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Mahindra & Mahindra   art of growing with joint ventures
 

Mahindra & Mahindra art of growing with joint ventures

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Mahindra & Mahindra - Art of Growing with Joint Ventures

Mahindra & Mahindra - Art of Growing with Joint Ventures

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    Mahindra & Mahindra   art of growing with joint ventures Mahindra & Mahindra art of growing with joint ventures Presentation Transcript

    • M&M and the art of growing with JV’s
    • Mahindra & Mahindra - Snapshot
    • Mahindra Group Business Leadership Market leader in UtilityVehicles in India Market leader in Tractors in India – Number One global manufacturer (Single legal entity) Mahindra Finance : Leader in rural financing TechMahindra : Leader in Telecom Software Mahindra Holidays : Leader in ‘Time Share’
    • Before 1983 - License Raj The Import Substitution Phase 1950s-1981 Four features characterized this early phase of the auto industry 1. Limited number of players and high degrees of government control Firms needed licenses to operate, and the government restricted capacity in all product lines—e.g., trucks and heavy vehicles for Telco, Buses and trucks 2. Small volumes, slow growth, slow technical change. With no new players coming into the market, and little direct competition, volumes grew very slowly; and technology changed very slowly Most technology was licensed—as in the case of Fiat and Premier Auto, Standard Auto and even Ambassaor-Morris.And production was characterized by high degrees of vertical integration. 3. Confrontational industrial relations, and hierarchical, arms-length supplier relations. The big manufactures used the “exit” strategy of supplier development, and encouraged the development of a large number of suppliers to bid down prices as low as possible.“ Buyers thought cultivating multiple competing sources of supply was the cheapest way to buy components” (Rane interview, March 2000) 4. Focus on the domestic market. High tariff barriers and import restrictions led to minimal exports, and a primary focus on the domestic market.
    • M&M -License Raj Weakness Production quotas were given by the government Technological influences from outside were banned by restrictions on imports of machinery or know-how Company lacked resources due to fixed prices Strength Limiting Imports pushed M&M to produce parts domestically Developed capability to produce all parts indigenously Developed engines for tractors Build Knowledge base “Hence there was No-need & No-Opportunity for the company to excel Production, Product Quality or Shine through Innovative moves”
    • Changes in Automotive Sector (1983 -1993) 50% JV of Suzuki with the Government of India (Maruti Udyog Ltd) brought three key changes With public pressure to make this JV succeed, the government gave Suzuki quite a free hand. It introduced the concept of volume production and economies of scale to local car manufacturers as opposed to capacity fragmentation encouraged by the policy of licensing MUL introduced the industry to a new approach to quality Maruti “brought in a sea change in the industry’s approach to quality by introducing modern elements of manufacturing, such as continuous improvement and zero defect manufacturing, rapid product development and the introduction of new models Transformed vendor relations (Alliance) MUL pioneered the introduction of Japanese-style supplier relations in India Even though they remained limited to MUL, this exposed firms to new practices Especially the tiering of suppliers, single sourcing, long-term supplier relations JV’s at the first tier level, and a tight localization of key suppliers around the assembler, and massive transfer of technology and continuous technical assistance to its key suppliers.
