Mahindra & Mahindra in South Africa


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Mahindra & Mahindra in South Africa business case, submitted at International Business class in Amsterdam Business School, MBA, 2013

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Mahindra & Mahindra in South Africa

  1. 1. Amsterdam Business School MBA International Business, part-time Assignment week 5, November 25th, 2013 Case: Mahindra & Mahindra in South Africa What approach M&M should take to South Africa? Michelle Donovan 10429859 Kivanc Ozuolmez 10429832
  2. 2. Mahindra & Mahindra entered South Africa by exporting automobiles in October 2004, and within six months they formally shaped their business structure by setting up a 51% subsidiary, as a joint venture with a local investment partner. Since then, M&M appointed dealers in all nine provinces of South Africa and also created a network of customer service outlets and a distribution network for spare parts. Despite the global economic downturn between 2007 and 2009, from their first step into South African market till now (2010), M&M had constant market share growth in its niche SUV segment. M&M now expects to capture much larger market share with the new economic momentum both in South Africa and in other countries in the region. With a view to fully control and manage its business, M&M (SA) bought out its local partner’s stake in August 2009. Although M&M (SA) did very well for 6 years, the new market share targets require M&M to review its strategies in South Africa and for the African market in general. Manufacturing in South Africa vs Importing Fully Assembled Units So far M&M assembled its vehicles in India and imported them into South Africa as fully assembled units. This, of course, had some advantages from an Indian production line perspective. But from the South African market perspective, M&M missed many advantages of manufacturing in South Africa; - - - Government support in the form of subsidies or import duties for CKDs (MIDP and APDP plans) M&M pays 25% import duties for CBUs into South Africa (where it is 20% for CKDs) If assembly were done in South Africa, some components could be substituted from local market, cheaper than importing. Delivery times could be shortened. (Delivery time due to manufacturing in India and shipment of the CBU takes two months, and could lead tolosing customers/proposals especially in African governments’ large purchases) As a trading company only, and having brand awareness which is not par to competitors like Toyota, Mercedes, BMW, it is harder to market and build customer trust. As entry barriers in to the South African market are high for CBU trading/importing companies, M&M might not meet its strategic goals of using South Africa as a springboard for the larger African market. M&M already has six assembly plants outside of India and is therefore experienced in manufacturing and / or assembling its vehicles internationally.In order to benefit from the advantages of local manufacturing in South Africa, and establish the foundation for its growth strategy in Africa, M&M should start manufacturing in South Africa. This initiative can be realized as an FDI (Greenfield, acquisition, joint venture) or contracting for manufacturing. Below, we assess the potential for all options.
  3. 3. Starting a manufacturing plant in South Africa; a) Greenfield investment Setting up a manufacturing plant in South Africa would be consistent with M&M’s mission of being a long term player. It would also demonstrate to customers its commitment to the local market and attract sales by building trust in warranties and after sales service and help to build up brand awareness in the region. Although M&M is a cash surplus organization and upfront costs to start up the manufacturing plant are not a concern, greenfield entry is probably the most expensive and slowest paying off investment.Additionally, M&M only has trading experience in South Africa, which it gathered through its joint venture. Currently M&M SA doesn’t have local manufacturing experience, and is missing local knowledge on the manufacturing market and resources. Therefore, greenfield entry brings challenges on "Context specific resources... networks and relationships with other firms, with agents in distribution channels and with government authorities [which]are all important assets” (Meyer et. al. ,2009) Additionally however, greenfield entry helps to capture many of the benefits of local production, the current and projected sales figures of M&M in South Africa and Africa region are not close to 50.000 units per year, (in 5 years of SA existence, M&M sold 11.000 units in total) which is the defined minimum production limit to benefit from MIDP import duty rulings for CKDs. So M&M would not be able to avoid duty disadvantages on the CKDs that it imports under the current market share with greenfield investment. b) Joint Venture Joint venture entry would help M&M to benefit from all local manufacturing related advantages that greenfield entry would do. In addition, the local partner would bring its experience in the local manufacturing, resources market, networks and relationships, all of which would result in a faster start of the entry