Abstract:

This case is about the split between the Hero Group and Honda Motor Company. Hero Honda Motors Ltd. (Hero Honda), a joint venture between Hero Cycles of India and Honda of Japan, came into existence in 1984 as a motorcycle and scooter manufacturer in India. In 2001, Hero Honda became the largest two wheeler manufacturing company in India with over a million units produced as well as the 'World's number one' company in terms of the unit volume sales for the calendar year. The technology for manufacturing the bikes was provided by Honda whereas Hero was strong in its distribution and service network spread across the country.

In August 1999, Honda Motor Company announced the setting up of Honda Motorcycle and Scooter India (HMSI) for making scooters and later motorcycles as well. After this, the stock of Hero Honda fell by 30%. Subsequently, HMSI started producing motorcycles, competing directly with Hero Honda. Hero felt that its ambition to go international was being hampered by the joint venture. Both the companies decided to end the joint venture and signed their parting agreement on December 16, 2010. With the split, the erstwhile partners became competitors. Both the companies have several opportunities ahead of them and are likely to face challenges to gain and consolidate their position in the Indian two wheeler market. Issues: Understand the benefits (utilizing strong points of both) and problems (different ambitions) of companies being in a Joint Venture. Understand how the companies can together make the Joint Venture a success. Discuss whether the decision of both companies to split Hero Honda was correct. Discuss the future strategies of both the companies and what they need to do to succeed. Analyze who will benefit more from this split. Analyze the impact of this split on consumers and competitors.

The timing of the end of the joint venture is advantageous in terms of the fact that the overall market is expanding and specifically it has ended uncertainty within the two companies. The

termination of the joint venture opens up the opportunity for Hero to become a global player which was a constraint during the joint venture." 1 -Rakesh Batra, partner and national leader of the automotive practice at Ernst and Young, in 2010. "On the face of it, one would assume that with this change there would be greater competitive activity both for the export markets where one should expect Hero to be more active and also in the domestic market place one could expect more action from Honda." 2 -Rajiv Bajaj, MD, Bajaj Auto Ltd. in 2010

Splitsville On December 16, 2010, India-based Hero Group (Hero) and Japan-based Honda Motor Co. (Honda) signed an agreement to dissolve their partnership, thus putting an end to one of the most successful joint ventures in the Indian automobile industry. The companies decided to part ways owing to unresolved disputes, and their own plans for the Indian and international markets. Honda decided to exit the venture by selling its 26% stake to the Munjal family, the owners of Hero. On ending the partnership, Fumihiko Ike, Managing Director and COO, Honda-Asia and Oceania, said, "When we entered India, the idea was to explore the market, but much has changed since then. Both companies have their own vision of what they want." He added, "Our joint venture agreement will be dissolved, but our positive relationship will continue. Honda will grant the necessary license to enable continued production and sales of current products as well as license for new products."

Hero and Honda entered into a joint venture, Hero Honda Motors Ltd. (Hero Honda), in 1984 and introduced Hero Honda CD100 the next year. The first 100 CC bike in the country provided high mileage and went on to become the most popular two-wheeler in the country. The joint venture also resulted in several path breaking motorcycles, like the Splendor and the Passion. However, over the years, differences emerged between the partners mainly due to Hero's global plans which were hampered by its agreement with Honda, and the foray of Honda's Indian venture, Honda Motorcycles and Scooters India (HMSI), into the Indian motorcycle market, directly competing with Hero Honda. Both the companies decided to part

amicably, with Honda continuing to provide technological support to Hero till 2014, and Hero continuing to pay royalties to Honda.

After the split, Hero went in for a rebranding exercise, renaming itself Hero MotoCorp. It launched a new logo, along with an advertising campaign. Hero also launched new products and announced its intentions of exploring international markets. Though Hero was successful in retaining its position as the top two-wheeler company in the Indian market, some challenges remained. According to Pawan Munjal, Chief Executive Officer and Managing Director of Hero, the main challenges Hero faced were, "First is to bring our own product. Second is to go out and set up our distribution globally, and third to replace the brand, which was already one of the most established brands in the country. The Hero Honda Joint Venture The origins of Hero date back to 1944, when four brothers of the Munjal family started a bicycle spare parts business in Amritsar, Punjab, North India. In 1956, Hero Cycles Ltd was established in Ludhiana, Punjab. In the first year, the output was 639 bicycles. They started exporting bicycles in 1963. The Munjals also incorporated several bicycle component manufacturing units, which included Rockman Cycle Industries for manufacturing bicycle hubs and chains, and Highway Cycles for making freewheels. By 1975, Hero had become the largest manufacturer of bicycles in India. In 1978, Majestic Auto Limited, was incorporated. The first product from this venture was Hero Majestic Moped, a motorized two wheeler. In 1986, Hero became the largest bicycle manufacturer in the world.