    • Prior to liberalization Cars were inefficient, expensive, and rare as a result of heavy licensing restrictions and high tariffs
    • Mahindra & Mahindra Automobile The Company started its business by assembling US jeeps under the license of Willys Overland Corporation – 1947 (Only assembly of the Jeeps) Required Low-Technical Skills Required Low Know-How
    • India 1993 - liberalization De-control De-licensing De-regulation
    • Opportunities - Auto Industry The introduction of a new Automobile Policy in 1993 which coincided with the liberalisation of the Indian economy reduced the barriers to foreign entry considerably M&M entered India’s new economic era with a small but solid, even though obsolete, Primary knowledge base
    • Ansoff’s Product/Mission Matrix in wake of Opportunities in India Present product New Product Present Mission Market penetration Product Development New Mission Market Development Diversification Global Companies Domestic Companies
    • Mahindra Ford India Limited 50:50 Joint Venture Formed October 1995 Ended March 1998 30 months operation
    • Scope of Opportunity in India Ford M&M Strategic Scope Global Reach Diversification Economic Scope Enlarged Revenues New Source of Revenue Operational Scope Untapped Market - India Huge Opportunity Constraint Political & legal constraints Technology Capability Technology Infrastructure; Labor & Legal relations
    • Market Entry Strategies Greenfield Investment M&M did not have the required Know-How for in- house development of New Products in the new Era Foreign Companies were apprehensive due to restrictions and red-tape in India Merger & Acquisitions There weren’t much companies in India who could have given the technical edge to M&M for the New Opportunity of liberalization and growth
    • M&M and the latecomer strategy Linkage LeverageLearn Latecomer firms, are able to exploit their late arrival to tap into advanced technologies, rather than having to replicate the entire previous technological trajectory They can accelerate their uptake and learning efforts utilizing various forms of collaborative processes and state agencies to assist with the process, bypassing some of the organizational inertia that holds back their more established competitors The strategic goal of the latecomer is clear: it is to raise real incomes through catching up with the advanced firms, and to move as quickly as possible from imitation to innovation
    • Linkage In the context of globalisation, latecomer firms are faced with new opportunities for linking up with emergent institutions and networks. Through linkage, the latecomer firm can secure more than just a stream of revenue. It can tap its links with more advanced firms to acquire knowledge, technology, and market access – things that would otherwise be beyond the firm’s limited resources
    • Entry barriers – Promoting Linkage The reason why joint venture mode was the main choice during these years was due to continuing government restrictions on Foreign Direct Investment (FDI) of over 51% despite considerable de-licensing post 1993. This made obtaining approval for a wholly-owned subsidiary a challenging task. Instead of getting entangled with the government over regulatory issues, collaborations with a domestic car maker were a more favourable and hassle-free option
    • Leverage “It is this capacity to secure more from a relationship than the firm puts in that in the strategy is referred to as Leverage”
    • Leverage Type of Alliance between M&M and Ford Motors Horizontal Complementary Alliance The JV was a 50:50 partnership, and they utilized each others complimenting capabilities to develop a major business force challenging the mighty and became the 3rd largest manufacturer in India (1st Maruti & Suzuki, 2nd Tata) Mahindra offered Market knowledge & capacity for an incumbent (Ford) Ford offered Process know-how in producing a car & Overall advancement
    • Ford and M&M JV - Entry Entry Barrier reduced Got the land and approvals in less then 6 months as Tamil Nadu government was an ally in the Central government Investment Incentive Initial investment 800 crore 50% term loan by Government (400 crore) 25% Ford investment (200 Crore) 25% M&M investment (200 Crore) SalesTax concession – Estimated 29 crore Development of infrastructure like road to the plant developed by the government Got land 350 acres of land from the government on a discounted rate of 30 crore
    • Learning These sequences of linkage and leverage can be repeated over and over again until a firm, or collection of firms within an industry, enhance their capabilities and become, potentially, advanced players themselves. The sustained and repeated practice of these strategies by groups of firms can be described as a form of industrial learning
    • Learning for M&M M&M got a peek in ModernTechnology Able to bring its engineering capability from 19th century to 21st Century M&M gained knowledge about Assembly technology Production systems Assembly line layouts Training of M&M employees at Ford Tacit knowledge about Purchase Management Quality Systems
    • Change in Ambition Ford had complete control over the factory management and Production – M&M was just a silent partner in the Alliance “After a lot of soul searching we decided we did not want to become an Indian subsidiary of a large multinational.We wanted to grow ourselves into a global player for sports utility vehicles in the low and medium segments”– Mr. Pawan Goenka, Head of Product development M&M Ford did not want to collaborate with M&M in R&D M&M wanted to grow global but Ford did not want any alliance with M&M outside India
    • Change in Strategy of Parent Companies Ford Ford wanted to expand its operations in India and hence needed a lot of investment Mahindra & Mahindra Mahindra wanted to focus more on SUV segment (Scorpio) that will take them global and did not want to invest more in the expansion
    • Change in Commitment H i g h B Power Battle A High Commitment L o w C Low Commitment D Lack of Support Low High Pre 2000 Ford (High Entry Barrier) - A • Strategic Importance of Alliance – High • Need for a Partner – High M&M (Low Capability) - A • Strategic Importance of Alliance – High • Need for a Partner – High Result – AA (High Commitment) Post 2000 Ford - C • Strategic Importance of Alliance – Low • Need for a Partner – Low M&M - C • Strategic Importance of Alliance – Low • Need for a Ford as a Partner – Low Result – CC (Low Commitment) Need for a partner StrategicImportanceofthe Project AA= High commitment BB= No partnership CC= Low Commitment DD= Very low commitment AB= Potential Conflicts AC= Potential Conflicts AD= High Conflicts
    • Issues in Alliance Product Market Fit Ford Fiesta was priced out of the reach of most buyers Operational Marred by quality problems Financial Large investment requirement – M&M could not afford Strategic Change in Ambition of Parent Companies Change in Strategy of Parent Companies Change in Commitment of Parent Companies
    • End of Ford and M&M JV - 1998 Ford took its ownership to 72 per cent in March 1998 and later increased its holding further, even as Mahindra & Mahindra restrained additional investment "The automotive industry requires significant investment, particularly at the initial stages, coupled with a lengthy product development cycle,“ "Such capital intensiveness can be burdensome on partnerships, and the need for large investment and R&D can be difficult to maintain if it's not your core business.“ Michael Boneham, president of Ford Motor Co's wholly-owned India unit told Reuters.
