Honda Motor Company of Japan has set up a 100% subsidiary in India to manufacture scooters with a capacity of 100,000 vehicles. There has been concern regarding the impact of this subsidiary on Hero Honda's operations and prospects in which Munjals and Honda Motor Company hold 26% each.

Hero Honda is the market leader in the motorcycle industry having a share of 42% currently. The strengths of the company include a strong brand name, fuel efficient and innovative products, leadership in technology and a wide distribution network. The company reported a turnover of Rs 22,700 m for FY2000.

The opening of this subsidiary has led to fears in the market regarding Hero Honda's status and whether the company will have access to technology from Honda in future. However certain reasons why we believe prospects foe Hero Honda do not look as negative as they are made out to be are as follows:

1. Honda's subsidiary is slated to manufacture only scooters for the first five years and it has a capacity of only 100,000 vehicles currently. Hero Honda in comparison has a motorcycle manufacturing capacity of 650,000 units as per its FY99 annual report . As per the agreement between Munjals and Honda, the fully owned subsidiary Honda Motorcycle & Scooter India Ltd, is slated to stay confined to manufacturing and marketing scooters only for the first five years. Honda's subsidiary would enter the motorcycle business only after five years.
2. Both companies would mutually decide on new models and products entering the market so as not to tread on each others' path in future. Also as Honda Motor Company, is keen to capture a major chunk of both scooter and motorcycle market share it may very well be that each company would concentrate only on one segment so as to be quick in garnering up its market share in both segments.
3. As per press reports it is quite likely that Honda could dilute its stake in its 100% subsidiary by entering into a joint venture. Honda operates via three separate joint ventures in China, hence they could very well do the same in India. The joint venture with the Hero group in motorcycles could complement the company's other joint venture in scooters.
4. Hero Honda has signed an agreement with Honda Motor Company for continuing inputs in technology for motorcycles, this would be valid even after their agreement expires in 2005.

Market View:
Analysts have rated Hero Honda as a 'BUY' on the back of good demand for motorcycles. However a major concern that has made them cautious on the company is Honda's 100% subsidiary in India to manufacture scooters and motorcycles.