India’s Siel Rethinks Ending Honda JV

MUMBAI – India’s Sriram Industrial Enterprises (Siel) has backed down from trying to break off its 17-year-old joint auto-making venture with Honda, but that’s not necessaily a sign the companies have made peace.

Amid millions of dollars in losses, dwindling sales, internal dissension and fiscal disputes with Honda, Siel in October sought an exit from Honda Siel Cars India. Since then, however, Siel has seen demand for Honda cars rebound as the auto maker shifts its focus toward  profit-making premium small cars.

Honda hasn’t indicated how it will respond to Siel’s second thoughts. But even if the companies call off their separation, issues from their past relationship remain pending before government regulators and eventually could return to the courts.

The JV was formed in 1995 with Honda holding a 60% stake. Siel sold all but 2% of its interest in the car-making enterprise in 2005, then bought back a 3-percentage-point share in 2010 when the market appeared to be improving.

Honda Siel, however, lost Rs2.5 billion ($45.5 million) between 2009 and 2011 after writing off accumulated losses of Rs800 million ($14.5 million) several years earlier.

Last September, Honda proposed raising Rs12.1 billion ($218 million) in share capital to finance development of small cars and diesel-engine production, two areas where it has lagged and, as a result, lost market share in India.

The Japanese auto maker sought to broaden its product portfolio beyond sedan and luxury cars and better compete against Maruti Suzuki, Tata and Hyundai India, which were enjoying robust sales of inexpensive small hatchback and compact cars.

Honda Siel took on its rivals with the Brio, a premium small car with the interior space and feel of a sedan, but it could not match their prices.

Siel, meanwhile, objected to the nature and timing of the rights issue, and to the per-share premium of Rs47. 15 ($0.85) on its face value of  Rs10.00 ($0.18).  The two sides could not reach agreement, and both filed complaints with government regulators as the Japanese auto maker picked up what Siel would not take and proceeded with the issue.

Tiring of the ongoing losses and declining sales, Siel announced in late October it wanted out of the JV. By then, Honda had a new problem on its hands: Brio sales were being crippled by supply-line disruptions caused by flooding in Thailand and, before that, the Japan tsunami.

In December, Honda Siel sold just 1,056 cars and deliveries for all of 2011 totaled only 47,222 units, down 24% from year-earlier, according to WardsAuto data.

Honda’s subscription to the new-capital issue, coupled with Siel’s refusal to participate, raised the auto maker’s stake in the JV to 96.84%. In March, Honda reportedly offered Siel the exit price of Rs57.15 ($1.03) a share, but rejected the Indian company’s demand for  Rs100 ($1.80) a share.

The standoff had continued into this month, but Siel executives began second-guessing themselves after small cars such as the Brio boost Honda sales in the first four months of 2012 to 28,606 units, a 71.8% year-on-year increase. They also saw potential profits in diesel-engine development and fresh investments in the Rajasthan components plant.

Mindful of those factors, Siel wants to increase its current 3.16% stake in the JV back to 5%, which would restore its rights and status of a “minority shareholder.” But to do so, Siel might have to accept a share price set by Honda.

Honda is planning a new capital issue of Rs21.2 billion ($382 million), and Siel says it is willing to subscribe to it and all future issues. But the complaints to government regulators about the JV’s governance and valuation have not been resolved.