process. Another advantage with joint venture structure is, setting up a joint venture could require less investment of funds in comparison to greenfield entry. But the joint venture structure would still fall short of fulfilling the limit of 50.000 units per year production for the government duty subsidy for the imported CKDs, and M&M would still have the CKD import duty disadvantage against its competitors. Another point is, M&M always wants to be the leading partner in joint ventures, and according to Damanpouret. al. (2012),this mindset can make the management of the joint venture and execution of strategies harder and may result in an underperforming organization. c) Acquisition Acquisition of a local manufacturing company would yield the most benefits of an FDI in M&M’s South Africa case. First of all, through the acquisition M&M will have access to all
  4. 4. “context specific resources that were previously embedded in the local organization”. (Meyer et. al., 2009)The acquisition will also give M&M the freedom to lead and manage its incentives to the full extent, without any friction of other management – unlike in a JV. In addition, previously produced units can be added to M&M’s assemblies, and therefore this could help to get the government subsidies on the CKD import duties by reaching the 50.000 unit of production per annum threshold, or it will help them to reach this target earlier. Will acquisition require less or more funds than greenfield entry? – This is unknown, but assuming that there are suitable organizations that M&M can acquire, it’s the most appealing option in line with M&M’s strategic goals, if their next step in South Africa is an FDI. But still, post-acquisition success is bound to “implementation and ongoing management of the business” (Damanpour et. al. ,2012) Contracting in South Africa for Assembling Meyer et al, (2009) highlights macro-level institutions’ effect on transaction costs. Complementarily, Dunning, J. (2000) argues that strong institutional frameworks lead to lesstransaction costs, and therefore offer near perfect markets where contracting could be most beneficial for organizations. As South Africa opened its economy to international markets, and supported FDIs with clear and objective legislation, intensified investments in the country, as an institutional framework it appears a strong and reliable figure for MNEs. As the South African market is integrated with global markets, and has a maturing institutional context, JVs and acquisitions in South Africa may not offer benefits as par to underdeveloped economies, or they may result in unnecessary transaction costs for M&M. On the other hand, by contracting with a local assembler, M&M will enjoy all the benefits of local manufacturing; lead times will be shortened, market and after sales service trust will be established, and some parts can be substituted with local components. In contrast to the three FDI options above, contracting has the following advatanges: economies of scale and the CKDs import subsidy can easily be achieved under the assembler’s production unit declarations; as management involvement and organizational integration are minimal, “management friction and corporate culture clashes are at the minimum level” (Damanpour et. al. , 2012); and, maybe the most important of all, contracting requires the least entry investment in comparison to FDIs (a fraction of the cost). Also a very important benefit of contacting is, the time between the managerial decision and the production of first unit is the shortest. Conclusion
  5. 5. “The decision on how to conduct business in a foreign country depends not only on various factors...but also on the time and resource constraints that the manager faces when he/she makes decision.” (Kumar et. al. , 1997) M&M has built its distribution network, after sales services, and has experience on trading in South Africa, and what it needs is an assembly operation, where it can also leverage economies in scale in low volumes. In addition, to catch the economic momentum, M&M knows that they should act fast. Although resource constraints might not seem to be a big concern, the break-even point is. Therefore, M&M should choose the most economically feasible option for its market projections. To realize its market projections, quick action and results are also important. Therefore, under the current situation given in the case, the most viable option for M&M is to find a partner that will work under an assembly contract, and assemble imported CKDs on behalf of M&M for its African market. References Dunning, J. (2000). The Eclectic Paradigm as an Envelope for Economic and Business Theories of MNE Activity, International Business Review, 9, 163-190 Kumar, V. &Subramaniam, V. (1997) A Contingency Framework for the Entry ModeDecision. International Business Review, 32(1): 53-72. Meyer, K., Estrin, S., Bhaukin, S., & Peng, M. (2009) Institutions, Resources, and Entry Strategies in Emerging Economies. Strategic Management Journal, 30(1): 61-80. Damanpour, F., Devece, C., Chen, C., &Pothukuchi, V. (2012) Organizational culture and partner interaction in the management of international joint ventures in India. Asia-Pacific Journal of Management, 29: 453-478.