Cars and bikes are in Pankaj Munjal’s blood — after all, his family founded the Hero Group, the New Delhi-based US$5 billion enterprise comprising 20 companies including the world’s largest manufacturer of bicycles. As managing director of Hero Motors and Hero Cycles, Munjal oversees the company’s two-wheeler production as well as its global auto components business. In an interview with India Knowledge at Wharton at the 2010 Wharton India Economic Forum, the auto aficionado spoke about why his firm is focused on the small-car market, what he looks for in new hires, and what toys he likes to take for a drive.

An edited transcript of the conversation follows.

India Knowledge at Wharton: Tell us about the structure of your business.

Pankaj Munjal: The Hero Group is the eighth largest manufacturing group in India. We have sales of US$5 billion and employed 27,000 people last year. Our group has two ends: a front end — bicycles and motorcycles [that directly] touch customers — and a back end [which consists of] parts and services. Our group’s companies are the leaders in bicycles; we claim to be the world’s largest maker. [We are also a big player in] motorcycles, and our parts [business had] about US$1.2 billion in sales last year.

Hero Cycles and Hero Honda [are customer-facing businesses]. [For our] parts [manufacturing] companies, we have a joint venture with Showa of Japan. We are market leaders in the country and supply to Suzuki and Honda. Suzuki is a market leader, with a 50% market share in India. And we’ve got a joint venture with Sumitomo Corp. called Munjal Kiriu. We supply to Suzuki, Toyota, Nissan, General Motors — practically everybody. Every Hero Group company is number one in [its] field.

Then we have a foundry and aluminum die-casting plant, which supplies [these parts businesses]. These components go into automobiles, so they are [quite] competitive. [Our customers] are global companies. When Suzuki [puts out] a tender, it will be a tender for worldwide sales. So if they buy from us, it means we are really globally competitive. So this is the broad structure of the group.

India Knowledge at Wharton: The business that you are in, especially auto parts, depends on the health of the auto industry. Have you seen any challenges with the global downturn? What has been your strategy to weather those?

Munjal: India never really had a downturn. In October 2008, when the meltdown started, there was a little lull for about two months. It was not like a depression, but a little flat curve; growth was not so aggressive. Come January 2009, things were up and buoyant again.

Our North American exports got hit pretty badly. [At that time] we were feeding the recreational products [market] in all-terrain vehicles. Now if [people] have money in [their] pockets, [they can] buy these expensive toys. But if there is a problem, then [that market takes] the worst hit. So we have now focused our energies on the small-car market. The Indian market is 2 million units per year; it’s [soon] going to be 4 million units a year, and … 6 million units a year in the next four years. Now, it’s a similar number in North America, but then North America is a huge market, with luxury cars, big cars, vans and all that. India is a small-car market. So that’s where our focus is. This market segment is worth US$16 billion [and is] going to be US$125 billion. It’s a big jump. So we are focused there.

Hero has the best technology partners. In Germany we have ZF [a joint venture with ZF Friedrichshafen, a worldwide supplier for driveline and chassis technology]. Sumitomo, Showa, Honda Foundry — all these are [our] technology partners. When I go to customers, I can present them a solution including a trusted technology partner and low-cost manufacturing capability.

India Knowledge at Wharton: What do you see in terms of consumer trends in India? What vehicles are people looking to buy?

Munjal: The consumer trend is very clear. A bicycle owner goes to a motorcycle, and a motorcycle owner goes to a car. So when the jump is from two-wheels to four-wheels, he is looking at a somewhat basic car. He is not looking at spending very dramatically. He has to pay both the fixed cost [the vehicle’s price] and the running cost [fuel and of maintenance]. So if he buys today, he has to pay [the fixed cost installments] in 36 or 40 months, and then there is the running cost. Due to these constraints, it is a small-car or compact-car market; it’s not really feature-driven but price-driven.

India Knowledge at Wharton: In the U.S. and other countries, when buying a car, a lot of people take a loan. In India, you saved first and then made the purchase. Have you seen a shift in the Indian mindset toward consumer credit in recent years?

Munjal: Yes, India is divided into rural and urban markets. The urban consumers are pretty much [akin to the] Europeans or North Americans — they wear Zegna designer suits or whatever. They buy with financing, [on installments]. People spend more than [their means].

