The battle in the two-wheeler market between homegrown Hero MotoCorp and Bajaj Auto is set to play out overseas too. Hero MotoCorp Chief Executive & Managing Director Pawan Munjal recently announced plans to build 20 manufacturing or assembly facilities abroad to expand the company's presence to 50 countries by the end of the decade. Interestingly, the geographies being explored by Hero MotoCorp in Central and South America as well as in Africa are the very same in which Bajaj Auto has claimed dominance over the last few years.
Pune-based Bajaj Auto is, in fact, the largest exporter of two-wheelers from India. In the last financial year, Bajaj Auto exported 1.29 million motorcycles, an increase of around two per cent over 1.26 million shipped out the previous financial year. Exports accounted for over a third of the company's overall sales of motorcycles in 2012-13. In the same period, for Hero MotoCorp, exports fell 16 per cent to 161,023 units. Exports account for 2.7 per cent of the company's annual sales of 6.07 million
Till two years ago, Hero MotoCorp was called Hero Honda, a 26-26 joint venture between the Munjal family and Honda of Japan. Under the joint-venture agreement, the company could export to only those markets where Honda was not present. The only countries it could export two-wheelers to were Sri Lanka, Nepal and Bangladesh in the sub-continent and Colombia in South America. This had ensured that the company remained, by and large, a domestic Indian player.
Hero MotoCorp is now keen to make up for that lost opportunity. As part of its ambitious global expansion plans, the company has drawn up a blueprint to set up six assembly lines spread across three continents in 2014. Munjal says, "We will be selling in 50-plus countries by 2020 and produce 12 million motorcycles and scooters every year. This will come from 20 assembly lines from inside and outside the country." Annual turnover is estimated to rise to Rs 60,000 crore by 2020 from Rs 24,000 crore in FY13. To achieve this target, the company will have to increase its production to 12 million units annually from 6-7 million right now.
Hero MotoCorp's overseas drive, say industry observers, has been partly propelled by increasing competition from its erstwhile partner Honda Motorcycle and Scooter India in the domestic market. In the last financial year, Hero MotoCorp's share in the domestic two-wheeler space declined to 42.9 per cent from 45.2 per cent in FY12. In the same period, Honda Motocycle's share rose to 18.9 per cent from 14.9 per cent. The company plans to expand its footprint overseas by setting up manufacturing facilities abroad and stitching up local partnerships for marketing and promotion over the next two to three years.
Earlier this year, Hero MotoCorp incorporated its first off-shore investment subsidiary in the Netherlands to drive its overseas expansion plans. "The overseas arm would take care of our international operations, be it expanding exports or making investments in joint-venture partnerships and strategic alliances. In certain countries, the duty structure is such that we need to maintain specified levels of local content in our products. The off-shore subsidiary in such cases would help us in making investments in setting up assembly units or manufacturing facilities," Ravi Sud, chief financial officer, Hero MotoCorp had earlier told Business Standard.
Hero MotoCorp is also actively exploring opportunities to set up companies in the United States, Europe, South America and Southeast Asia. "If we need to import components from China, we may consider having a subsidiary in Hong Kong also. We may also look at setting up an overseas company to expand our business in the US," Sud had said. Strategically, the new ventures are aligned with Hero MotorCorp's target to increase the share of international business to 10 per cent of total volumes by 2016-17, from less than 3 per cent in 2012-13. Hero MotoCorp has already started despatches to new international markets in Central and South America.
The company has set up its first assembly unit in Africa in Nairobi (Kenya) where it has also launched its first modified product-the HF Dawn. The other two African countries where the it has launched operations include Burkina Faso and Ivory Coast. In Kenya, it has partnered with Sameer Group to sell its two-wheelers.
By the middle of next year, Hero MotoCorp is looking at commencing full-fledged manufacturing operations in Colombia. This would be the company's first initiative to kickstart manufacturing operations overseas. Currently, it assembles completely knocked-down units there through its distributors.
A person in know of the development informs, "Hero MotoCorp already has distribution partners in the country. The company is looking at expanding operations and setting up a full-fledged manufacturing unit in Colombia next year. Later on, plans are there to explore opportunities for assembly facilities in African countries such as Nigeria."
The market size in Colombia is significant and the manufacturing unit there would help the company rapidly expand its business. Industry sources indicate 600,000 two-wheelers are sold in Colombia annually. "Indian two-wheeler companies will sooner or later look at setting up manufacturing units in South American, African and Southeast Asian countries. There is a lot of potential in these markets. In case of exports, freight costs get added on to product prices; without a local production base, eventually it would become difficult for companies to remain competitive in terms of pricing," says Abdul Majeed, partner and leader (automotive practice), PricewaterhouseCoopers.
In August this year, the company launched its operations in Peru, initially targeting a 15 per cent share in that market. Hero MotoCorp has roped in Motocorp S.A.C as its sole distributor. The Peru operation has been kicked off with a network of 85 outlets, and more outlets will be added subsequently in a phased manner. Peru, where about 250,000 two-wheelers are sold every year, is expected to become a significant market for Hero MotoCorp in the future.
A few months before setting up base in Peru, Hero MotoCorp commenced its operations in the Central American markets of Guatemala, El Salvador and Honduras, where the company has appointed Indy Motos Group as the authorised distributor for its two-wheelers.
In September, the company is slated to start selling its products in Ecuador. Next in line are large two-wheeler markets such as Brazil and Argentina in South America and a clutch of African markets. The company is believed to be working on an engine specifically for the Brazilian market.
The motorcycles to be sold in these markets include a mix of models from 100cc to 125cc engine capacity. Hero is initially focusing on markets where volumes are large, and products can be sold with minimum or no changes to rapidly rev up its overseas business.