KINETIC HONDA- THE BREAK-Up

Presented By: Ramesh Kumar Abhishek Jallan Nishant Kumar Nishtha Sharma Arif Lateef Jasmeet Kaur

BREAK-UP

CASE STUDY

Introduction :

Kinetic Engineering Ltd. Started in 1972 by H.K.Firodia (buying ‘luna’ moped’s design from a foreign company).

In 1985, under Arun Firodia’s (H.K.Firodia’s son),Kinetic tied up with Japanese major auto player Honda Motor to Form Kinetic Honda Motor Ltd.(KHML).

Both company holding equal stake 28.56% . Primary Business manufacturing scooters. First ungeared scooter KH-100 manufactured

was a huge success.

Starting Problem!

1980s, Kinetic was largest moped manufacturer with 44% market share and a 15% share of the overall two-wheeler market.

A decade later sales of Kinetic started declining 22% for moped market and for other two-wheeler sector the market share was just 5%.

1991 Kinetic turnover was Rs. 121 crore was competing with TVS Suzuki and Hero Honda whose turnover was Rs.140 crore and Rs. 150 crore respectively for the same year.

1999, TVS and Hero Honda grew seven times to Rs.1081 crore and Rs.1146 respectively.

Kinetic just managed to double its turnover in the same year.

Reason for the failure

Kinetic missed the pulse of the market which was moving towards motorcycles.

Stipulation of Honda joint venture (Kinetic could not make motorcycles because that meant competing with Hero Honda).

High operating margin due to import of raw materials and financial position also started dipping in 1990s.

The same year kinetic had to shelve its plan to launch a small, 500cc, 2-cyclinder car after a substantial sum was spent on the project.

1993, allowing Honda to increase its stake to 51%. Spending less on R&D i.e. 0.31% of the turnover where as

the competitor spend 1-1.5% of turnover during the year. During 1993-98 kinetic spend just Rs.20 crore on

advertisement.

Greenmail by Honda

Company recorded Rs.6 crore loss in the first quarter of 1998.

So , Honda decided to part from Kinetic thus called Arun Firodia to Japan in December 1998.

Honda made an offer to Firodia either buy the 51% stake from Honda or Honda will purchase its 19% stake.

Firodia negotiated a deal to acquire Honda stake at Rs.45 per share(when the market price was just double), at a total cost of Rs.35 crore.

Firodia signed an agreement with Honda to manufacture and sell existing kinetic Honda models.

Honda also agreed on providing technical know-how in lieu of royalty and technical fees from kinetic.

The Joint Venture between both the company came to an end .

Claims made by Firodia for declining the Venture

Kinetic could not enter Motorcycle segment as Honda was already present in that segment with Hero Honda which was not in favour of Kinetic as demand in market was shifting toward motorcycle in 1990s.

Kinetic as an umbrella brand was not being promoted.

Half-hearted approach made by Honda toward managing the company.

Honda was preoccupied with other markets such as Indonesia and Thailand, where unlike India Honda was doing well.

Contd…

Honda was not interested in engineering out a product for Indian roads.

Honda never agreed on increasing advertising expenditure.

Honda wasn’t quick to react to the demand of the marketplace as managing director(nominee of Honda) was changed every three years.

Cost of making Kinetic scooter was much higher than cost of manufacturing Motorcycle still selling price of motorcycle was Rs.10000 more.

Claims made by Honda for declining the Venture

Unfriendly move made by Kinetic by developing indigenous technology for its four stroke step-through vehicle k400, competitor to Hero Honda street model.

Miscalculation of the purchasing power of the Indian middle class. Decided to position as a niche player at the upper end of the segment and that segment did not grow.

Having single model for several year had served to company’s disadvantage.

Introducing new model involved huge cost, rendering the end product uncompetitive.

Disagreement over advertising expenditure and the interference of the Firodias in the appointment of dealers widened the rift between the partners.

Survivor(Reviving The Kinetic) Started promoting the umbrella ‘Kinetic’

brand and telling the dealer about the product plan for 1999-2001 (entering the motorcycle segment).

Conducted training programs for its dealer.

On distribution front kinetic gave its dealers full range or ‘Pavilion’ dealership.

New logo was adopted to give the company new corporate identity.

Contd…

Company got the group two auto-finance companies kinetic leasing & Finance Ltd.(KLFL), Kinetic Fincap to offer attractive finance schemes (wonder loans) (sales picked up by 20% during the year).

Adspend was increased from Rs.12 crore in 97-98 to Rs. 20 crore in 98-99.

New public awareness campaign on road safety was launched.

Company also set up direct sales division which included 50 teams of people going from shop to shop and door to door, informing people about the company’s products and finance scheme.

Contd…… Kinetic launched a new aggressive and

consumer-focused strategy with new motto ‘closer to you’.

Group also launched ‘kinetic care’, a package of post-sale and post warranty benefits for consumers.

Kinetic Mileage Advantage service camps were held across the country where more than 25000 scooters were tuned for optimal mileage free of cost

Scooter service campaigns were organized, where spares and lubricants were offered at a discount and no labour charges were charged.

Contd…

For popularizing K4-100, ‘customer satisfaction’ camps were organized, were free spare parts were provided to the customer even the warranty period had lapsed.

Company opened more depot around the country. Kinetic decentralized the distribution network and

thus reduced inventory cost. Kinetic engineering had 20 C&F agents across the

country which company used to reach semi-urban and rural areas.

Kinetic introduced new technology in its scooter to increase the mileage of the scooter from 30 Kmpl to 50 Kmpl after consulting expert around the world.

Return of Honda August 1999,Honda announced that it

was setting up a wholly-owned subsidiary to manufacture scooters in India with an capacity of one lakh units per year.

Company set up an independent distribution network for new venture.

Honda planned to set up $43 million subsidiary to focus on scooters for a period of five year.

Contd…

Honda introduced scooters in a different range as it has entered into contract with Firodias not to manufacture same scooter through a subsidiary or joint venture.

Honda launched its first scooter model in mid-2001.

Rose fears regarding guidelines for foreign companies being allowed to set up wholly owned subsidiary in India , when they already have joint venture here, CII(Confederation of Indian Industry) expressed that this could develop into new trend that would adversely affect the local partners in these joint venture.

Conclusion

The case tells us about not so good relation between Kinetic and Honda.

Problem in managing the joint venture(Kinetic and Honda joint venture).

It also give knowledge of post- break up strategies followed by both the company.

The strategic initiatives taken by the Kinetic group to stage a comeback.