KINETIC HONDA

It was in August 1998 that the first chinks in the Kinetic Honda Motors Ltd. (Kinetic Honda) armor were
reported by Business India. Both Honda and the Firodias of Kinetic were quick to deny rumors of a split,
though reports of the Firodias quietly raising resources to buy out Honda's stake kept surfacing. The
Firodias were even reported to have securitised the assets of their two-wheeler finance company - 20th
Century Kinetic Finance (TCKF) - to raise this money.

Trouble had been brewing since the company recorded a loss of Rs. 6 crore in the first quarter of 1998.
Eventually Honda decided to put the matter to rest and called Arun Firodia (Firodia) to Japan in
December 1998.

Honda made Firodia an offer - either he buy their 51% stake or Honda would buy out his 19% stake.
Analysts remarked that it was difficult for Firodia to let go of the company that he had nurtured for the
best part of his life. Eventually, Firodia negotiated a deal with Honda, to acquire its stake at Rs 45 per
share, (when the market price was almost double), at a total cost of Rs 35 crore. He also signed an
agreement with them for continuing to manufacture and sell the existing Kinetic Honda models. Honda
also agreed to continue providing technical know-how support in return for royalty and technical fees
from Kinetic.

Considering the fact that Honda was the world's biggest and most successful scooter manufacturer, the
pullout came as a surprise to industry observers, as it was quite unlcharacteristic of Honda Motor to give
up a segment. More so, as just a couple of months earlier, Honda had been reported to be planning to
make further investments in Kinetic Honda1. This was seen as a major setback for the company. It was
also perhaps the only instance of a Honda failure anywhere in the world.

Starting Problem!

In 2001, the Kinetic Group had two automobile companies - Kinetic Engineering Ltd and Kinetic Motor
Company Ltd. After the December 1998 deal, Kinetic Honda Motor Ltd was renamed Kinetic Motor
Company Ltd. Kinetic's story began in 1972 with the founder H.K.Firodia buying the 'Luna' moped's
design from a foreign company. The moped, which aimed at capturing the bicycle market, went on to
become such a huge success, that Luna became a generic name for mopeds.

In 1985, under Arun Firodia's (H.K.Firodia's son) leadership, Kinetic tied up with Japanese auto major
Honda Motor2 to form Kinetic Honda Motors Ltd. (KHML) with both the partners holding an equal stake
of 28.56%. The company's primary business was manufacturing scooters. Sales of spare parts formed a
minor part of the turnover. The 'KH-100,' the first ungeared scooter in India, proved to be a huge
success in the initial stages.

Throughout the 1980s, Kinetic remained India's largest moped manufacturer with a 44% market share
and a 15% share3 of the overall two-wheeler market. A decade later, the company's moped market
share halved to 22% and the overall market share figure reached an abysmal 5%. Also, in 1991, Kinetic,
with a turnover of Rs 121 crore, was competing on an equal turf with the Rs 140 crore TVS Suzuki and
the Rs 150 core Hero Honda4. But by 1999, while TVS and Hero Honda grew seven times over to Rs 1,018
crore and Rs 1,146 crore respectively, Kinetic just managed to double its turnover.

A major reason for this was the fact that Kinetic seemed to have missed the pulse of the market, which
was fast moving towards motorcycles. Kinetic had no motorcycles to offer - mainly due to the Honda
joint venture stipulations. (Kinetic could not make motorcycles because that meant competing with
Hero Honda.) Kinetic's financial position also took a beating in the late 1990s. While sales grew slowly,
compared to its competitors, its operating margin was the lowest in the industry because of the high
import content of raw materials. Kinetic also had to shelve its plans to launch a small, 500cc, 2-cyclinder
car after a substantial sum was spent on the project5.

With Kinetic Honda's fortunes declining, Firodia agreed to let Honda increase its stake to 51% in 1993,
perhaps hoping that if Honda were in control, it would bring in new products more quickly and thereby
improve the company's prospects. But Firodia soon realized that this was not to be. At a time when its
competitors were spending 1-1.5% of the turnover on R&D, Kinetic Honda did not move beyond 0.31%.
On advertising, Honda spent just Rs 20 crore during 1993-98. As a result, Kinetic Honda's market share
declined steadily during 1996-98.