    • Ingredients of Failure Hindrances of Ford motors sharing knowledge with M&M Refusal to share R&D Refusal to make M&M part of product development team Inability of parent companies to compromise on difficult issues Refusal to develop a car for India market in the event of failure of Ford Fiesta Changes in Ambition; Strategy & Commitment of parent companies led to disagreements and made decision making complicated
    • New Era – Post 2000
    • Post 2000 2002 officially ended all restrictions and regulatory clauses of the previous Auto Policy It now allowed for 100% FDI This encouraged foreign automobile manufacturers to either increase their stakes to 100% in their current joint ventures or end the joint venture agreement with their domestic partners Ford Motors India and General Motors increased their share to 100% The most striking example is that of Fiat India which had an entry equity of a mere 2.51%; today it has 100%. Post 2000, instead of entering the Indian auto market through joint ventures, foreign companies began to adopt the Greenfield method Global giants like Nissan andVolkswagen who arrived late in the Indian market, entered with wholly-owned units
    • To emerge as an autonomous car producer and move from “Imitation to Innovation” -- Mr. Pawan Goenka, Head of Product development M&M
    • M&M in the New Era of Automobile Industry The learning' idea of Mahindras came in handy, for they designed, produced and sold the MUV, Scorpio which was a great success Scorpio was a 100% indigenous design, with inputs from world-class automobile and equipment manufacturers It was conceptualised and designed by M&M’s in-house IDAM (integrated design and manufacturing) team led by Pawan Goenka of the GM Detroit fame. It shared the face with Cherokee, the head lights with the Japanese Pajero and the rear end with the Range Rover. The machine, equipment and dies came from Fukui and Fuji of Japan and jigs and fixtures in the body shop from Wooshin Korea. Fori Automation, U.S., supplied the tester line for the chassis. It had the latest technology incorporated into the automobile with 2.6-litre petrol engine coming from Renault churning out 116 BHP and 18.7 kg of torque and had the latest electronic fuel management system
    • Mahindra Renault Limited 51:49 Joint Venture Formed October 2005 Ended April 2010 55 months operation Linkage LeverageLearning New Cycle of Linkage- Leverage-Learning
    • Linkage – M&M view After the success of Scorpio, M&M wanted to go global and showcase a product to rival the best offerings of global auto giants But there was one problem.The group did not have access to modern technology, especially those related to production of a moncoque platform In moncoque technique the external frame supported the building of the car, rather then older method where everything relied on the chassis This new technique had revolutionized the global automobile industry with large scale benefits M&M needed to acquire the technology to become a global power
    • Linkage – Renault View Renault wanted operation in the Indian market which is highly emerging market with respect to automotive sector Renault had no experience with the needs of Indian customer JV with M&M was seen to help to create the first right hand drive version of Logan Renault was also eyeing to mark its presence in Indian market in short period of time
    • Objectives Renault M&M Technology Exploit the technology and economies of Scale An opportunity for learning a new technology Resources Technology Market Knowledge Strategy Global Expansion Develop Core Cometency Opportunity New Market Development New Product Development Boost up the creeping sale Expand customer base Renault was looking for major global expansion; along with India it was also starting its operations in Romania, Russia, Morocco, Colombia and Iran M&M wanted to go global and showcase a product to rival the best offerings of global auto giants
    • Leverage – M&M brand Mahindra Group a US $ 2.5 billion company is the market leader in multi-utility vehicles and tractors in India Mahindra and Mahindra had 55 years of manufacturing experience M&M had built its high network of distributors and suppliers in India efficiently High presence in automotive components, information technology & telecom (Mahindra British Telecom), and infrastructure development (Mahindra GESCO, Mahindra Holidays & Resorts India Ltd.) Mahindra had a reputation of providing TATA Motors the platform to harness the automotive growth in India M&M had not much presence in Sedan segment i.e. C-segment so Renault had no fears of having conflicts of interest Mahindra as a brand was a trusted brand in India With the leverage of Mahindra as a brand Renault was also leveraging its own brand in Logan, as the joint venture was called Mahindra-Renault
