Royalty to Honda a dent on our business: Munjals

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New Delhi, Aug 5: The chasm is seemingly widening between the Munjals and their joint venture ally Honda. The Munjals have listed royalty payments to the Japanese partner among reasons for Hero Honda’s falling operating margins in the country. This is what Hero Honda managing director Pawan Munjal has said in the company’s annual report for 2006-07.

“To protect our market shares in key segments, we had embarked on our largest-ever product upgrade programme during the year. The accompanying marketing spends and royalty payments to our joint venture partner have also affected our margins,” Munjal said while addressing shareholders.

In stark contrast, Honda Motor chairman Satoshi Aoki —who was recently in India—advocated that government ceilings on royalty and the new product introduction fee be abolished. Existing norms allow a foreign partner to charge 5% of domestic sales value and 8% of exports as royalty. Royalty is also charged on new model introductions.

This is not the first time that the two companies have been at loggerheads. They are already fighting it out in the bike market after Honda started selling bikes through its wholly owned subsidiary Honda Motorcycle and Scooter India (HMSI). Munjal’s grievance emanates from the fact that remittances to Honda have seen a spurt over the last few years, especially as the company’s sales go up. The royalty payout was Rs 68.9 crore in financial year 2003. This jumped as much as 269% to Rs 254.3 crore for 2006-07. The payout was Rs 212.4 crore in 2005-06.

When contacted, Hero Honda said, “All such decisions are taken with mutual consent of the two joint venture partners, keeping in mind the interest of all stakeholders of our company.” On its part, while not making any direct comment on the matter, the official spokesperson for Honda Motor Co said from Japan, “Consideration needs to be given to the fact that Honda spends billions of dollars every year in R&D efforts and R&D assistance to JV partners to offer the products best suited to a country. Apart from that, there are also issues, such as technology transfer and the brand value of Honda. These take time to establish.”

Apart from royalty that is paid for two-wheeler models sold in the domestic market, other annual remittances to Honda include a model fee (for new model launches in a year) and an export commission and technical guidance fee (for help received from Honda engineers).