The Yancheng venture gives the firm access to a low cost manufacturing base.
Mahindra and Mahindra’s joint venture with Yancheng Tractors should give it a stronger presence in the fast-growing Chinese market apart from access to a global dealer network through which it can push exports from India.
The Rs 11,503 crore M&M has bought itself a low-cost manufacturing base. M&M has paid $26 million (Rs 112 crore) for a controlling stake of 51 per cent in a joint venture with Yancheng, which will transfer $50 million worth of tractor-related assets to the new company.
Yancheng, the third largest tractor maker in China, generated revenues of $120 million from sales of tractors in CY07 and was making money at the operating profit level. Thus, the deal is relatively inexpensive though M&M may need to invest in technology and people.The deal will be funded through the Rs 700 crore raised via the recent sale of a 3.6 per cent stake in the company to Goldman Sachs.
This is not M&M’s first foray into the Chinese market; it has an existing joint venture with Jiangling Motors which sold around 4,459 units in FY08 posting revenues of Rs 55 crore. With Yancheng, M&M hopes to expand it share of the Chinese market — from around 4,500 tractors currently, it will be selling an additional 26,000 tractors.
Yancheng has a strong dealer network across 25 provinces and a large product portfolio (16-25 HP) that will complement M&M’s existing range. The Chinese tractor market has grown at 40 per cent compounded annually during 2003-07 with the government subsidising tractor purchases.
Besides, Yancheng exported 8,000 units in CY07 through its worldwide network across the US, South America, Europe, Russia and Africa. M&M will aim to leverage this network — last year M&M exported 10,000 tractors from India. Export volumes have picked up in July this year — up 65 per cent — after a sluggish June 2008 quarter when they grew just 2.5 per cent.
By consolidating its presence in China, M&M, which is the market leader in India, hopes to be able to overtake peer John Deere to become the biggest tractor maker in terms of volumes. It is now the third largest player in the world. At the current price of Rs 516, the stock trades at seven times its estimated FY09 earnings.