In the early 1990s, Japan-based Honda was looking at entering the Indian two wheeler market (both scooters and motorcycles) through joint ventures7. Honda had been the largest manufacturer of motorcycles in the world since 1959. In terms of automobile manufacturing, it was the sixth largest in the world. Initially, Honda intended to partner with the then market leader Bajaj Auto Ltd. (Bajaj). But the venture did not work out, and Honda partnered with Kinetic Engineering Ltd. (Kinetic), which manufactured the Luna brand of mopeds. Both the companies entered into a joint venture, with each company holding 28.56% of the equity. The venture, Kinetic Honda Motors Ltd. (Kinetic Honda) opted to produce scooters through the joint venture, as the scooters were highly popular at that time.

Then for the motorcycle venture, Honda approached Hero. Hero's bicycle business, mopeds, and wide distribution network attracted Honda. Both the companies started negotiating in 1983 and entered into a joint venture in 1984. The joint venture agreement was for a period of ten years. As per the deal, Honda agreed to provide the technical know-how, set up manufacturing facilities, and carry out Research and Development activities. Hero Honda had to pay a royalty of 4% on the ex-factory price of each vehicle for these services. Hero also paid a lump sum fee of US$ 500,000. In the venture, both the partners held 26% of the equity, 26% was sold to the public, and the remaining was held by financial institutions. On the board of Hero Honda, Honda appointed four members and the Munjal family had four representatives. Employees from Honda, Japan, were brought to take care of the quality and engineering functions. Other functions like marketing, finance, HR, and daily operations were managed by the local staff.

Hero Honda announced that it would launch a 100 cc motorcycle the next year. At that time, industry observers were of the view that consumers would reject motorcycles as they were more used to and preferred scooters. Hero Honda set up a factory in Haryana, North India. The company launched its first bike - the Hero Honda CD 100 - in 1985. The CD 100 was designed completely by Honda. The four stroke motorcycle was equipped with an electronic ignition system, illuminated speedometer, and 4-speed gear box. The bike set very high standards of fuel efficiency, promising a mileage of 80 km per liter. The Hero Honda CD 100 was launched with the campaign - 'Fill it, shut it, forget it' that highlighted the mileage that it provided. The motorcycle became highly popular owing to its mileage and the fact that it was the only four stroke engine motorcycle at that time in India Honda has other Plans as Well... While the Hero and Honda joint venture was going from strength to strength, the joint venture of Honda with Kinetic was not doing too well. Kinetic Honda was the first gearless scooter in India. The vehicle became highly popular, especially among women, due to its electric start and gearless operation. By the early 1990s, the company started facing competition from TVS which came up with its own version of gearless scooter called Scooty targeted at women. But Kinetic was not allowed to enter the motorcycle segment as Honda already had a joint venture with Hero. In 1993, Honda increased its stake in the joint venture