But in the rural market, consumers behave a little differently. They don’t want to carry a risk for their family. So, the growth coming from the rural areas is with cash, with a little bit of financing. In urban areas 70% is paid with financing, and 30% is cash. In the villages, it’s the other way around.

India Knowledge at Wharton: In this industry, everyone is talking about pollution and environmental concerns. What has your company done in this area?

Munjal: Laws are driving this segment a lot; carbon monoxide, hydrocarbons, and nitrogen oxide emissions are being controlled. In India we are at Bharat Stage IV — [part of a planned timeline for implementing European Union emissions standards for various Indian vehicles]. I would say these laws are pretty international. We are in line with Europe and North America, maybe running a few years behind. We have the technology to meet the norms.

India Knowledge at Wharton: Do you see your company playing a leadership role in this space?

Munjal: We have electric scooters … fun vehicles to ride. Electric scooters are getting visibility.

India Knowledge at Wharton: Hero is a family business. Experts have analyzed the challenges faced by family businesses [balancing family members’ desires vs. the need for professional managers]. What has Hero’s experience been with this?

Munjal: Hero has more than 20 companies; some are private, some are public. Let’s talk about the public companies: They are professional. They have outside CEOs — the CEOs are empowered and they are running the organizations. So it’s family-owned; it’s not family-run. It’s family-owned [but] professionally run. The stock market sees this. The markets give us better ratings, and our price-to-earnings ratios reflect this.

India Knowledge at Wharton: Have you developed any written governance standards to make sure that — even [if your companies are] professionally managed — the family is kept separate?

Munjal: The water flows from the top. The board structure is pretty balanced; it’s not family-driven. The outside people [on our companies’ boards] are more [in number], so that sets the tone. And of course, there are corporate governance guidelines.

India Knowledge at Wharton: At the outset, [Hero had] a joint venture with a Japanese company, right? Are you [now] Indianizing [the research and development] or is it done abroad? Are you producing your own intellectual property around R&D?

Munjal: R&D is on product and process. The product R&D is with the Japanese, especially in Hero Honda. We are nurturing our own R&D now. We have a small setup in Austria, and we have our engineers placed there close to the customer. That story is building up now. For the process R&D capability, those [intellectual property rights] are ours.

India Knowledge at Wharton: Why Austria?

Munjal: Some of our big customers are in Germany. Austria is very close to Germany; we have a good setup there.

India Knowledge at Wharton: What kinds of products are you developing there, and for which markets?

Munjal: What we are doing there is for European products [components for European cars]. Indian R&D is India-specific.

India Knowledge at Wharton: When you hire people, what is your strategy? What do you look for in a candidate for this kind of company?

Munjal: They should have the ability to look me in the eye and say “No.” Some great people just don’t have an opinion. I have seen some very good people who could not get their point across. So [I look for people who] somehow or the other [have] the ability to say no and get the reality on the table. If you get the problem on the table, it will be solved. If not, [then it’s a problem].

India Knowledge at Wharton: Do they have to have a passion for the business?

Munjal: Without that there is no story.

India Knowledge at Wharton: How do you gauge that in a candidate?

Munjal: In an interview, you get maybe 30 minutes to spend with a candidate, but there’s so much more you have to really understand. Once the employee comes in, you are partners for life — you have to live with each other for a long time. So, to understand that, you read a little bit about their past and try to understand their nature, capabilities, the demographics, psychographics, body language, references. A lot of homework is done before [a candidate] comes up to us.

And we really want some of the American culture, I would say.

India Knowledge at Wharton: What do you mean by that?

Munjal: Our company is now boundaryless; some of the supply chains come from outside India, some of our front end goes to Austria, to Mexico, to Germany, to America, to the U.K. — so it’s not an Indian company supplying them anymore. We have to make it more boundaryless.

India Knowledge at Wharton: So you are looking for a global mindset.

Munjal: Definitely.

India Knowledge at Wharton: What would I find in your garage?

Munjal: I love cars. I have some nice toys.

India Knowledge at Wharton: How many?

Munjal: A few.

India Knowledge at Wharton: What’s your favorite?

Munjal: I love my Audi R8, but of course the two-wheelers are fun.

India Knowledge at Wharton: Which two-wheelers do you take around?

Munjal: Our own!