In 1997-98, Kinetic Honda's sales grew marginally to Rs 353 crore over the previous year, but profit after
tax dipped to Rs 2.16 crore from Rs 2.30 crore. This, coupled with the Rs 6 crore loss for the first quarter
of 1998 made the Firodias give serious thought to parting ways with Honda. Firodia said, "There was no
growth, so we decided to review the contract." The new agreement involving the Honda stake sell-off
and the technical collaboration arrangement was signed after this. Commenting on this, Firodia claimed,
"It's a win-win scheme for everybody."

Though Firodia claimed that Honda's equity sale decision was taken jointly by both partners, media
reports had a different story to tell.
Souring Ties

Reports claimed that right from the beginning there had been differences between Honda and the
Firodias over the issue of management of Kinetic Honda. Firodia admitted that there were serious
differences over issues like introduction of new models, advertising expenditure, marketing strategies,
etc. As a result, the company suffered in terms of growth and profitability.

Under the joint venture agreement, Kinetic Honda manufactured scooters and Kinetic Engineering made
mopeds. Both of them could not manufacture each other's products or motorcycles. Because Honda was
present in the motorcycle segment with Hero Honda, the Kinetic group remained in mopeds and
scooters. This was not in favor of Kinetic because the moped market had declined considerably during
the 1990s. Kinetic had ambitions of becoming a full range two-wheeler company as it was strong in
operations and also had a large distribution network.

When Kinetic developed indigenous technology for its four-stroke step-through vehicle K400, a
competitor to Hero Honda's Street model, Honda saw it as an unfriendly move.

The Firodias were unhappy about the fact that 'Kinetic,' as an umbrella brand was not being promoted.
Consumers associated the name Kinetic with scooters and 'Luna' with mopeds, but did not see them as
belonging to the same business house. To support the Kinetic brand as an umbrella brand with a
number of products under it, the Firodias wanted to advertise heavily and bring out new products.
According to Sulajja , "The tie-up with Honda was limiting our competitive capabilities."

Kinetic Honda insiders claimed that Honda had always taken a 'half-hearted approach' towards
managing the company. They also said that Honda was too preoccupied with other markets such as
Indonesia and Thailand which were growing much faster and where, unlike in India, Honda was doing
well. Also, Honda's margins were much higher in these markets - even a 50cc Honda scooter cost more
in other parts of the world than the lead model being sold in India. Yet, Honda scooters were considered
expensive in India. Industry watchers pointed out that Honda, with all its resources, could have easily
engineered a product for the Indian roads, but was simply not interested.

Honda claimed that it had decided to position itself as a niche player at the upper end of the segment
and that segment did not grow as much as the company had anticipated. Company sources said, "We
miscalculated the purchasing power of the Indian middle class. We thought it would go up, but it didn't.
Instead, the economy went into a tailspin and we couldn't grow." However, Honda admitted that having
just a single model for several years had worked to the company's disadvantage. But the investment
required to develop and introduce new models was very high, rendering the end product uncompetitive
and hence an unattractive proposition. Honda claimed that the Firodias did not have the marketing
acumen of the Munjals of Hero Honda. Disagreements over advertising expenditure and the
interference of the Firodias in the appointment of dealers widened the rift between the partners.

Kinetic wanted Honda to increase the advertising expenditure, but Honda did not agree. Being a large
organization with various decision-making layers, Honda wasn't quick enough to react to the demands
of the marketplace. The joint managing director, a Honda nominee, was changed every three years.
Thus, by the time he understood the demands of the marketplace, it was time for him to be replaced.

