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Local edge, global plans

Bhupesh Bhandari Swaraj Baggonkar & Arijit Barman  |  New Delhi/ Mumbai 

Local edge, global plans
Bhupesh Bhandari, Swaraj Baggonkar & Arijit Barman / New Delhi/ Mumbai August 23, 2010, 0:25 IST

Mahindra & Mahindra wants to leverage its dominance in the Indian market to tap global opportunities

Pawan Goenka There’s a hall in Mahindra Towers at in Mumbai where the Mahindra & Mahindra bosses address the media. There are close to 60 chairs in the hall. A wooden panel slides to reveal a large screen. On Thursday, 12 August, journalists were called for an impromptu conference in this hall. Mahindra & Mahindra Vice-chairman and President (automotive & farm sector) would be there to make an important announcement, they were told. By the time the journalists trooped in sometime in the afternoon, the cat was out of the bag. News agencies had flashed from Seoul that troubled of South Korea, which has competencies in sports utility vehicles (SUVs), has picked Mahindra & Mahindra as its preferred buyer.

This is not the first time that Mahindra & Mahindra has tried to acquire a marquee global SUV brand. It was also in the race to acquire Jaguar-Land Rover, but was beaten to the post by Its name had also come up as one of the suitors for Hummer, but the company denied any interest. SsangYong may be a bit player in South Korea with a market share of just 2 per cent, but it has in its portfolio SUVs like the Rexton, and Kyron. It has 138 dealers in its home country and another 1,300 spread across 98 countries. “This is something which would have taken Mahindra & Mahindra about five years. The deal is triggered less for technology,” says S Ramnath, an analyst with SSKI Securities.

True, SsangYong is neck deep in debt — $640 million long-term paper as on December 31, 2009 — but Mahindra & Mahindra feels the situation has not gone out of hand. The bid price has not been disclosed. Mahindra & Mahindra has cash reserves of Rs 2,500 crore on its books and its debt is less than a third of its equity capital, which leaves a lot of headroom to raise money. “We can almost double the debt without affecting our credit rating,” says Mahindra & Mahindra President (finance, legal and financial services sector) Uday Phadke. There can be no room for error. SsangYong, after all, is critical in Mahindra & Mahindra’s strategy to become a global player in utility vehicles (SUVs, multi-purpose vehicles and pick-up trucks).

Global footprint Mahindra & Mahindra is the largest player in the Indian market for utility vehicles with a share of almost 60 per cent. It knows that it is extremely difficult to grow the share any further, and it will be more than happy if it is able to protect it. Moreover, utility vehicle sales as a proportion of the car market have stagnated at 17-18 per cent for some years. Elsewhere in the world, the uptake of utility vehicles happens to be much stronger. The trick, clearly, lies in spreading wings abroad. The current trends in the global automobile market, according to Goenka, are favourable for such a move. Buyers want utility vehicles at low prices but with high fuel-efficiency, and there is the growing demand for environment-friendly vehicles (hybrid and electrical). “You will see a lot more automobile exports from India in the days to come, both by multinational corporations and Indian companies like and us,” says he. To improve its brand equity in the clean technology space, the company is working on a diesel hybrid (the budget is Rs 200 crore). The acquisition of Bangalore-based Reva Electric Car Company has given it capabilities in the field of electric engines.

“We want to develop new products, and have a range that is as wide as, if not bigger than, any player in the world,” says Goenka. Rivals say Mahindra & Mahindra’s pace of new launches has not been too inspiring so far. It took almost seven years after the Scorpio to launch the Xylo in 2009. But the pace could gather steam in the days to come. Mahindra & Mahindra Chief Executive (technology, product development and sourcing) Rajan Wadhera says that as many as seven new platforms are in the works, which will all be rolled out by 2016. First off the block will be a whole new SUV for the global market some time next year. Price will be the USP of Mahindra & Mahindra, though not the only one, insist Goenka and his men.

But look at the equation to see where the advantage resides: Goenka says that Mahindra & Mahindra can develop a whole new platform for Rs 500 crore and variants for less than Rs 200 crore, if the engine and transmission are already in place; or else, the expenditure could go up by Rs 350 crore. Globally, such an exercise can set an automobile maker back by $600 million (Rs 2,800 crore) — more than three times of what it costs Mahindra & Mahindra. “The idea is to leverage the dominance in the Indian market for global opportunities,” adds Mahindra & Mahindra Chief Executive (automotive division) Rajesh Jejurikar. But is Mahindra & Mahindra ready to sell at a loss to gain market share? Goenka says: “We are very focused on financial results. We will not do anything that is not financially prudent.” But he adds in the same breath: “Any manufacturer will optimise its overall portfolio; there will be some loss leaders and there will be some cash cows. We will achieve the right balance.” Analysts expect Mahindra & Mahindra SUVs to address the lower and mid ends of the market, while SsangYong SUVs will go for the top end.

