Hero MotoCorp

Aug 8, 2019

Venturing into Colombia

DBRC 2019 | Group 7

Ankush Jhawar 1811330

Chandramauli Gupta 1811396
Gunjesh Kumar 1811413
Nitesh Kumar Singh 1811370
Firm Background
In 1956, Hero Hero Honda started In 2001, became
Cycles Ltd. was operations in 1984 as a JV largest two-wheeler
established between Hero Cycles of India manufacturer in the
and Honda of Japan world

In 1975, Hero Cycles

Initial focus on fuel In 2010, the two
Ltd became the largest
economy and low companies decided
manufacturer of
cost motorcycles to de-merge
bicycles in India

Hero MotoCorp – Venturing into Columbia

Joint Venture with Honda

Conditions of JV Reasons for Demerger in 2010 What next for Hero?

• Honda would provide • HMSI - 100% subsidiary of • Hero could now export
technology and assist in Honda was established in 1999 to any country in the
setting manufacturing to compete with Hero Honda world
facilities • Competing products • Compete with rivals
• Hero Group was not introduced by HMSI - Honda like Bajaj in foreign
allowed to export to Unicorn and Hero Honda CBZ markets
International markets • Honda's reluctance to fully and
where Honda was present freely share technology
which excluded Sri Lanka ,
Bangladesh and Colombia

Hero MotoCorp – Venturing into Columbia

Where all could Hero
go in the world after
2010?

Hero MotoCorp – Venturing into Columbia

GDP (PPP) per capita

Hero MotoCorp – Venturing into Columbia

Global Road Infrastructure

Hero MotoCorp – Venturing into Columbia

Bajaj in Foreign Markets

Bajaj’s Export Data

Hero MotoCorp – Venturing into Columbia

Exchange Rate Trends (USD-INR)
Exports become more rewarding when domestic currency depreciates

Hero MotoCorp – Venturing into Columbia

Choices for Hero

Continue export of Assemble bikes in Set up foreign

finished bikes from foreign markets by manufacturing plant
India exporting
knockdown or semi-
knocked down parts

Hero MotoCorp – Venturing into Columbia

Export vs Local Assembly vs Local Manufacturing
Exports
• Exported products are
costlier due to customs
duty. Ex- 35% custom duty
on automobile in
Colombia
• For instance, a Rs. 60k bike
in India would cost
approximately Rs. 90k in
Colombia due to taxes
• Given the price sensitive
nature of demand, it
affects business adversely
Local Assembly
• Local Assembly helps
lower customs duty
thereby reducing the
overall cost of production
down
• Ex- on an average 5%
custom duty on parts in
Colombia
Hero MotoCorp – Venturing into Columbia
Local Manufacturing
• Local Manufacturing helps
in leveraging economies of
scale and an end to end
control of the production
process
• Overall lowers the cost of
production
• Faster responsiveness to
local market
Hero presence post 2010

Hero’s market presence Bajaj’s market presence

Hero MotoCorp – Venturing into Columbia

Should they manufacture
in Africa or Latin America?

Hero MotoCorp – Venturing into Columbia

Hero MotoCorp – Venturing into Columbia
Risk Profile of Africa
Doing Business Score Corruption perception index
LCC Risk Low Highly Corrupt Region
Mostly Very High Risk

Hero MotoCorp – Venturing into Columbia

 Risk Profile of Latin America
LCC Risk Doing Business Score Corruption perception index
Moderate Risk Moderate Mostly Corrupt Region

Hero MotoCorp – Venturing into Columbia

Global Motorcycle Penetration

Hero MotoCorp – Venturing into Columbia

Two Wheeler Market (mn units)

Hero MotoCorp – Venturing into Columbia

Stagnating sales in domestic market
Stagnating Domestic Market share of Hero Increasing exports of competitors

Sale of two-wheelers (Domestic+Export)

(million units)
20
18
16 5.47 6.03
4.43
14 3.44 3.81
12 2.83
10
8
6 11.94 11.95 12.46 13 12.91
10.5
4
2
0
FY11 FY12 FY13 FY14 FY15 FY16

Motorcycles Other Two-Wheelers

• Post 2011, share of Hero in domestic 2-wheeler market was stagnating

• Corresponding sale of other two-wheelers driven mostly by scooty was on a rise
• This implied, Hero had to look beyond the domestic market for sale of its motorcycles
Growing Latin America Market
Per capita consumer expenditure on purchase of cars, motorcycles
and other vehicles
80.00 3000.00

Latin America (in $)

70.00
Columbia (in $)

2500.00
60.00
50.00 2000.00
40.00 1500.00
30.00 1000.00
20.00
10.00 500.00
0.00 0.00
2010 2011 2012 2013 2014
Axis Title

Latin America Colombia

Thus, it made sense to enter Latin America to set up a manufacturing plant

Hero MotoCorp – Venturing into Columbia
Why setting up plant
specifically in Colombia
made sense ?