Unlike the Hero Honda venture, where the Munjals and Honda showed complete faith in each other and
worked together as a team right from the beginning, the Firodias and Honda reportedly never shared a
good rapport. In Hero Honda, the partners had equal stakes and this made decision-making easier.
Moreover, because of lack of competition for a long time, things were easier for Hero Honda. But Kinetic
Honda had to compete with a giant like Bajaj. Also, while the cost of making the Kinetic scooter was
higher than the cost of manufacturing a motorcycle, the selling price of the latter was Rs 10,000 more.
The profitability of Hero Honda, therefore, was much more and they could afford to spend more on
advertising. Also, the Munjals could take their own decisions regarding adspend. Firodia said, "If we
could have done the same, it would definitely have increased Kinetic's visibility and volumes would have
grown faster."

Honda's exit raised questions about Kinetic's survival. It was thought that the Rs 35 crore the Firodias
paid for acquiring the entire stake would put a great strain on their finances and weaken the company.
Analysts were quick to comment that Kinetic would have problems regarding the development and
induction of new products. Honda's technical support limited to the existing range of products. And as
the existing products - Kinetic Honda and Marvel - were not doing very well at that time, the withdrawal
was seen as an unwelcome development.

Survivor

Firodia denied that the dropping of the Honda tag from its scooters would affect the sales. The company
introduced tough measures to facilitate improvements on various fronts including input costs, asset
management and inventory management. Kinetic realized that gaining customer and dealer confidence
would be a key task if it wanted to survive without Honda. Kinetic told its dealers about its product plans
for 1999-2001 and tried to convey to them that now on they would be selling not just Kinetic Honda
scooters, but promoting the umbrella 'Kinetic' brand. This meant that they would also be selling mopeds
and motorcycles. This in turn, meant higher volumes and, thus, higher profits in the coming years.
Kinetic conducted training programs for its dealers to help them deal with customers in a better
manner. On the distribution front, Kinetic gave its dealers full range or 'pavilion' dealership. A new
Kinetic logo was adopted to give the company a new corporate identity.

However, after the breakup, Firodia's immediate strategy was to push up sales by getting the group's
auto-finance companies - Kinetic Leasing & Finance Ltd. (KLFL), Kinetic Fincap and Kinetic Capital Finance
(later merged with Kinetic Fincap) - to offer attractive finance schemes. Those finance companies were
strategically located to service the three biggest markets for two-wheelers in India - north, west, and
south. They offered a wide range of finance schemes (termed as Wonder Loans) to suit various customer
needs. The move paid rich dividends as sales picked up considerably. Kinetic Fincap and Kinetic Leasing
&Fincap contributed 20% of Kinetic Honda's sales in 1999.

Kinetic called dealer meetings in all regions of the country to assure them of the company's strong
prospects even after Honda's departure, which had a very positive feedback. Kinetic also stepped up
promotion of the Kinetic brand, using both television and newspaper ad campaigns. A considerable
amount was spent on an image-building campaign for the group. Adspend was increased from Rs.12
crore in 1997-98 to Rs.20 crore in 1998-99. A new public awareness campaign on road safety was
launched. The company set up a direct sales division as well, which had 50 teams of people going from
shop to shop and door to door, informing people about the company's products and the finance
schemes offered. The response was overwhelming and around 12% of the sales came from this division
in 1999. A survey conducted across nine cities showed that Kinetic had maintained its hold, despite
Honda's exit.

On the customer front, Kinetic launched a new, aggressive and consumer-focussed marketing strategy,
with the new motto 'Closer to You.' The group launched 'Kinetic Care,' a package of post-sale and post-
warranty benefits for the consumers. Several 'Kinetic Mileage Advantage' service camps were held
across the country where more than 25,000 scooters were tuned for optimal mileage free of cost.
Scooter service campaigns were organized, where spares and lubricants were offered at a discount and
labor charges for replacing these spares were waived. For popularizing the K4-100, 'Customer
Satisfaction' camps were organized across the country. These were attended by over 18,000 customers,
who got free spare parts even though the warranty period had lapsed.
Kinetic's moves on the operations front, included opening of more depots around the country and a
change in the credit policy. The Honda stake came with Rs.400-500 million as outstanding with dealers.
Once these were recovered, interest costs came down considerably. Kinetic decentralized the
distribution network and thus reduced inventory costs. Kinetic Engineering already had 20 C&F agents
across the country. Kinetic used these agents to extend its reach to semi-urban and rural areas. For
example, Kinetic was able to reach places like Anand and Gandhinagar from a depot in Ahmedabad
within 24 hours. From its Pitampur plant, this would have taken almost three days. Kinetic also
approached banks and negotiated deals to reduce its cost of borrowings. Material costs were reduced
by reducing unnecessary imports. To improve the mileage of its scooters, Kinetic consulted experts from
around the world and introduced a new technology in its new series of scooters, raising the mileage
from 30kmpl to 50kmpl.

