A Case Study -by Rashmi Vasist Basavaprabhu P Karagi Munavvar Ahmed Rounak Mudbhatkal

Kinetic Honda Kinetic & Honda

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 Hondas 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.

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 8090 decade, Kinetic remained Indias 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 couldnt offer a motorcycle due to Hondas 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, KHMLs sales grew marginally, and coupled with the 6 crore loss in the first quarter, Firodia considered parting ways. Competitors were spending 11.5% 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 !
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.

Implications
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 !
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.

Implications
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
Kinetic claimed that Honda

Dhishum
Honda blamed Kinetic for

always had taken a half hearted approach towards managing the company.
They said Honda was

being complacent by having only 1 model for several years.

Honda claimed that Firodias

preoccupied with other markets such as Indonesia and Thailand.

They also said Honda with its

did not have the marketing acumen of Munjals of Hero Honda

Disagreements widened the

resources could have easily engineered a product for Indian roads, but were simply uninterested to do so.

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. Hondas exit raised questions about Kinetics survival chances in India.

Survival
After the Split, Firodia denied that

Implications
Firodia pushed up sales by getting

dropping the Honda tag would affect sales.

Company introduced tough

the groups auto finance companies to offer attractive schemes.

This move paid rich dividends, it

measures to facilitate improvements .

Kinetic realized that Customer

contributed to 20% if Kinetics sales in 1999.

Kinetic took up a CSR with the

and dealer confidence was a key factor of survival without Honda.

A new Kinetic Logo was coined

for improving Kinetic as an Umbrella brand.

new motto Closer to you , Kinetic care, Kinetic Mileage Advantage and Customer satisfaction camps where more than 18000 customers got free spares.

Survival
Kinetic opened more depots around

Implications
Once these costs were recovered,

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.

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 years loss of 6 Cr and posted profits of 3.69 Cr for the same period, sales increased by 25% in fiscal 2000.

Honda
1999, Honda announced that it was

vs

Kinetic

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

Kinetic , obviously was not too perturbed by Hondas announcement, as they believed they were leaders in ungeared scooters. Firodias expected this from Honda right from the start of the HJV, that Hondas announcement would be a possibility.

2004 with Unicorn.

Hondas decision sparked debates in

industry circles over guidelines regarding foreign companies being allowed to setup wholly owned subsidiaries when they had JVs here.
CII warned the adverse effect of this

on local players.

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 ??