to 50.92% Bone of Contention When Honda announced in August 1999 that it would set up a subsidiary to manufacture scooters and motorcycles, Hero Honda's stock plunged by 30%. In 2004, when it was time for the agreement with Honda to be renegotiated, Honda announced that it would enter the motorcycle market through HMSI. At the same time, Honda allowed Hero to have a minority stake in HMSI, and allowed Hero to examine the motorcycles that HMSI would release in the market. Though Hero Honda launched several new products from time to time, Honda was reportedly reluctant to share its technology with Hero Honda, though it had an agreement to do so. Company insiders were of the view that Hero Honda was unable to bring out new bikes with better technology while competitors came out with better versions, as innovation was solely in the hands of Honda... The Split and the Aftermath In December 2010, both the companies decided to part ways in a phased manner because of unresolved differences and independent plans. Honda decided to sell its stake of 26% to the Munjal family and to exit from the venture. On the split, Pawan Munjal, said, "The Hero group together with Honda had a great 27 years of the joint venture which all of us have benefited from. It was time for us to get into a new mode where we as a group can then involve a whole lot of our own people here in the company and start doing our own technology development, which was one of the big reasons why we thought of parting ways and also to get into the international market and to take the Hero brand global."... Opportunities and Challenges In the past when there had been a split between an Indian company and the partner in the joint venture, the results had been mixed. For example, Bajaj and TVS were able to sustain and grow even after breaking away from their joint ventures with Kawasaki and Suzuki respectively. On the other hand, Kinetic and Eicher suffered after falling out with Honda and Yamaha respectively. Regarding the split of Hero and Honda, there was a poll conducted and afaqs asked advertising and marketing professionals about the impact of the split on both brands. The experts felt that the Hero group would continue doing well, especially in the mass markets, but R&D and technology would remain a challenge. They said Honda would do well in the premium segment, but creating a mass market appeal might prove difficult.

Another challenge would be in the terms of local distribution, after-sales service, and spare parts

Successful family businesses

Indian Family Businesses: Their survival beyond three generations Introduction Family as a social institution is one of the oldest surviving (Goode, 1982), but only in recent years family business, an important arm of it started receiving academic attention. After a detailed review of the existing literature, Zahra and Sharma (2004) concluded that family business research has a long way to go from the present fragmented and descriptive state. There are conceptual differences between family and business (Ward 1987, 2004), though opinions on treating them as conflicting systems vary. Family businesses are found to split up like amoeba as they grow, and very few of them survive beyond three generations, supporting the age old saying, shirt sleeve to shirt sleeve in three generations (Carlock and Ward 2001, McCulloch 2004). Most discussions in this area are based on research in advanced countries. In most developing countries, including India, it still remains a black box; academics and industry observers were puzzled to witness the recent break up in the second generation of the Ambani family, the largest private sector group worth over US $ 20 billion. Even anecdotal evidence is limited to a few biographical sketches (Tripathi, 2004; Piramal, 1998) and consultant impressions (Dutta 1997; Sampath 2001). Sharma and Manikuttys (2005) study of diversified family groups is one of the few notable research pieces from India in this area. In essence, not much is known either about the survival rate or the factors contributing to the successful survival of family businesses in India. Taking the survival bar as three generations, it will be interesting and instructive to know how family businesses perform in the fourth generation. Since the implicit assumption here is that the family has survived as a single entity, it is important to know how the familys involvement in business is and also how the family and outside professionals manage the business. Relevance of success of family business

For historical, evolutionary reasons, most countries have family businesses constituting the largest category in terms of ownership; estimates do vary, but is above 75 percent in all cases (Duman 1992, Paisner 1999; Watts and Tucker 2004). About a third of the companies listed in Fortune 500 are family businesses (Lee 2004). Since they normally do not have short term orientation but are interested in growing the family wealth with necessary precautions and have a different set of strategic goals compared to non-family owned private companies (Ward, 1987; Sharma, Chrisman and Chua, 1997), their long term contribution to economy is significant. This is true with the Indian economy too. However, long term sustenance of family business depends on its smooth survival across generations as shown in Figure 1. Families that successfully survive three or four generations have a complex web of structures, agreements, councils and forms of accountability to manage their wealth (Jaffe and Lane 2004). This seems to be much more evident in the west compared to emerging economies such as India. Reflecting the complexity of the process involved, succession planning has been an area of keen interest for researchers. This could be for a variety of reasons. One, organizational transition from an entrepreneurial stage to a system driven, professionally managed firm is not easy (Churchill, 1983), and involves evolutions, revolutions and crisies (Greiner, 1998). Two, there is often a simultaneous process of transformation taking place in the family and business with the size of activities of both growing (Kepner 1991; Morris et al 1997; Sharma, Chrisman and Chua 2003). There are also challenges of multiple stakeholders for the leadership position (Lansberg, 1999). Very often, there is lack of communication between the incumbent and incoming generations. The incumbents do not know how to handle the succession challenge, while the incoming generation does not know how to raise it. Studies in the American context showed that families choose their most competent member(s) to manage the business, disregarding age, gender or bloodline (Chrisman, Chua and Sharma, 1998). This is a reflection of the familys willingness to separate family hierarchy from organizational hierarchy. Given the level of socio-economic and cultural contexts prevailing, it is difficult to be true in the Orient including India. However, post-succession role of the