At the moment, overseas sales account for just 5 to 6 per cent of Mahindra & Mahindra’s volumes. It sells in the Indian subcontinent, Africa, South America and Europe. (In Europe, the Scorpio sells as the Goa because the brand Scorpio there is owned by Ford; in all other markets, including the United States, Mahindra & Mahindra has bought it from Ford.) But if it wants to ramp up its volumes, it has to sell in the United States which accounts for almost 47 per cent of global car (utility vehicles included) sales. To be sure, Mahindra & Mahindra had signed an agreement with Georgia-based Global Vehicles in 2006 to distribute its vehicles there. That company has gone to court saying that Mahindra & Mahindra has still not delivered its vehicles, which has put in jeopardy the $35 million it has invested to sign on 350 dealers. These dealers, it has alleged, have spent another $60 million for Mahindra & Mahindra. It has also sought protection from the courts against any attempt by Mahindra & Mahindra to drop the 10-year agreement and appoint a new distributor.

Goenka declines to comment on the matter because it is sub judice, though there has been speculation in the market place that Mahindra & Mahindra could settle with Global Vehicles out of court. So, much of the strategy for the United States is still under wraps. Still, it seems that Mahindra & Mahindra is keen to make its utility vehicles there. “The car market in the United States has slumped from 17 million per annum to 10 million now,” says Mahindra & Mahindra Chief Executive (international operations, automotive & farm equipment sectors) Pravin Shah. “This means there is a lot of spare capacity there, which can be taken on rent,” says he. Mahindra & Mahindra also owns five plants in Africa because of the tractors it supplied at one time under a government-to-government exchange programme. Some of these, says Shah, could be used for vehicle assembly.

All for one In April this year, Mahindra & Mahindra’s automotive and tractor businesses were brought together and paced under Goenka. The idea was to drive maximum synergies between the two. The development and sourcing functions have been merged. The technical expertise required for both the product categories is the same. When brought under one roof, there can be osmosis of ideas and innovation between the two. Same is true of raw material purchase. More than half the 500-odd vendors for the two lines are the same. Combined orders will surely drive down prices. In overseas markets, one office drives tractor as well as utility vehicles sales now. In the domestic market, the 1,300-strong dealer network for tractors will also become touch points, and even perhaps service centres, for utility vehicles. Club Mahindra resorts will showcase the company’s SUVs. Films made by the group will promote these vehicles. Its information technology companies — Tech Mahindra and Mahindra Satyam — will be leveraged for software solutions. Mahindra Finance, of course, finances almost a third of all Mahindra Vehicles sold in the country. All told, Goenka feels that the company can save up to 1.5 per cent of its costs through the various synergies — the money, of course, goes straight to the bottomline. Of course, he hopes this to boost sales as well.

Currently, Mahindra & Mahindra sells almost 200,000 utility vehicles in India. In a way, high volumes in the domestic market are important for the overseas markets. It helps the company recover the development cost. “We can’t develop a product unless we sell in large volumes in India. Otherwise, the development cost is not justified. We cannot recover it by selling a few hundred,” says Goenka. A crucial part of the Mahindra & Mahindra’s strategy for India is dealer development.

The company promises 25 to 30 per cent return on investment (excluding real estate). In three to four years, says Jejurikar, most dealers recover their investments. The company has rolled out a new programme called Gurukul, under which its experts tell dealers how to improve their profitability. At the same time, the company wants to expand its network of service stations so that no customer has to travel more than 50 km to get his vehicle serviced. According to Jejurikar, the target has been achieved for 85 per cent of the country.

Concurrent to utility vehicles, Mahindra & Mahindra wants to become a leading player in the small commercial vehicle segment (0.5 tonnes to 0.75 tonnes) in India — no global ambitions here, though there could be some pockets of interest outside the country.

It has four products in this category (three-wheelers Alpha and Champion, and four-wheelers Gio and Maximo) and is the fourth-largest player after Bajaj Auto, and Piaggio. The technology is all homegrown. Mahindra & Mahindra was thus able to develop the Gio for as little as Rs 25 crore. But this is a game others can play too, especially because this segment is growing much faster than the 12-13 per cent annual growth seen in the overall automobile market. General Motors, for instance, plans to use the expertise of its Chinese partner, Shanghai Automobiles, to launch a similar vehicle in India. The technology is basic, and there are really no entry barriers. Goenka is confident that Mahindra & Mahindra can grow its market share from 15 per cent now to 25 per cent or even 30 per cent. But he can rest assured that it will be a crowded market.

