Ahmedabad, 8 September 2013

Nikkei (http://www.nikkei.com/article/DGXNASDD030G0_T00C13A9MM8000/) on 4th Sept 2013, reported that Honda Motorcycle and Scooters India (HMSI) plans to park in Gujarat for their fourth plant in India. This is indeed big news both for assuring confidence in India story as well as reinforcing faith in Gujarat as Credible India within Incredible India.

After separating from Hero group, both companies found themselves benefiting from split. While Hero is now free to develop export market which was dominated by Bajaj, HMSI tried to focus on the local market and has been a stellar performer for auto sector since the split. So far Honda was only north heavy company. Since 2001, they have factory spread over 52 acres in Manesar. Their second factory in Tapukera in Rajasthan is in 60 acres. Together they can produce 2.8 million vehicles, with close to 1.6 Million vehicles coming out of Manesar plant. As the split with Hero was evident Honda was aggressively working to establish own brand in India. Quite frequent labour problem in north coupled with 30% of demand coming from south India, they established a plant this year at Narasapur just outside Bangalore. Their foray was to be much bigger but they had to curtail their plan for south for reportedly multiple reasons.

When they bought land in Narasapur which is almost double the size of Manesar plant which produces 1.6 million vehicles, it was supposed to be their biggest factory in India. But their current plan is to match Manesar plant. According to sources, the location in Kolar is extremely rocky area. To get it plain one needs to use dynamites. Availability of water is another major headache. This is common problem. Even Pune’s some of the industrial area has the same problem. To compound their woes the state industrial development board could not provide enough infrastructure to their suppliers. The situation was so bad that Honda had to curtail plan of inviting all their suppliers. This is again a common problem in south. In neighboring Tamil Nadu, only for the Ultra Mega Project, they provide uninterrupted power supply. So on one hand Nissan assembly plant gets full power supply; the neighboring supplier park of Nissan goes blank. Hence for Honda must be in a big dilemma. In spite of double the land size of Manesar plant their production even after phase-II will be almost similar to Manesar.

The power of Dreams is slogan for Honda and everyone would reckon that they are having Dream run currently in India. Interestingly this year their motorcycles sales zoom passed that of scooters. Again it is a Dream Yuga and Dream Neo leading the pack. In spite of tough year for Auto companies in general, Honda beat the estimates by miles and grossed 31% growth in 2012-13 with record breaking sales of around 26 Lakhs units jumping to second position. The Honda Juggernaut continues to roll on. In current Fiscal 2013-14, HMSI aims to sell almost 40 Lakhs units and looking to clock phenomenal 43% growth this year. In the long term Honda strives to be number one player in India. At present Honda’s market share is 24% compared to 42% by Hero.

The gap between HMSI and Hero is steep. While striving to be number one in Indian market, Honda has opportunity to use India as big export base. Currently export numbers are far from their potential. However things will change as India would continue to be the largest Market for two wheelers. The current per capita two-wheelers ownership in India is only one fourth of countries like Thai or Vietnam. Even though India is moving towards high growth in two wheelers market, the potential demand will sustain the volumes. Needless to say, once the number grows Honda will achieve economies of scale and will be easier to make India as export base for global models which are conceived and made in India. And that is the precise reason that they need urgent capacity building. When north is suffocating, South is infra short, where does the company Go to chart ambitious growth plans.

Japanese companies are considered very conservative and take a long time in decision making. Since official details are yet to arrive there are distinct benefits for Honda in considering Gujarat which would be weighing on the mind of their management.

Last year Narendra Modi visited Japan, his visit to Hamamatsu got highlighted by his sojourn at Suzuki’s HQ and meeting with Chairman Osamu Suzuki. Hamamatsu like Gujarat is the cradle of entrepreneurship and also headquarters for Yamaha. It is also home to Honda and they must have kept a keen eye on Narendra Modi’s Gujarat. Especially with mindless industrial terror taking place in Manesar. Many Japanese companies including Honda would have seen Jetro’s announcement of Japanese Industrial Township as an encouraging step. It falls precisely in line with State’s vision to be Auto-Hub and increase employment in State. Here is just few benefits for Honda in choosing Gujarat.

(1) The first and foremost is Government that works for people and humble officers who care for investors. Coupled with peaceful labor environment, Gujarat should come to Honda as fresh air, a rarity in India.

(2) The second most advantageous is reasonably robust infrastructure across the board. For a large state, this point is indeed rarity. The good infrastructure is normally limited to in and around big cities like Bangalore, Chennai, Mumbai, Pune. Also in Gujarat the policies don’t discriminate for SMEs, hence Honda can bring in big number of suppliers.

(3) The third point being location. Gujarat would be in centre to both their locations in North and South. Thus can work as mother plant as well as buffer for any eventuality. (Remember what happened to Maruti when Manesar Mayham forced closure)

(4) The proximity to Mundra and Kandla ports means more competitiveness in exporting to Africa and beyond Arabian seas.

(5) Last but not the least, synergy with Maruti-Suzuki’s suppliers. Since Suzuki has big plans for Gujarat, it will also bring their suppliers in big numbers. There is discreet benefit to Honda as quite a few of Suzuki suppliers also have diversified into two wheelers and are catering to HMSI.

What is required out of Honda is to think big. If they are bullish on India and want to make this market as one of the most important one, Gujarat would be the place to achieve this. It might make sense for them to go for bigger expansion and not limit as being reported to 1.2 Million units.

Today GoI’s clueless calls on FDI do not make much headway. However news of global brands like Honda expanding in India will surely send much stronger signal than any ineffective statement from FM or PM. On local level, it means huge opportunity to both manufacturing and services industry. As Suzuki planning to come to Gujarat too, there is going to be huge fillip to auto parts industry in Gujarat. While HMSI and Suzuki’s existing suppliers will come along, there will be windfall opportunity for industry in Gujarat as companies try to reduce their cost by sourcing locally. Honda alone by conservative estimates will invest 200 Million USD and create 3000 jobs. But it is also rumored that it may bring more than 2 dozen suppliers along with them. The trickledown effect on economy is going to be immense.

It’s a win-win for both the global brands. The Power of Dreams riding on Vibrancy of Gujarat augurs well for India and Honda. Gujarat would once again show the way, on how to invite legitimate capital even during recessionary time.

Other day while attending Idno-Japan seminar had a chance to learn firsthand what Japanese lending agencies think of Indian Govt attitude towards Infrastrucutre apathy? I was reminded of one very different tone and content by one SME Toyota Forms where CEO spoke why he chose Gujarat during Vibrant Gujarat summit. Hope to cover this in next topic.