Hero, Honda split after 26 years

A 26-year-old partnership between Japan’s Honda Motor and India’s Hero Group ended on Thursday. Announcing the break-up of joint venture company Hero Honda Motors Ltd (HHML), Pawan Munjal cited changing market dynamics coupled with ambitions of growing beyond India as the two compelling reasons for the split.

Under the present agreement, HHML was not permitted to tap overseas markets, seek technology from any other company and even participate in large scale exports.

Terming the deal as beneficial to all stakeholders, including small shareholders, Munjal, CEO and managing director (MD) of HHML, said the Hero Group will buy out Honda’s 26% stake in the company by raising debt initially. He did not disclose the price at which Honda has agreed to sell its shares. As per the current share price, Honda’s stake is valued at close to $2 billion. Reports have suggested that the Japanese are willing to sell out at 30-33% discount.

Munjal declined to confirm if there was a lump sum royalty payment. He said Hero’s royalty payment to Honda would start declining from next year, adding that media reports saying royalty payments could go up significantly after the termination of the joint venture were incorrect. Munjal also clarified that the deal envisages a new technical agreement, which will cover existing as well as new products till 2014.  

“For the company and for me personally, this is one of the most important announcements I have made in the last 25 years... through the new arrangement, Hero will be free to launch its own products, get its own R&D capability.” Munjal said.

“The new licensing pact will provide us not only new products, but also new platforms... there couldn’t have been a better deal than this for all stakeholders,” Munjal said.

“We are not selling off our stake in HHML to make money. We realised that Hero has its own vision and Honda, its own... when the joint venture was inked over two decades back, it was a totally different world... we had to respect their vision and had to unwind our holdings,” explained Fumihiko Ike, Honda’s MD and COO for regional operations (Asia and Oceania).

Munjal said a definitive agreement will be signed over the next few weeks and the actual buyout of Honda’s stake should be completed by next year.