In the fast lane

Why utility vehicles maker Mahindra & Mahindra is racing into the passenger cars industry?

Anand Mahindra is exasperated. "This is not just about getting into passenger cars or changing our focus. We are strengthening our production base and getting new technology," says the 51-year-old vice-chairman and managing director of the Rs 9,807.33-crore Mahindra & Mahindra group, adding, "We want to be ruthlessly focused on building global competence and a brand for our sports utility vehicles (UVs)."

The "this" that Mahindra is referring to is his company's sudden acceleration into passenger car manufacture.

Having sold out its stake in a car venture to Ford in 1999, last year M&M forged an equal alliance with French auto major Renault S.A. (2005 revenues: Euro 41. 34 billion) to make the Logan, a mid-sized sedan developed primarily for Dacia, Renault's Romanian arm.

The aim: a modest 50,000 cars a year, by mid-2007. Now, the alliance appears to have shifted gears. The installed capacity has been increased 10 times, to 500,000 cars, and high odds are being offered that sister company Nissan will join in and the trio will bring out 750,000 units. That's a staggering number, given that Indians bought just over 800,000 passenger cars in 2005-06.

Industry watchers tend to agree with Mahindra's declaration that M&M is not making a play for the Indian car market.

"Is it M&M's ambition to be a car player? I don't think so. The company is simply monetising its manufacturing, distribution and the vendor base," says Arindam Bhattacharya, partner, Boston Consulting Group.

Adds Ramesh Rajan, partner and leader, automotive practice, Pricewaterhouse-Coopers, "Since the UV is very much like a car, there's synergy with what M&M is doing and it will give the company a wider offering."

So, what is behind the sudden car craze?

Think scale
It's already decided that a new plant will be set up to make the cars. If nothing else, sheer scale should make the new venture cost-efficient.

For perspective: the 500,000 cars a year figure is higher than anything M&M has thought of before. The company's total capacity at its four plants, after on-going expansion projects are completed in about two years time, will be 300,000 vehicles a year.

No one is talking about what the bill for the new venture will be, but there's no doubt it will be huge.

Consider these for perspective: the greenfield plant in India set up by Ford in 1998 is estimated to have cost around Rs 1,000 crore for a capacity of around 80,000 cars, while Hyundai's 130,000-unit Chennai plant, complete with engine shop, cost Rs 2,300 crore.

M&M has been planning a new factory for a while, but there is no way it could have put up a facility of this size.

Explains Mahindra, "We are spending what we were going to spend anyway, but we are getting scale for which we would have needed to spend three times as much. So, we are lowering the systemic costs. At the same time, because we can access engines that Renault plans to make at its facility, our development costs, too, will come down."

The short point: the cost per unit for M&M's new products (perhaps even the new UV, the Ingenio) will drop.

"How much lower is difficult to say at this point, but there's clearly room for saving," confirms Pawan Goenka, president, automotive sector, M&M.

Buy more, save more
Goenka believes that the biggest saving will come from common procuring of inputs "" sheet metal, casting and forging products.

Today, approximately 60-65 per cent of the cost of production is accounted for by raw materials and M&M's raw materials bill "" for both the automotive and farm equipment businesses "" is around Rs 6,800 crore annually.

Now, instead of buying parts for around 250,000 units, the team will be shopping for nearly 1 million vehicles. So shaving off even a couple of percentage points will mean huge savings.

"We would kill for 2-3 per cent," says Goenka, adding that "it will go straight to the bottom line". Adds BCG's Bhattacharya, "Globally, companies turn in net margins of 3-4 per cent so, obviously, it is a big benefit."

What's more, M&M, which at present does all its shopping within the country, may soon be able to tap into Renault and Nissan's global purchasing system.

Technically, the agreement with Nissan doesn't cover purchasing, only manufacturing. But Mahindra doesn't rule out the possibility.

"If the chemistry works, they may come back and say, 'can we procure stuff together?' Carlos Ghosn [CEO, Renault and Nissan] already says costs in India are 35 per cent lower and he's contemplating working with us because we have scale. Why should he not want to procure with us "" not just for Renault, but also for Nissan?" he asks.

Moving up the learning curve
Apart from bringing down costs, the two partners will seek to strengthen the vendor base, add new suppliers and bring them up the technology curve.

"We can share parts and choose from a larger basket," explains Goenka, adding in a lighter vein, "and arm-twist the vendors." Seconds Ranjan, "Together, they can source components more efficiently."

But Goenka is most excited by the learning opportunities and the technological leapfrog M&M will achieve because of the Renault partnership. UVs like the Scorpio are easier to build with their body-on-chassis construction.

Passenger cars use unitary construction: pressed steel monocoques with drive train, suspension and tyres attached to it. M&M can learn a lot from Renault here.

"Sharing a common workshop, press capacity and a paint shop will bring us tremendous learning. We could even introduce some of their processes in our plants and improve the quality of our vehicles," adds Goenka.

That's possible because the new production line will be such that any kind of vehicle can be made on it. Of course, by using the Renault engines for its new models, M&M will be automatically upgrading technology.

And while there is no firm agreement between the two companies to work together on the engineering of products, there is an "intent" to do so. And Mahindra is confident that it will happen because technology today is embodied in procurement.

"The technology jump comes because we are going to be sharing suppliers. Today, technology has been pushed back from manufacturing to suppliers and therefore, managing the supplier interface is very important."

The M&M team is already coming up the curve as it adapts the Logan, expected to roll out in mid-2007, to suit Indian conditions "" not least being the shift from left-hand to right-hand drive.

The joint venture will begin by launching the three-box sedan, followed by other variants and body styles based on the same platform. The variants are yet to be launched in Europe.

A better deal for dealers
M&M may also benefit from the joint venture in terms of distribution. Within India, the Mahindra-Renault cars are to be sold through M&M's existing dealer network.

Currently, M&M works with three sets of dealers. The personal channel retails only the Scorpio, while the other two channels sell other UVs and commercial vehicles, respectively.

The first set of showrooms (120 across India) will stock the Logan and its derivatives. While dealers will also have first right of refusal for the commercial vehicles "" from M&M's joint venture with International Trucks "" it is not yet clear how cars from the Nissan stable will be sold, if they are made here.

In exchange, Renault has conveyed its willingness to help M&M sell its utility vehicles overseas, especially in Europe. So far, M&M hasn't taken up the offer "seriously" "" its UV range does not yet comply with stringent European emission and crashworthiness norms, which is why it has been concentrating on developing right-hand drive markets like South Africa.

Still, M&M's entry into passenger cars when the Indian car market is booming is no coincidence.

Rajan points to the huge opportunity here: 2 million cars will be sold in India annually by 2010. And the C segment especially, is growing. Since that is where the Logan will be positioned, that must be welcome news for M&M.