incumbent is not often planned leading to complications. This could lead to what is often described as return of the father in 18 months into the business reflecting the retiring persons return to take charge of the business again. Hence, there is a need for determining the possible role of the incumbent as a mentor or non-executive chairperson. It is also possible for the person to pursue a totally different profession such as teaching! Retirement related planning is increasingly becoming important with growing longevity of people. Although ownership and management succession are the key concerns of a large number of business families, they do not devote enough attention to the process involved. Studies (Watts and Yucker, 2004) have reported that families hesitate to address this issue. Succession dilemma is also closely related to the family policy on entry of new generation, retirement of incumbents and mechanisms for resolving conflicts. A number of case studies on family business taught in leading business schools have brought out the critical role of open communication within the family in developing and sustaining harmony and growth. Entry of new members from the family depends also on the space available in the organization, which in turn depends on the success of the business. While management literature on strategy is rich on vision, not much has been known about the need for synergizing values and vision of family and business on an ongoing basis. This is particularly so in a dynamic environment. Family business authors (eg. Carlock and Ward, 2001) have developed approaches to strategy making in business and family. As discussed by Paisner (1999), developing a sustainable mechanism for business ownership that does not lead to inequitable wealth distribution and avoid amoebic type break up, is also an important area of concern. Paisners idea of a trust

route seems to be good, but needs to be empirically validated. Families are united over generations by their vision, values and emotional bondage. There is growing realization that families have a social role to fulfill and be responsible for specific activities including community development through charity (Gallo, 2004 and Grant Thornton, 2001). All the five family businesses studied here, like most other big groups, have their independent entities for charity in the form of trusts, often run by lady members of the family. This is one way of giving recognition and occupation for ladies, who are not generally involved in business. There exist an unwritten rule in all the families studied here that daughters-in-law do not get involved in business while daughters anyway, go to their in-laws house. The current generation shows signs of this rule changing, slowly. Another source of challenge is in the nature of competitiveness. For instance, when the Indian economy was opened up in 1991, most Indian Companies, of which a huge majority were family owned, were put under competitive pressures for the first time. Many firms, particularly those that grew under government protection (Khanna and Palepu 1997) did not have a strategy to respond and take it as an opportunity rather than threat for a variety of reasons (Ray..). This created huge tensions in business families, sometimes leading to division of assets. It is also true that most businesses face such competitive pressures at different stages in their life, under the influence of economic cycles, product life cycles and firm life cycle. Competitiveness to survive and grow depends on the organizational capabilities, which flow from the family directly and from the resources hired from outside. The need to hire non family resources to build organizations is well recognized. However, an area of

conflict is the decision on the roles and responsibilities of outside professionals. Following the arguments of Agency theory (Williamson 1975, Eisenhardt 1989) and the sensitivities of separating ownership and management in family business, conflicts do arise between owner families (principals) and non-family professionals (agents). However, whether they do act as self-centred managers or forms partnership with principals through emotional and non-monetary relationships (Ghoshal, 2004), depends on the situation. Studies of business histories of a number of groups (Tripathi, 2004, Karanjia, 1997) confirm that these relationships are not purely of the classical principalagent type. There is strong personal and family level bondages out of love and respect, generated over a period of time between the principals and agents. The extent to which such relationship determines the survival and growth of family businesses needs separate research, particularly in the days when professionals loyalty is suspected to be towards their profession and not individual organizations. In essence, the most important areas of concern for the success of family businesses appear to be the ten dimensions as listed in Figure 2. These are all interrelated, such as between succession planning and conflict resolution and ownership structure. It is the synergy created by the interactions and reinforcements of these dimensions that help family businesses to perpetuate. While this needs empirical validation as the most important of many dimensions there does not seem to be any dispute on their relevance. We could call them the Ten Commandments of Family Business.