Last month the iconic American motorcycle maker Harley-Davidson announced its intent to exit Indian market citing mounting losses and low sales. The company which had mulled selling 10,000 units every year in India could manage to sell only around 25000 units till date from commencement of operations in August 2009, a number far below its expectations.
Speaking to analysts, Jochen Zeitz, chairman, president and CEO, Harley-Davidson, said: “Under our focussed participation model, we are exiting about 40 markets where low volumes and little profit do not warrant investments. We are establishing dealer-direct or distributor model in about 17 markets, and our 36 highest potential markets will have the leadership, resources and clearly defined operating framework that we believe will derive desirable growth and profitability in the future.”
India is one of the biggest markets in the world for two-wheelers with intense competition among international motorcycle companies like Yamaha, Honda, Benelli, Kawasaki, Triumph, Ducati, Suzuki, Indian Motorcycles, MV Agusta all competing for a slice of pie in the luxury bike segment with engine capacity of above 500 cc. Royal Enfield is currently the only Indian manufacturer with a presence in this segment.
Barring one or two motorcycle manufacturers mentioned above, all the above motorcycle manufacturers also offer mid-size capacity bikes of less than 300 cc in the Indian market. On the other hand, Harley-Davidson’s product offerings in India comprised only of heavy and expensive bikes which were unsuitable for regular use on Indian roads with heavy traffic.
However, instead of an abrupt exit from Indian markets, Harley-Davidson has decided to forge a tie-up with Hero Motorcorp for development, sales and service of a range of premium motorcycles under the Harley-Davidson brand in India as well as support for spare parts. Hero Motocorp would also sell Harley accessories & general merchandise including riding gear and apparel through a network of brand-exclusive Harley-Davidson dealers and its existing sales network in the country.
Bajaj Motorcycles, one of Hero Motorcorp\’s biggest competitor, currently has a non-equity partnership agreement with Triumph Motorcycles to build and market a new mid-range capacity motorcycles (200 to 750) range for domestic and international markets.
TVS Motor Company, another competitor of Hero Motorcorp, has a similar tie-up with BMW Motorrad development for manufacturing and distribution (including sales and support) of less than 500cc motorcycles.
Hero Motocorp’s tie-up with Harley-Davidson is expected to be a win-win situation for both motorcycle manufacturers. While Harley-Davidson can still maintain its brand presence in India, this tie-up will open up a window of new opportunities for Hero Motocorp. Despite being the largest motorcycle manufacturer in India, Hero Motorcorp caters mainly to the entry-level segment (100-125cc motorcycles) and executive segment (150-220cc motorcycles) and does not have any product offering in the premium motorcycle segment.
The premium mid-weight motorcycle segment in India, which is currently dominated by Royal Enfield motorcycles offers higher operating margins to manufacturers as compared to the entry-level motorcycle segment where margins are very low. As volume growth in the entry-level motorcycle segment is expected to diminish in the next few years, most two-wheeler manufacturers are planning to move up the value chain to widen their presence in the market the as well as improve their profitability.
The tie-up with Harley-Davidson would help Hero MotoCorp enter the premium motorcycle space, and the expertise gained through the same can pave the way for developing higher capacity motorcycles for its own brand in future.
Bottom line: Is it worth investing in the shares of Hero Motocorp?
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