Hero buys 49.2 per cent of Erik Buell Racing for US$25 million

The rumours started yesterday and now Hero MotoCorp has confirmed that it has indeed purchased 49.2 per cent stake in US-based Erik Buell Racing. Hero already had an agreement with Erik Buell Racing for developing a new motorcycle, rumoured to be a 250cc-class sportsbike. Hero also sponsors two race teams run by Erik Buell Racing in the US racing.

Ravi Sud, CFO, Hero MotoCorp Ltd. with Pawan Munjal, MD&CEO, Hero MotoCorp Ltd.

For those who came in late, Erik Buell is an american engineer who came to the limelight by developing an effective sportsbike based on Harley-Davidson engines. The man went on to found his own motorcycle company Buell, which continued to use Harley engines and created some really spectacular, innovative sportsbikes. Later, Harley acquired a stake in Buell, formalising and integrating the operation. The economic downturn led to the shutdown of the Buell operation and Erik Buell left to create Erik Buell Racing which runs their sole current production motorcycle, the EBR1190.

Hero started out as Hero Honda, a joint venture with Honda that successfully rose to the top as the world's largest motorcycle maker. A couple of years ago, Hero purchased all of Honda's stake in the JV to create Hero MotoCorp and is currently locked in a fierce battle to keep its top slot in the Indian market and working on expanding its presence to markets abroad while Honda, the former partner is currently showing frighteningly steady and ebullient growth in a depressed Indian market.

To shore up their traditional weakness, Hero MotoCorp has three tie-ups in place that focus on the engineering side of the equation. Hero has tied up with AVL in Austria as well as Engines Engineering to help with their fledgling R&D setup that is under a rapid expansion program. The third tie-up is with Erik Buell Racing.

Hero has already invested US$10 million and the rest of the money is likely to be invested over the next nine months. The investment in EBR is being done through Hero MotoCorp's newly-incorporated subsidiary (wholly owned), Hero MotoCorp Limited (NA).

Mr. Pawan Munjal, MD & CEO, Hero MotoCorp Ltd, said "The equity partnership with EBR is reflective of our long-term vision of transforming Hero MotoCorp to a truly global two-wheeler major with footprints spread across continents, offering a wide range of technologically-advanced two-wheelers. Indeed, this equity partnership is a natural extension of our existing relationship with EBR, which is going to further strengthen our strategic alliance. As we go on spreading our footprint in new international markets, we will look at having extended centres of our own R&D at multiple locations around the world, developing two-wheelers for our global customers. Our evolving relationship with EBR is an initiative in that direction. We will continue to look for both organic and inorganic growth as we keep expanding globally. Our fully-owned new overseas subsidiaries such as the one in the US and in Netherlands will play important roles in our future overseas acquisitions and investments."

Hero will now get two directors and one observer of the EBR board though Erik Buell will continue as chairman and CEO. No other organisational changes are being made at this time.

We believe this is a planned move on the part of Hero MotoCorp to further strengthen their relationship with the American company. Among its tie-ups, it is the sole engineering company to have actual experience in designing, manufacturing, selling and servicing their motorcycles. Erik Buell hasn't really worked in the small displacement end of the market - the Buell Blast, a entry-sports bike featuring one half of their usual engine, a single cylinder, in effect was their smallest production motorcycle. The new investment will make EBR's financial position immeasurably stronger and their focus on the Hero MotoCorp project far more secure and assured.

Along with the Bajaj-KTM and TVS-BMW tie-ups, this means all of the three big Indian two-wheeler manufacturers now have tie-ups in place for the premium segment. The only remaining Indian player still going solo then, is Mahindra Two-Wheelers.

Hero has not confirmed when the EBR-made motorcycle hits India but we believe end-2014 is our best guess of a good timeline. Hero is also mulling bringing the EBR1190 down to India for the CBU end of its operations. Hero has made clear from the start that it isn't just going to be a volume player anymore and premium segment motorcycles are very much on the cards.

This also makes ecoonomic sense since the bottom of the market has been depressed lately and that puts intense pressure on margins. The premium segment in India has proved more resilient and does offer greater margins per unit as well.