Hero MotoCorp – Venturing into Columbia

Hero MotoCorp – Venturing into Columbia
Risk Profile of Colombia

Inform Risk Marsh Index Euler Hermes

5.46, High 58.5, Unstable Medium Risk
H&E Vulnerability LCC
6.8 6.2 4

Ease of Doing Business Corruption perception index

69.89/100 37/100
Ranked 3rd in the
region

Hero MotoCorp – Venturing into Columbia

Risk Profile of Colombia

• Colombia with inform risk score of 5.46 is high risk, higher than the average score of the Latin
America region
• LCC risk at a score of 4 is the lowest, not only for the country but also in the region
• Low LCC implies better institutions and infrastructure
• For existence of motorcycle demand, there is requirement of infrastructure like roads, petrol
pumps
Hero MotoCorp – Venturing into Columbia
Risk comparison with India
Inform risk trend- Colombia

• Colombia has a stable inform risk

score compared to its peer
countries in Latin America

• Comparing it with India, there is a

high level of similarity in the risk
profile of the two countries
Inform risk trend- India

• It makes sense for Hero, an Indian

company to make their first foreign
endeavour to a similar risk profile
country

Hero MotoCorp – Venturing into Columbia

Diplomatic Ties with India
1959 - Colombia and India established diplomatic relations; NAM member (1961); Founders of
G-77(1964)
1970 - Trade Agreement between the Government of the Republic of India and the Government
of the Republic of Colombia
2001 - Colombian President visits India. Ties get better. MoUs signed for visa exemption and
academic collaboration

Colombia becomes a strategic entry point into LAC region for India

Other MoUs
2009 - Bilateral Investment Promotion and Protection Agreement
2010 - MoU on Business Development Cooperation
2011 - Double Taxation Avoidance Agreement

Hero MotoCorp – Venturing into Columbia

Strategic Location
• Colombia is located in the northwest corner of South America which makes it a mandatory
transit way for shipping companies that covers Northern and Southern routes.

• Proximity to the Panama Canal - that permits the interconnection of sea freighters between
the Atlantic and Pacific oceans.

• The presence of large megacarriers 1 in Colombia and prime maritime connectivity with the
world.

• 75% of all major shipping companies in the world (approximately 15 carriers) have access to
dock in services for import and exports in and out of Colombia.

• Low cost freight rates compared to the region for transport general cargo to markets in North
America, South America and Central America.

Hero MotoCorp – Venturing into Columbia

Strategic Location & Alliances

• CAN (Customs Union between Bolivia, Colombia

and Ecuador, Brazil, Peru)
• Pacific Alliance • Mercosur
• Colombia • Caribbean Community (CariCom)
• Chile • Group of 3(G3)- Colombia, Mexico, Venezuela
• Mexico • European Free Trade Association
• Peru • The US Colombia Free Trade Agreement
Hero MotoCorp – Venturing into Columbia
Conclusion
It made sense for Hero to set up manufacturing plant in Colombia because
of the following reasons:

WhySuitable
setting up
Risk Profile
plant specifically
Government Relations
in Colombia
made sense
Ready Market ?

Strategic Location

Previous presence (120+ Outlets)

Hero MotoCorp – Venturing into Columbia

Possible Gaps and Improvements
Possible Gaps
• Hero aimed to set up this manufacturing
plant to serve the LATAM market. But the
biggest market in this region – Brazil was
dominated by ethanol-based vehicles. Hero
did not have the technological capability to
cater to this demand.
• The exports of Hero in FY14 amounted to 2
Lac units across 20+ countries across the
globe. Thus, setting a manufacturing plant in
Colombia with 80000 capacity might not have
been the right choice.
Improvements
• Engine design is a critical and niche
capability and prior to entering the LAT
market, hero should have developed the
capability of ethanol-based engine to cater
to Brazilian market. Even till date, Hero
hasn’t been able to develop the engine.
• Hero could have considered Africa as a go
to market as well given strong presence of
Bajaj there and the portfolio of products of
Hero suitable for the African demographic.
Hero MotoCorp – Venturing into Columbia
Hero MotoCorp – Venturing into Columbia