Shifting gears

It's moving into the big league. Mahindra & Mahindra's joint venture with the Paris-headquartered Renault inked in early 2005 for about 50,000 cars a year was a modest endeavour.

But with a deal to set up 4, 00,000 capacity for passenger vehicles with two world players, M&M's scaling up significantly. It will be an equal partner in the venture contributing 50 per cent of the equity, with Renault and Nissan bringing in the rest.

The Rs 8,229 auto and components major will not make cars in Chennai where the Rs 4,000 crore plant is to be located. Car manufacturing will be restricted to the joint venture with Renault which will roll out the Logan sometime in mid-2007. Instead, the Chennai capacity will be used to make utility vehicles.

As M&M group vice-chairman and managing director Anand Mahindra has said often enough: M&M wants to sell its utes all over the world. Working with among the best in the world is probably the best way to do it.

After all,both Renault and Nissan can give M&M state of the art technology for its utes. And as Mahindra had pointed out when the joint venture was taking shape late last year, M&M could not have hoped to put up a project of this size on its own. Moreover, because there are three partners, it's easier on their balance sheets-- the money needs to be brought in only in phases.Also, the project should start generating cash once it gets going.

The sheer scale""there's talk of the capacity going up to as much as eight lakh cars or even more""will bring with it fairly big cost advantages. For perspective, India sold 8.82 lakh passenger cars and 1.94 lakh utility vehicles in 2006. M&M's total capacity at its plants once it completes on-going expansion will be three lakh vehicles. The procurement of ancillary products is expected to happen through a common pool""for M&M's entire requirements as also for the new venture.

And that should fetch the buyers good prices apart from the fact that, vendors, assured of big orders would tend to give them priority. Says Pawan Goenka, president, automotive sector, "With net margins in this business at around 9-10 per cent or even lower for foreign players, even a three per cent saving on our current annual raw material bill of around Rs 6,800 crore, saving would be good enough." Adds Yezdi Nagporewalla, Head, automotive practice at KPMG, "They will undoubtedly have greater bargaining power as a team with such tremendous scale."

Renault and Nissan are likely to facilitate the movement of component suppliers from Europe to India. These component manufacturers would, according to Goenka, set up shop here by partnering local vendors. "A couple of such partnerships have been formed for the M&M-Renault joint venture which will make the Logan and it could happen in Chennai too," he observes. Arindam Bhattacharya, Partner, The Boston Consulting Group believes it's a big advantage.

"Managing vendors can be a challenge, "he says. Adds Ramnath S, vice-president at SSKI Securities, "Apart from ensuring that the technology of the new utility vehicles are of top quality, this venture could also benefit M&M's components business." M&M's ambitions in the auto ancillary space are no secret: it wants to hit a turnover of Rs 4,500 crore in a few years time and has made a string of acquisitions over the last year.

Renault's cars produced in Chennai will be sold through the distribution network being created for the Logan. Nissan, which already has five dealers in India, will further develop its network. In return, M&M is free to use Renault's distribution network in other parts of the world to sell its utes."We're talking to Renault about using their channels in a couple of markets overseas," observes Goenka adding that, "As we get to know Nissan better, similar opportunities will open up for us." Talk of going places, M&M's sure got the route worked out.