This case study details the entrepreneurial success story of Hero Honda, driven largely by the attractiveness of the market in macro terms. Hero Honda is a joint venture between an Indian bicycle manufacturer and a global leader in small-engine technology. This venture reaped the benefits of an enormous Indian population in need of affordable transportation, one having still modest but growing buyer power. In 1983, Hero Cycles of India signed an agreement with Honda Motor Corporation, forming Hero Honda.
This agreement, between an Indian firm that got its start making bicycle parts, and the world’s largest motorcycle manufacturer, marked Honda’s entrance into the Indian market for motorized two-wheeled transportation. While the country was already crowded with competitors such as Suzuki, Yamaha, LML and Kinetic, Honda’s executives and Hero’s founder and CEO, Brijmohan Lall Munjal, saw significant potential in the Indian two wheeled market. Why was the market attractive? At first glance, the Indian market was attractive because of its sheer size and significant growth.
India boasted a population of approximately 725 million in 1983, growing at a rate of 2. 2 per cent per year. At that rate of growth, the Indian population was expected to grow by 163 million people in the 1980s and to surpass 1 billion people by 2000. Not only was the total population of India enormous, but Munjal also knew that the adult age group most likely to purchase two-wheelers (15–65-year-olds) was expected to grow to over 500 million by 1990 and to an estimated 695 million by 2005.
But why would one want to pursue a market where 35 per cent of the population was impoverished? Mitigating this fact was growth in the purchasing power of the Indian population, expected to grow per capita by 5. 2 per cent between 1983 and 1993. Furthermore, even in the early 1980s, the country was wealthy enough to support an infrastructure of 1. 4 million kilometres of highway. In total, Munjal saw that a large population coupled with a substandard economic situation was an ideal environment for inexpensive, motorized, two-wheeled scooters.
Honda also saw the potential. With air pollution from industry and vehicle emissions topping India’s environmental concerns, emissions regulations had become increasingly stringent. These regulations made environmentally friendly vehicles more attractive, and two-wheelers with their fuel efficiency and low emissions fit the bill. Honda also recognized that Asian countries such as India and China, with their huge populations and relatively low levels of economic development, were likely to embrace two wheeled vehicles as a popular means of transport.
In short, India offered a large and growing market for two-wheelers, supported by several favourable macro-trends that boded well for the future: growth in numbers in the demographic group most likely to buy twowheelers, growing purchasing power across the Indian population, and regulatory encouragement. How did Honda enter the market? Rather than enter the Indian two-wheeled market alone, Honda opted to join hands with the established bicycle manufacturer Hero Cycles, a company with proven manufacturing, distribution and management practices.
Founded by Brijmohan Lall Munjal and his brothers in 1945, Hero Cycles was an ideal partner for Honda. In business for nearly 40 years, Hero had manufactured and distributed bicycle parts and bicycles in India for as long as Honda had produced motorcycles. And, with strong distribution channels and well-honed supplier management, the Hero Cycles name was as reputable in India as was Honda’s in Japan. But Hero Cycles was no ordinary partner. The Munjal family’s management practices had led to exceptional results, low employee turnover, and never a day of strike in 40 years.
The company used modern manufacturing concepts such as just-in-time supply chain management, multi-tasking assembly line workers, and stringent quality assurance programmes. Most importantly, Hero’s management brought an intimate familiarity with the Indian economy, government, business culture and people. ‘What drew Honda to Hero was the philosophy and value of the group. It’s good management and customer-oriented thinking’, said Honda’s Kazumi Yanagida, one of two Honda directors on the Hero Honda board. Macro-trends steer India’s two-wheeled market
In the 1980s, the geared scooter with a four-stroke engine was Hero Honda’s most popular two-wheeled vehicle, providing inexpensive and reliable transportation to India’s largely rural population and growing middle class. Hero Honda had seen something that all the motorcycle manufacturers had missed. The biggest chunk of demand was to come from villages, small towns and the middle-class office-goers in cities for whom the fuel economy of a four-stroke engine was a bigger draw than the looks and the power of two-stroke bikes.
As Brijmohan Lall Munjal remarked, ‘Looking into the rear view mirror today, the choice of a four-stroke bike in the 1980s may sound providential, but we knew that buying a product is one thing and running it for a long time is quite another. That is why we wanted the running cost of our vehicle to be low’. The advantages of four-stroke engines were threefold. Not only did they produce less pollution than a two-stroke engine (commonly used in other motorcycles) but they were also more fuel-efficient and ran for longer than the more powerful two-stroke engine.
