Motorcycle market leader Hero Honda Motors Ltd (HHML) has opened its third manufacturing plant at Haridwar in the state of Uttarakhand on April 9. This new facility has an installed capacity of 500,000 units per annum, which would be scaled up to one million by the end of 2008 and subsequently to 1.5 million in three years.
The company, which is the largest motorcycle manufacturer in the world, has received a slew of fiscal incentives from the State government, including 10-year excise exemption and income tax relief for the next five years. Thereafter, it would have a 30 per cent rebate on income tax for the next five years of operations. All of which translates into sizeable fiscal benefits for the new plant.
Nevertheless, Hero Honda's margins are under increasing pressure due to increases in input costs and an overall slowdown in motorcycle sales in the domestic market. The company has indicated that it could re-jig its production among its three manufacturing units so as to avail of maximum fiscal benefits, by shifting more production to Haridwar.
According to managing director Pawan Kant Munjal, the company had set up an in-house team as part of its project ‘Samadhan’ that would decide whether or not to cut production at the two existing plants. “This will decide on utilisation of capacities at Gurgaon and Dharuhera as we ramp up capacities in Haridwar,” he said.
Munjal declined to comment about whether the company would actually cut production at any of its existing two plants. “Last fiscal the motorcycle market had declined yet at Hero Honda we were able to maintain our numbers,” he said. The new Haridwar plant will initially manufacture the Splendor Plus and Passion motorcycles, its two high-volume, high-margin products. Munjal also said that the company is looking at manufacturing a low-priced motorcycle and Hero Honda's constant endeavour is to develop inexpensive bikes. He, however, denied that there is any move to produce a Rs 15,000 motorcycle as was reported earlier.
Taking about the Tata Nano, Munjal said that it is unlikely to impact motorcycle sales in a major way. He said “there is a huge market at the lower end that we cater to and this segment would never opt for the Nano.”
Big ticket investment
The company has made an initial investment of Rs 450 crore at the Haridwar plant and by the end of this year another Rs 150 crore will be invested. Capacity will be expanded to 1.5 million units by 2010 with a combined investment of Rs 1,900 crore. The Haridwar complex is the biggest of the company’s three manufacturing operations, covering 275 acres.
“Initial production will be 2,000 units per day which would be scaled up to 4,000 units per day by the end of this year. Around 100 ancillaries will be setting up their manufacturing base in Haridwar over the next two years. To begin with, 40 ancillaries will set up their facility in the industrial parks being specially developed for Hero Honda ancillaries,” said Munjal.
HHML had completed the construction of the new plant in 2007. It was to inaugurate the plant in the last quarter of calendar 2007 but delayed the same to avail of the new tax benefits in the new financial year.
Shrine of technology
Calling his new plant a “shrine of technology” in the holy city of Haridwar, Munjal said it is the latest state-of-the-art addition to the company’s facilities. The new paint shop at the plant is based on modern acrylic cathode deposition technique. Being water-based, the paint is environment friendly, several times more rust-resistant and can be applied with uniform thickness and greater gloss.
The new plant is also one of the greenest in the country. It has 70 percent of its area as green open spaces. Approximately 45,000 square metres of the plant roof area is being converted into a green roof through plantation. It also has the most contemporary effluent treatment and handling equipment and there is zero discharge of liquid effluents.
The average age of the workforce is just 25 years and the plant currently employs 700 people. This is expected to grow to 2,000 by the year end, with Haridwar and the surrounding areas contributing to 75 percent of the work force. A fully-equipped training centre, called Hero Honda Gurukul, provides technical and other training for staff.
Infrastructure development
Even as the company has plans to ramp up production at the new plant, it has also announced big plans for the areas surrounding the plant site. The company which has been talking about new business opportunities in the past will now be entering into the real estate business through its new fully-owned subsidiary, Arrow Infrastructure.
Arrow plans to build facilities like schools, malls, hospitals and housing complexes in Haridwar. “Arrow International will build these infrastructure facilities near the plant. This will include three more industrial parks and two residential parks. Haridwar today lacks basic infrastructure and this issue will be addressed by our company,” said Munjal.
However, he said that it is too early to talk of the investment in these new projects. He also said it was not yet decided whether the Group would undertake this venture alone or do it with other partners.
Seen overall, and in the light of the recent downturn in the fortunes of the motorcycle industry, Hero Honda will be somewhat hardpressed to keep posting good sales. But expect the two-wheeler major to keep plugging away.