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For the last couple of years, South Korean makers of automobile components have seen a surge in demand not just from neighbouring Japan but also from Europe and America. While, on the one hand, they have been undercutting Japanese rivals who are struggling with an appreciating yen, on the other they are increasingly being recognised as high-tech manufacturers with low labour costs. With the global automobile market in slowdown, car makers have lost all pricing power; the only way they can sustain their profits is through rigorous cost management. This is driving purchase managers to Korea. The Renault-Nissan Purchasing Organisation, the source of many a benchmark in automobile component sourcing, has shown a keen interest in Korean component suppliers.
Renault's erstwhile Indian partner, Mahindra & Mahindra, too has been quietly working at sourcing more and more components from Korea. Its acquisition of SsangYong (for $463 million, or Rs 2,100 crore then, in 2010) opened the doors for this opportunity. The exercise has even won it the Procurement Leaders award for excellence in 2013 organised by the global network serving the supply chain community and major corporations. All eyes are now on the results of this initiative: the two new platforms being jointly developed by the two companies which will go into production early next year. If successful, others will certainly choose to replicate this business model. The first of these, a SsangYong car, will be launched in January 2015. For Mahindra, which entered the premium segment of the sports utility vehicle, or SUV, market in India with the SsangYong Rexton, the new platforms are integral to growth. While Renault (with the Duster) and Ford (the Ecosport) have attacked it from the bottom with compact SUVs, its arch Indian rival, Tata Motors, is readying to launch new platforms by 2015.
Setting the rules
Mahindra started rationalizing its vendor base about a decade back. The list of empanelled vendors came down from 1,000 to 400. Out of these, about 100 are its core suppliers. SsangYong, on its part, has around 400 suppliers. The game plan is to leverage each other's vendor base to cut costs as well as go-to-market time. Mahindra and SsangYong have already developed six engines with the help of common sourcing. Mahindra claims to have shaved off 7-15 per cent costs on engine components in the process. In the next phase of cross-sourcing, Mahindra could save around 8 per cent in the automatic transmission system it is developing with SsangYong. Also, the synergies in tooling and moulding from common sourcing are likely to save crores of rupees, according to senior company executives. Clearly, this is big for Mahindra and the company attaches the utmost importance to it. "If the auto industry learnt manufacturing from Ford, then we have learnt sourcing from the Renault-Nissan partnership," says Mahindra & Mahindra Executive Director & President (automotive & farm equipment sectors) Pawan Goenka. "Their processes are very strong, though we have not copied them."
The cross-sourcing plan is comprehensive. Mahindra & Mahindra Chief Purchase Officer (automotive and farm sectors) Hemant Sikka says: "There are three ways to go about cross-sourcing. One is getting a Korean supplier to make components for Mahindra vehicles. Another would be using standard parts made by Korean suppliers, earlier made for SsangYong vehicles, to be used in our existing cars as well. And the third would be to source components for the platforms that SsangYong and we are jointly developing. For that, engines are already done." Thus, the sourcing for automatic transmission will see SsangYong as the lead customer with Mahindra going to the same suppliers. The transmission will be used in both SsangYong and Mahindra vehicles. "Only the application will be different; the system will remain the same. The Japanese supplier is common," says Sikka.
But no sourcing from SsangYong's suppliers would be done if the import, logistics, inland transport and staff costs don't add up to less than the cost incurred while sourcing from an Indian supplier, insist both Goenka and Sikka. So, when sourcing for the engines, a part otherwise costing Mahindra Rs 100 would cost it anywhere between Rs 93 and Rs 85 if it is being imported from a Korean supplier. "On every such sourcing, and we have done many now, we have been able to reduce costs," says Sikka. But it is not just about costs - it is also about plugging capability gaps. Thus, after the Mahindra XUV 5OO's infotainment (Taiwanese) system drew flak from users, the company has identified a new system developed by Dijen, a supplier to SsangYong. This company will now supply to Mahindra in collaboration with Nippon.
However, there is a limit to cross-sourcing because not all parts can be common for the vehicles manufactured by the two companies. But, says Sikka: "Suppliers will bend over backwards to win an order once we consolidate our volumes. If we jointly place orders with the same vendor, the volumes will go up from 50,000 to 300,000 a year."
