Recent Alliances with Global Automobile Majors

For all practical purposes, Tata Motors and Mahindra & Mahindra are the only two Indian companies in automobile manufacturing, particularly in passenger cars and SUVs. And if the two enterprises, wish to remain the major players in domestic market or have dreams to go global ultimately, perhaps the only way will be some reliable alliances with some automobile majors of the day. Both are on the right track.

Last year, Carlos Ghosn, CEO of both Renault and Nissan and Anand Mahindra, M&M’s vice-chairman and managing director, signed an alliance in Paris. The two decided to set up a plant that would make half a million cars a year in India within the next five years, Many expect an investment of over $1 billion in the project, may be the largest investment announced by any auto company in India. Both Renault and M&M vehicles and, possibly, Nissan’s too, will be manufactured in this plant. Ghosn puts a lot of importance on this deal. Both Nissan as well as Renault wish a presence in India with a strong Indian partner and use India to manufacture models for some export market too. So under a previous agreement, Maruti Udyog will also manufacture 50,000 Nissan cars for export.

Under a separate alliance, Mahindra International, a 51:49 joint venture (JV) between M&M and the $9.6-billion US-based International Truck and Engine Corporation, will develop and market commercial vehicles in India, Asia, the Middle-East, Africa and central Europe. It will also develop low-cost products for the American continent. The duo will invest $80 million in the project. It appears, M&M has a strong global ambition for automotive sector from engineering service outsourcing to contract manufacturing.

Tata Group chairman Ratan Tata and Fiat Group CEO Sergio Marchionne have also gone for another grand alliance that was announced in September 2005. Tata Motors will distribute Fiat vehicles in India. Later on in late 2005, Fiat announced plans to build Tata Motors’ vehicles (probably one-tonne pick-up trucks) at its plant in Cordoba, Argentina. And last month, the duo announced a Rs 4,000-crore investment to set up a plant in Ranjangaon, Maharashtra with a capacity of over 100,000 cars and 200,000 engines. The manufacturing facility will produce both Tata and Fiat cars.

The two groups are now closely studying each other’s platforms that are under development, including the Tatas’ Rs 1-lakh car. Ravi Kant, managing director, Tata Motors said, “Up to this point we have done this (development of the Rs 1-lakh car) on our own. In future, if a partnership is required, we will look at it.” Alfredo Altavilla, CEO of Fiat PowerTrain Technologies and senior vice-president (business development), has been a little more forthcoming: “We are fully available to cooperate on any platform that Tata requires. Fiat’s considerable expertise in small cars has been made available to Tata.” The next generation of Indica will have Fiat’s diesel engines. And a lot of the design and development of new Fiat models could be done by the Tatas to cut down the development cost.

Tata Motors also has alliances with Spanish truck and bus maker Hispano Carrocera (with a 21 per cent equity holding) and with Thailand-based Thonburi Automotive Assembly Plant (70 per cent) to make pick-up trucks. Tata Motors are also on look out for an acquisition that further expands its presence in passenger car business.

Why is India important now? One, India’s automobile sector today is considerably big rushing fast to the two million a year with a growth rate in double digits. India now forms a vital part of the global automotive industry’s cost-cutting plans.

In the automotive industry, millions of dollars are pumped in R&D and manufacturing for each new model. These costs used to be recouped from the vehicle sales that would go on for many years. Now, with the product life cycle significantly reduced based on customers’ expectations, the manufacturers have fewer vehicles to spread these costs on. As a result, if the global biggies don’t cut the development costs, the losses can’t be avoided.

Indian automobile manufacturers have proved its cost effectiveness in product development. As reported, M&M’s Scorpio was put on the road at a cost of only $120 million ($30 million in development; $50 million in dyes, tools, etc.; and $40 million on manufacturing facilities). In the developed world, a comparable product would cost over $600 million. Tata Motors also came out with its product development with similar lower figures. So is the advantage in manufacturing too. As reported, Indica costs about 40% less than what a comparable developed in the West would have cost.

Indian companies might not have a lot of technology to offer in basic design, but can be a good and cheaper source for engineering tasks related to new platform development. Both Tata Motors and M&M are having a pool of engineers engaged in product development. As reported, over 200 M&M engineers based in Pune are working on global product development for International Truck.

Indian firms ensure that break-even is achieved in about two years instead of the usual five years from a new manufacturing facility. And that makes a big difference.

The alliances have two things in common for the foreign partners. One, they have set ambitious growth targets for the next 4-5 years. Two, none of them has a strong presence in India. So it a win-win situation for all the partners, while for Indian partner, it is the easier way to go global.

The 5 Ss of Japanese efficiency
by Surinder Kapur

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