All these efforts soon translated into improved performance, proving the company's detractors wrong.
Kinetic posted good results for both KEL (sales rose by 20%) and KMCL (sales rose by 23%) for the first
half of 1999. KMCL also wiped off the previous year's loss of Rs 6 crore and posted profits of Rs 3.69
crore for the same period. In fiscal 2000, sales increased by around 25%.

Return of the Prodigal

In August 1999, Honda announced that it was setting up a wholly-owned subsidiary to manufacture
scooters in India with an initial capacity of one lakh units per year. The company set up an independent
distribution network for the new venture. Through this $ 43 million subsidiary, Honda planned to focus
on scooters for a period of five years. Later, Hero Honda and the Honda subsidiary were to be free to
expand the range to include all two/three wheelers. Honda's first scooter model was launched in mid-
2001. Around one-third of the total proposed outlay of Rs 150 crore had already been invested by that
time. Though the contract with the Firodias prevented Honda from manufacturing the same scooter
through a subsidiary or a joint venture, Honda got around the clause by introducing scooters in a
different range. A Honda official said, "This is an extremely important market for us and there is no
question of giving up the scooter business - we never give up."

Honda's decision sparked off debates in industry circles over guidelines regarding foreign companies
being allowed to set up wholly owned subsidiaries in India, when they already had joint ventures here.
The Confederation of Indian Industry (CII) expressed fears that this could develop into a trend that
would adversely afect the local partners in these joint ventures.

Kinetic claimed they were not perturbed by Honda's announcement, as the group believed they were
the de-facto leaders in ungeared scooters. Also, they had the exclusive rights to manufacture the 100cc
and 110cc, Marvel, DX and ZX scooters. The Firodias were not really surprised by Honda's
announcement, because at the time Honda was negotiating with them for the Kinetic Honda stake, such
a possibility had been discussed. However, many felt that Honda could eventually enter the motorcycle
segment as well - something which seemed strategically wrong given the success of the Hero Honda
venture. Sulajja said, "If Honda was serious about its scooter business in India and wanted to grow in the
market by introducing new models, then why did they not do so during the 12 years that it was present
in India, through its JV with us? After all, it had a majority stake and full management control. Yes, its
true that Honda has said that it will start by manufacturing a 4-stroke scooter first through the new
company. But what one fails to understand is why Honda should reenter a business by setting up a
greenfield project at a whopping investment of over Rs.200 crore, when it has barely 10 months ago
exited that market, unless it has a larger game plan of manufacturing motorcycles too."

INDEX &REFERENCES :

1] In June 1998, Honda was reported to be contemplating further investments in KHML, despite the Japanese sanctions imposed on India
during that period. Honda was also expected to launch a new range of four-stroke scooters. This was however not confirmed by either party.

2] Established in 1948, Honda Motor Co. Ltd., was one of the world's leading automobile manufacturers. Globally renowned for its light and
utilitarian motorcycles, Honda had over 77 production facilities in 40 countries and sold its products in over 150 countries.
3] 1981 figures.
4] Hero Honda Motors Ltd. was a 50:50 joint venture between the Hero Group of India and Japanese automobile giant Honda Motors. Formed
in 1984, the company was India's biggest player in the motorcycle segment.
5] The vehicle named CityCar was to be priced at around Rs 1 lakh, provided Kinetic was able to get some excise concessions. However, these
concessions were not forthcoming and the project had to be shelved.

COURTESY :ICMR