Fuel efficiency and product longevity translated directly into money saved. Saving money appealed strongly to India’s middle-class consumer. Hero Honda had the first and for many years only four-stroke vehicle. As its early ads said, ‘Fill it, shut it, forget it. ’ Yet demand for these scooters would last less than a decade. The growing purchasing power of India’s expanding middle class would soon change what they wanted in two-wheeled transportation. In 1988, to understand its market better, Hero Honda conducted a massive customer survey, collecting some 25,000 responses.
The survey told Hero Honda a surprising story. India’s consumers had changed their minds. Scooters were no longer the vehicles of choice. Motorcycles were to become the two-wheel vehicles of the 1990s. Atul Sobti, Senior Vice President of Marketing and Sales for Hero Honda said, ‘It’s thanks to that survey that today we sell over a million motorcycles in a year’. Sobti couldn’t have been more accurate. In response to these surveys, Hero Honda set up a second plant in Gurgaon to allow for additional manufacturing capacity.
Ravi Sud, Vice President of Finance said, ‘With additional capacity, we found it easier to cash in on the trend in favour of motorcycles’. By 2000, motorcycles were the choice of 58 per cent of India’s twowheeled customers, up from 33 per cent in 1996. By making efforts to gauge and understand its market and the trends therein, Hero Honda cemented its reputation as a market-driven company, one that anticipated and acted upon these trends. As Brijmohan Lall Munjal said, ‘The excellent results achieved by Hero Honda can be attributed to our continued focus on understanding and satisfying customer needs to the finest detail.
We are committed to maximizing value to all our stakeholders, by delivering “value for money” products with the best in technology and service, to our customers, consistently, wherever they are. ’ In response to its customers’ desires, Hero Honda introduced other customer-friendly innovations to the Indian two-wheeled market, extending motorcycle warranties from six months to two years, and developing a Passport Scheme that included accident insurance and reward points for purchases and service.
The results of great market understanding Being market-driven has its benefits. The proof of that mantra is in the pudding: Hero Honda had 5 million customers and 40 per cent average annual growth in sales between 1996 and 2000. In 2000, Hero Honda’s Splendor, a model introduced in 1994, became the world’s largest selling motorcycle. In the first quarter of 2001, Hero Honda became the number-oneselling two-wheeled manufacturer in India, usurping arch-competitor Bajaj Auto Limited’s 43-year reign.
In the first four months of 2001, Hero Honda outsold Bajaj by 40,000 vehicles, grabbing nearly 50 per cent of India’s motorcycle market. In its year ending 2001, Hero Honda sold 1 million motorcycles, becoming the largest two-wheel company in Honda’s worldwide family. To put that in perspective, Honda’s two-wheel market in India ‘equals the whole of North America in cars’,25 commented Atul Sobti. With such a strong share of the market, Hero Honda expected to sell 1. 4 million motorcycles in its year ending March 2002,26 for net sales of more than 44 billion rupees (? 00 million). For his continued entrepreneurial accomplishments, Brijmohan Lall Munjal was named Ernst & Young’s Entrepreneur of the Year for India in 2002. It would be myopic to attribute Hero Honda’s successes simply to the size and growth of the Indian market. As the company’s case history shows, Munjal and his team have done many things well. Among the most important of these, though, is keeping a watchful eye on market trends in order to stay in tune with changing customer needs, appropriately matching their offerings to what customers want.
They understood the opportunity in 1983. Their ability to stay in touch with changes in the market has enabled them to continue to seize new opportunities as they have presented themselves. Lessons learned from Hero Honda In 1983, could Honda Motor Company and Hero Cycles have predicted that the Indian market would buy 320,000 motorized two-wheelers each month in 2001? 69 Probably not. But Honda and Hero were confident of significant market potential for motorized two-wheel vehicles in India, given the sheer size of the Indian market and its emerging middle class.
At the same time, they understood the limitations in the still-modest purchasing power of their target customers, so they offered products whose reliability and overall economy were unmatched by their competitors. Hero Honda’s ability to identify an underserved market – one that was large and would grow – and match its offering to that market’s needs were the twin factors that separated them from larger competitors who had targeted more upscale urban customers having quite different needs. These are simple ideas – marketing basics, really – but they comprise the foundation for many successful entrepreneurial ventures.