Hero Honda has been finding the going tough in a competitve motorcycle market environment with Bajaj Auto and TVS Motors. Even as it finds its market share under threat, Hero Honda also has to contend with an unfavourable cost structure, reports Economic Times

Royalty payments to secure technology and research and development support are needed. Royalty & Technology (R&T) fee is now Hero Honda`s third biggest expenditure head, after raw materials and employee expenses, and the fastest growing too.

Since FY01, R&T fee has been growing at a compounded annual rate (CAGR) of 53.7%, against 21.4% CAGR in net sales and 21.5% in total expenditure. In the same period, the company`s operating profit grew at rate of 29.3%, while net profit has grown by 29.2% annually.

While royalty payments are increasing, realisations are declining in real terms and input costs are rising. With each passing year, Honda is walking away with a higher share of Hero Honda`s revenue, even as the average price of the 100cc motorcycle has declined by around 25% in last four years.

Together with its own R&D expenses, product development cost (PDC) now accounts for over 2.7% of its net sales compared to less than 1% five years ago. In contrast, the figure for Bajaj Auto and TVS Motors was only 1.4% and 2.3% of net sales, and is declining as revenues and sales grow.

One of the reasons may be that while 90% of Hero Honda`s product development expenses go towards paying R&T fees to its foreign partner, TVS Motors doesn`t pay any R&T fee at all and Bajaj paid a royalty of just Rs 30 crore in FY06.