The joint-venture between Mahindra & Mahindra (M&M) and Detroit-based American automaker Ford Motor Company, in which Ford India has transferred its assets to Mahindra & Mahindra to operate, was long-anticipated.
The question that hung in the balance, though, was, why should M&M make this acquisition (at an enterprise value of $275 million) when the company already sits on excessive, unused capacity.
For Ford, however, the move was well-founded and reasonable -- failing to scale in the country despite $2 billion in investment in two decades, it would look at partnerships to reduce the operational costs of running in weak markets outside America.
M&M answered that question mostly with the synergies of “scale and skill” explanation. In a call with analysts, Pawan Goenka, managing director and chief executive officer at M&M and Parthasarthy VS, group chief financial officer, explained that the new 51-49 joint venture will utilise Ford’s expertise in product development and global sourcing to lower vehicle development costs by 30-35 percent.
The company will explore synergies in sourcing (M&M’s current sourcing from India is at $5.4 billion, the new company will add $1.6 billion, taking the total to $7 billion), synergies in manufacturing by combining capacity at both the company’s facilities in the country, leading to an annual capacity of 1.2 million vehicles, strengthening distribution channels and most importantly, achieving economies of scale in electric vehicle production by utilising Ford’s Aspire platform, and most importantly, growing focus on imports from India, most importantly.
The combined sourcing scale in the new company will achieve 1.3 times the sourcing scale of M&M, and three times for Ford. For manufacturing scale, the co will explain synergies with M&M, Ford and also Ssangyong, according to Anand Mahindra, chairman at Mahindra Group. The new joint entity will be a scale player in India with 14 percent combined market share, said Mahindra, adding that the joint venture is designed to be EBITDA positive from the very first year.
Addressing questions on how the two companies will utilise more spare capacity in the joint venture, Goenka said, "We are working on a C-SUV, which will be manufactured and supplied by M&M to both Ford and M&M, which will help us use up spare capacity faster at M&M, as we will be supplying to Ford also from the same plant. We are also working on two new products which will be based on Ford’s B-platform, which will be developed from Ford’s plants in Chennai or Sanand, though that plan hasn’t been approved yet. So that gives us the opportunity to use Ford capacity faster than it would have on its own."
However, there is scepticism in the industry if this acquisition was necessary. "They are speaking of synergies, but there was no need for this acquisition. M&M already has excess capacity, and it doesn't need any incremental capacity. For engines, they have Ssangyong. What was the necessity for this additional investment?", an auto analyst CNBC-TV18 spoke to said. Because the joint venture will still have lots of spare capacity, M&M will not need to invest any more in capacity expansion, Goenka added.
"This is a really big bet for Ford. This joint venture gives us opportunities we can’t have otherwise. The joint venture allows us to develop a new line-up of vehicles, to supplement our current line-up, but to go to market separately and have a profitable growth not just in India but also overseas for Mahindra," Jim Farley, president of new businesses, technology & strategy told CNBC-TV18.
Is this M&M’s shot at achieving the international scale it has been gunning for?
"It does help in that as Ford has a really large network in all the markets we are interested in. We have already started on that as part of the alliance. We are using some Ford dealerships in South Africa. For example, we have Ford helping us in Indonesia and some other South Asian markets. So the two-year journey we started becomes even more accelerated now, as we might even badge some Mahindra products as Ford in international markets.
"Electrification is a huge initiative for our company. We have spent more than $11 billion on electrification globally. But most of those vehicles are very high-end, very expensive, very large like the F150 Electric. We have a completely different opportunity to work on electrification with Mahindra. We believe that one in three vehicles globally in these emerging markets. And combining our know-how, we can serve a very different customer and complement the very high-end electric vehicles already in development," Farley said.
M&M currently working on a battery-operated vehicle on Ford’s Aspire platform, which is currently awaiting approval. Ford and M&M both said there are currently no plans to collaborate on entering the US market, and the focus will remain on India and emerging markets.
First Published: IST