the Munjal family has chosen to remain mum. The going has never been easy for Hero and Honda, with several issues in the past driving a wedge between the two partners.

There have been disagreements over parts’ sourcing by Hero Group, its inability to cultivate exports because of clash of interest with Honda’s presence in overseas markets and even the substantial royalty payments it has to make every year to the Japanese partner have caused heartburn.

But even now, how would the Hero Group fund a stake purchase remains unclear even as Honda’s continuing Indian ambitions are all too apparent.

Recently, HMSI said that its parent company is looking to almost double motorcycle sales in India in the next 2-3 years.

So not only is HMSI rapidly adding capacity in India, it is also believed to be readying more bikes at the entry level, lower price band which, till now, has been known to be the forte of Hero Honda.

HMSI officials confirmed that from sales of 12.7 lakh units (bikes and scooters) last fiscal, the company was gearing up to sell about 22 lakh units in the “next two-three years.

A second manufacturing plant with six lakh unit annual capacity will come on stream in the second half of 2011, giving a further boost to HMSI’s presence in the two-wheeler market. It has already launched CB Twister, a 110 cc bike which directly competes with Hero Honda’s products in the same segment.

Meanwhile, several issues have risen in the past between Hero and Honda officials to drive a wedge.

At various times, there have been disagreements over parts’ sourcing by Hero Group, its inability to cultivate exports because of clash of interest with Honda and the substantial royalty payments it has to make every year to the Japanese partner.