Ernst & Young Partner Rakesh Batra says that leveraging volumes is one of the benefits that joint-sourcing brings with it. Goenka adds: "Even with a multinational vendor, when SsangYong and Mahindra's volumes are put in one sourcing decision, (our) negotiation power increases manifold." The exercise throws open enormous possibilities for Mahindra's local vendors. An Indian vendor landed the SsangYong contract for the bulky, and hence unlikely, component of steel wheels because of its competitive rates and expertise as Korean suppliers have graduated to alloy wheels.
Blazing a new trail
The Mahindra-SsangYong joint sourcing is perhaps the closest to the Renault-Nissan Purchasing Organisation. Volkswagen and Audi too leverage their common sourcing but that is more at the raw material level, says Batra. That is because their powertrains and most of the specifications are different. Closer home, Tata Motors cannot utilise its Jaguar and Land Rover vendor base because of the difference in the nature of the two brands - one a high-volume, low-cost brand and the other ultra-luxury. However, Sikka is clear that not all of Mahindra's purchases will be thrown open to suppliers from South Korea. "We cannot source bulky sheet metal parts which have inefficient logistics. But where a higher level of technology is required, we can think of cross-sourcing."
Mahindra did not fuse the two sourcing teams unlike the Renault-Nissan Purchasing Organisation. However, it deputed Sikka for one year as the sourcing head for SsangYong to ensure that the joint-development and sourcing could be put on auto-pilot once he returned. From drawing up a supplier panel for the engine development, setting benchmarks for both SsangYong and Mahindra to understanding the cultural nuances of both the teams and vendors - all of it was ironed out in the past one year. For example, Korean suppliers are used to discussing bids in front of each other but Indian vendors are more comfortable presenting bids separately to the buyer. The solution was to bring the two business cultures together. Some Indian vendors had to participate in open bids through tele-presence, while SsangYong's team heard some out individually, where the technological intellectual property was far advanced.
The vendors wouldn't mind such minor compromises.
DRIVING OUT OF THE RED
Three years after it was acquired by Mahindra, there are signs that SsangYong is turning the corner. The company has registered a profit for the last two quarters, though it's not certain how soon it will report an annual profit - its loss for 2012 stood at 98.12 billion won (a little over Rs 500 crore) in 2012. It surpassed its sales target of 120,000 vehicles for 2012 by 717. In the first 11 months of 2013, it has sold 132,000 vehicles.
During Hemant Sikka's stint at SsangYong, he ensured the company localised most of its sourcing. Given its lineage which could be traced to Daimler, it had a lot of European suppliers and some in Japan. As the purchasing head, Sikka localised all the cylinder blocks and cylinder heads, leading to savings of 10-20 per cent for SsangYong. There was a lot of focus on material cost savings, which also saw aggressive negotiation with suppliers, taking volume discounts from suppliers (as a result of joint-sourcing), apart from the import substitution.
The rejuvenated products were well received in the market - so much so that this year, SsangYong is the only vehicle manufacturer to register growth in the South Korean market, albeit on a small base. Company executives note that the facelifts consisted of changes in exteriors as well as interiors, powertrain, and even new branding. So, while the Korando C got improved looks, it was also launched with a petrol engine and in a sports version. A re-branding exercise lifted the fortunes of the Rodius MPV, which was earlier clocking less than 100 a month - after its re-launch as the Turismo, it now sells nearly 800 a month.
INTEGRATED BUSINESSES, MORE BENEFITS
Mahindra is no stranger to an integrated approach to business. A few years ago, the company's automotive and tractor businesses were brought together and placed under Pawan Goenka. The idea was to drive maximum synergies between the two. The development and sourcing functions were merged. The thinking was that the technical expertise required for both the product categories is the same, and when brought under one roof, there can be osmosis of ideas and innovation between the two. Also, more than half the 500-odd vendors for the two lines were the same; combined orders, it was felt, will help drive down prices. In overseas markets, one office was asked to drive tractor as well as SUV sales. Club Mahindra resorts were required to showcase the company's SUVs. Films made by the group sought to promote these vehicles. Its information technology companies - Tech Mahindra and Mahindra Satyam - were leveraged for software solutions. Mahindra Finance, of course, finances almost a third of all Mahindra vehicles sold in the country. All told, Goenka had told Business Standard a few years ago, the company could save up to 1.5 per cent of its costs through the various synergies - the money, of course, goes straight to the bottom line.