    • Leverage - Renault Technological capability Ready design of a low-cost car that was to retail for under Euro 5000 had robust and trustworthy compared to the sleek beauties manufactured by the Japanese and the Koreans Very successful products in most parts of Europe Snatching the opportunity and mark its presence in Indian market in unison with Renault and started building and selling the Logan in India
    • Benefits of Alliance Internal Benefits Reducing cost and risk of new market & new product development Obtaining Scarce resources Technology – Renault Production & Sales Network – M&M Obtaining cheap factors of production with the help of M&M Develop economies of scale by gaining access to each other's financial resources Renault can acquire new customer base and gives access to Technology, knowledge, skills and better management Competitive Benefits Defensive strategy in response to the converging markets Reducing the time cycle of new product to the market Strategic Benefits Creation and exploitation of synergies among the Renault and M&M Building knowledge to expand into key markets Develop new products and improve productivity by shared expertise and lower costs Help them in accumulating money and people to work in short time Reduced exploration and production costs and thereby increase in the profit margins
    • Issues in Alliance When Logan was launched in April 2007, the joint venture was targeting sales of 30,000 cars a year, or 2,500 a month Actual sales have been just under 500 cars a month. In October 2008, that number fell to 401, a 68 per cent drop from the figure a year ago So what went wrong with the car? The biggest problem was the price point. The petrol range starts at Rs 4.43 lakh going up to Rs 5.32 lakh The diesel variant (1.5 DLX) is priced at Rs 6.68 lakh (all prices ex-showroom Mumbai). Stronger competing models in the market with aggressive price tags such as Maruti Swift Dzire andTata Indigo CS and other models like Ford Ikon and Hyundai Accent that were available in a price bracket close to the Renault model put pressure on demand for Logan Logan's failure to play the pricing game was because the localisation content (the percentage of parts sourced locally) of the car, which is at 50 per cent, is much lower than competition and thereby has pushed up the final cost of the car. Logan has suffered also because of the dual structure excise duty, which is lower for small cars ( up to 4 metres long) at 8 per cent while larger ones such as Logan (4.24 metres long) face a heftier 20 per cent Competitor Tata Motors has trimmed the length of Indigo to take advantage of the lower excise for small cars, thereby bringing down the cost of the car.
    • End of Alliance Financial Issue The joint venture posted a loss of Rs 490 crore in the year ending March 31, 2009 on sales of Rs 740 crore Financial Crisis of the western world in 2008 Trust Issue Ghosn had said at theTokyo Motor Show that amongst the three separate ventures it has in India -- Ashok Leyland, Bajaj Auto and Mahindra & Mahindra -- it was keen on continuing with just one of these Wind-up of JV Renault paid 135 crore to get out of the JV Offered M&M the Logan platform and the engine on license
    • Ingredients of Failure Unsuccessful product Development of Logan was a joint effort of Market information of M&M and product knowledge of Renault Product failed hence the teams started blaming each other for the failure Loss of Trust Open indication of the CEO of Renault about joining hands with other competitor Internal communication issues Change in ambition M&M – Wanted to focus on MUV segment and launch global product Renault – After the failure of Logan and Financial losses they wanted to enter India on their own
    • Learning Mahindra & Mahindra gained engineering capabilities for making superior engines and world-class manufacturing practices to bring efficiency through these joint ventures Foreign partners learnt the lay of the domestic market and ways of doing business in India