BY THE NUMBERS Mahindra & Mahindra’s share in different segments of the Indian automotive market
Segment Market share (in %)
Utility vehicles 60.00
Small commercial vehicles 15.00
Scooters 6.00
Cars (the overall market) 0.34

Commercial ambitions Mahindra & Mahindra also wants a slice of the large commercial vehicle market (3.5 tonnes and above), in India to begin with and later perhaps overseas. In the last 10 to 15 years, the segment has grown 6 to 7 per cent. “It’s not high growth but consistent. India is now the third-largest truck market in the world,” says Goenka. It has formed a 51:49 joint venture company with Navistar of the United States. Apart from North and South America, this company is free to sell its produce anywhere in the world. Mahindra & Mahindra has taken the joint venture route because it didn’t have the technology for large trucks. Interestingly, the joint venture does not plan to get Navistar products to India. Instead, it is developing new products from scratch on its own. Its first truck, priced at Rs 14.99 lakh, is expected to hit the market soon. “We are more expensive than current products but we are not comparable. We are giving more engine power, better fuel efficiency and better cabin space,” says Geonka. At the time when Mahindra & Mahindra had got into the joint venture, there were only two others to contend with in the market: Tata Motors and Ashok Leyland. Now, it is crowded with Volvo and Mercedes Benz also in the fray. Buses could follow later. But hasn’t Mahindra & Mahindra literally missed the bus? There were huge purchases of buses by cities under the Jawaharlal Nehru National Urban Renewal Mission. That scheme is now over. But Goenka is hopeful that there will be a market for its buses.

Of course, it has also launched scooters, which could be a precursor for motorcycles. India happens to be the largest motorcycle market in the world. But the two-wheeler market is as tough as nails. Scooters are a small part of the market, the bulk resides with motorcycles. And there are strong players there like Hero Honda, Bajaj Auto, TVS, Honda, Suzuki and Yamaha. The market has been very thinly spliced by these players, which makes differentiation a big challenge. A me-too product will not work. Informed sources in the company say that while Mahindra & Mahindra will sell scooters in the top dozen or so cities, its motorcycles will be mass-marketed. This means there could be a complete range from Rs 35,000 to Rs 100,000.

The only question mark is the Logan. With Renault exiting the venture, it is now owned by Mahindra & Mahindra. Goenka admits that cars are not at the core of the company’s strategy and the portfolio will not be expanded in the near future. But Wadhera says the Logan will get a refresh every two years or so, though the rights for the Logan hatchback are with Renault. Two new television campaigns have to re-position the Logan as a fuel-efficient sedan. Goenka feels that a foray into cars would spread Mahindra & Mahindra’s resources too thin. “I think we have enough to do at the moment. We know that if we spread our bandwidth too much, we won’t do well.” But has the company looked at the possibilities in the car segment? India, after all, has become the world’s most exciting market for small cars. “I am not saying that we will never do cars, but it’s not in our immediate plans,” adds Goenka. Still, adds Jejurikar, the alliance with Renault has helped Mahindra & Mahindra learn high-quality manufacturing processes, component development, supplier assessment and use of information technology. “There was joint buying for the Logan and Xylo. We bundled the orders for better rates,” says he. In Mahindra & Mahindra’s scheme of things, there are clearly no setbacks.

THE TRACTOR FACTOR Here’s a less-known fact. Nowhere in the world are more tractors bought and sold than in India. In 2009, tractors sales were of the order of 400,000 — the numbers this year could be almost 50,000 more. China comes second and the US third. In terms of value, India is probably third or fourth because it is a small tractor market. Mahindra & Mahindra has a 41 per cent share of the market — 30 per cent on its own and 11 per cent comes from Punjab Tractors which it had acquired three years ago. This makes Mahindra & Mahindra the largest tractor maker in the world. The ambitions it harbours are therefore global. The first port of call has been China, the number two tractor market in the world. Mahindra & Mahindra has acquired a majority stake in two companies there. This has made it the fifth-largest player in that market with a share of 10 per cent. Mahindra & Mahindra President (automotive and farm sector) says the target is to break into the top three in five years. The tractors are still sold under the brands of the two Chinese companies: Feng Shou and Jinma. “If there is a strong brand in any country that we get, it would be foolish not to use it,” says he. Still, the company is giving a hard look at its brand strategy in China. Some of the tractors have already begun to sue the Mahindra prefix and are sold as Mahindra Feng Shou. Going ahead, says Goenka, there could be more co-brands and co-badges. The tougher nut to crack will be the US. It is a large tractor market, which is not the core strength of Mahindra & Mahindra. The company has sold its tractors in the US for almost 10 years now, but it continues to operate in a small sliver of the market. Goenka says that Mahindra & Mahindra is fifth in that segment, and the ambition is to become the third in five years. The problem, according to farm sector experts, is that the company cannot develop products for the US alone — the small volumes do not justify the investments. In other words, the product strategy of Mahindra & Mahindra will have to be driven by India. Only when the Indian market becomes the same as the US can it hope to sell in large numbers there. Goenka is aware of this challenge. Still, says he, there are two tractors under development just for the US. According to Mahindra & Mahindra Chief Executive (technology, product development and sourcing) Rajan Wadhera, the company’s field force has fanned out in the farmlands there to understand the customer and his needs. “Our people literally sleep with those farmers,” says he. Goenka adds that if a good opportunity comes its way, Mahindra & Mahindra could look at an acquisition to gain competencies in the large tractor market. The other good news is that Indian farmers have begun to upgrade to bigger tractors. This could soon be leveraged by Mahindra & Mahindra to crack open the US market. Meanwhile, it has identified other markets across the globe which can be fed by its existing line of products

First Published: Mon, August 23 2010. 00:25 IST