Honda took majority control of Kinetic Honda in 1993 in the belief that it would be able to grow the market better than the Firodias. But over the last five years, Kinetic Honda has not been able to breach the 10 per cent mark in market share, lagging woefully behind Bajaj and LML. The Honda management apparently feels that if they cannot be number one in scooters, they should exit the segment. Hence the talks with the Firodias for a possible buyout.

If the Firodias succeed in regaining majority control through a negotiated purchase of Honda's 51 per cent stake in Kinetic Honda, it will be first instance in post-liberalisation history where an Indian promoter has bought out his foreign collaborator's majority stake. The Firodias currently own 26 per cent of the equity while the rest is with the public.

The Kinetic Honda scrip, which has dropped steeply over the last few months following speculation about the Honda pullout, has stabilised around Rs 51-52 this week. It closed on Friday at Rs 52.

According to sources in the automobile industry, Honda's move is primarily driven by internal compulsions to improve profitability after the recent entry of Honda's new CEO and President H. Yoshino.

Honda's main problem in India is that it has scooters primarily in the Rs 38,000-43,000 range--at the top end of the scooters market, which is anyway shrinking. Its two models (the Kinetic DX and the upper end Kinetic Marvel) do not offer enough range to give the company enough chance to expand market share.

Bajaj Auto, which hasn't been making much money on its scooter models, is hoping to remedy its own shortcomings by launching a slew of new models over the next few months. Meanwhile, LML, which has been quicker off its feet with newer technology and models, has gained marketshare. But while Bajaj has its three-wheelers and "other income" to take care of its bottomline, Kinetic Honda has been busy losing money. In the first quarter of 1998, it reported a loss of approximately Rs 6 crore.

Against this backdrop, it is not surprising that Honda is mulling a pullout since it can neither provide the range required to grow the scooter market nor give Kinetic Honda the price advantage that a Bajaj has. It has probably decided to concentrate on the motorcycle market. The option of making motorcycles in Kinetic Honda does not exist because of the joint venture with the Munjals in Hero Honda.

The Firodias, who have been strong in the area of manufacturing cheap two-wheelers, are probably betting that by buying out Honda they can have a stronger range overall. Taking Kinetic Engineering, the Firodia flagship, and Kinetic Honda together, they will be able to stake out the entire price segment in two-wheelers--from mopeds, to scooterettes, to motorcycles to upper end two-wheelers like the Kinetic Honda. Motorcycles in the 110cc and 150cc ranges are being planned with Korean and Taiwanese knowhow.