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A Rough Ride

Sumant Banerji     April 14, 2021

The new decade was barely a couple of hours old when India's utility vehicle major Mahindra and Mahindra and US carmaker Ford decided to put off their joint-venture plans. The two companies had been trying to cobble together a wide-ranging partnership since October 2019 that would have seen Ford exit the Indian market, leaving its assets in the JV with Mahindra. For a variety of reasons it had looked like a win-win deal. Ford would have benefitted from Mahindra's marketing pull and frugal vendor development strategy, while the latter would get access to the much-needed technology for the present (gasoline) and the future (electric). The two companies blamed the pandemic and the altered market dynamics for the parting of ways.

"It was not an easy decision but both companies were clear that given the current situation, this is the most prudent decision," Pawan Goenka, Managing Director and CEO for Mahindra, said at a virtual press conference on January 1. "We have to move on and focus on our core businesses."

The break-up is yet another addition to Mahindra's long list of unsuccessful collaborations. The decision comes at a time when electrification is structurally changing the global automotive industry. Mahindra finds itself under intense pressure in the utility vehicle segment in India - an area it lorded over not long ago. Its share in the segment has nosedived from a high 55.6 per cent in FY12 to just 15.2 per cent so far in the current fiscal. While it got swept aside by Maruti Suzuki as the leader in the segment in 2017/18, it has now fallen to a distant third and is close to being overtaken by Kia Motors, which entered the market only in mid-2019. As a result, its share in the overall domestic passenger vehicle market has shrunk to less than 6 per cent from 11.57 per cent in 2011/12, the lowest in nearly two decades.

"When a competitor in only its second year overtakes you in your backyard and you can't even fight back, it says a lot about your confidence," says an industry veteran who has worked with Mahindra in the past. "This isnt the company I worked for. We never had the best technology, but ours was the best product for Indian roads. We were unshakeable."

Giving Up On The Crown

It is ironic that Mahindra, which even today is synonymous with utility vehicles in India, is struggling when the craze for off-roaders is at an all-time high. Even in a pandemic-hit year like 2020, sale of SUVs and MPVs or people movers as some prefer to call it, accounted for an all-time high 37 per cent of all passenger vehicles sold in the country.

Mahindra, which is the oldest in the game and has the widest product portfolio in the segment, should have been one of the biggest beneficiaries. Instead, barring the resounding success of the Thar, it finds itself out of sync with the changing taste of consumers. The advent of new-age compact SUVs that have a monocoque body structure and are more car like in road manners has blurred the line between a passenger car and an SUV. (In monocoque body structure, the chassis and the shell are manufactured as one entity.) First Maruti, then Hyundai and now Kia have exploited this trend successfully. With products like Ertiga, Brezza, Creta and Venue, Maruti and Hyundai have increased their market share in the utility vehicle space from under 2 per cent at the start of last decade to over 20 per cent now. With the Seltos and Sonet, Kia is doing the same.

"Clearly the size and scale of the SUV segment has gone up, but a lot of it is because of crossover cars - platform based SUVs which are not really SUVs in the true sense," says Rajesh Jejurikar, Executive Director, Automotive and Farm sectors, M&M. "If we say we are going to have a right to win in everything, which has now come to be called an SUV, I don't think we are going to have that right."

It isn't that Mahindra has not tried to play the game, but the attempts have not worked. It has launched multiple products in the compact SUV space beginning with the Quanto, a derivative of the Xylo, the TUV300, the KUV100 and the XUV300, based on its South Korean subsidiary Ssangyong's Tivoli platform. None of them have hit the bull's eye. The other launches have not worked either. It pooled in resources from world over - design house Pininfarina in Italy and its North American technical centre - to develop the highly refined Marazzo MPV, and launched it with much expectation in the second half of 2018.

"Marazzo is a milestone launch for us and signals our global aspirations," group Chairman Anand Mahindra had said at that time. "It is inspired by the shark as it is the only predator in the sea that is unchallenged and so lives the longest. Similarly, we hope the Marazzo will swim through the waters of its segment like a shark, smoothly, silently, unchallenged and for many, many years."

The expectation was that Marazzo along with the premium SUV Alturas and the compact SUV XUV300 would add incremental volumes of 9,000 units every month to the company's kitty. In FY20, the three together delivered less than half of that target. Its last bonafide blockbuster success was the XUV500 in 2011. The hunt for the next one has perhaps ended with the new Thar, which has a long waiting period. But Mahindra needs more blockbusters.

"The market has changed, competitive intensity has increased, new players have come in. All that has directly impacted Mahindra," says Puneet Gupta, Associate Director, IHS Markit, an analytics firm. "They have been trying too many things at the same time. They need to get their act together. The brand is still very strong, especially in rural markets, and there will always be demand for their products. But the competition will only get more intense and Mahindra needs to identify segments they want to play in and go for them with full conviction."

In the past, Mahindra did try to foray into other segments such as full-sized sedan, compact sedans and even two-wheelers as a means to de-risk itself from any downturn in the UV segment. They have all failed. The company is now resetting its gameplan to stay clear of me-too products that try to compete with rivals in their game, instead focusing only on vehicles that are more intrinsic to Mahindras core DNA. The initial success of Thar - a thoroughbred SUV, has instilled a sense of confidence in this new strategy.

"We have zeroed down to saying that what we will make are SUVs, which represent the Mahindra brand DNA when you look at it. We will not make a series, which are 'me-too' or 'X fighter' or 'Y fighter' or whatever. But, that doesn't also mean we would only have chassis-based SUVs," says Jejurikar. "Our last three launches didn't go well, but here we (now) have a product (the new Thar), which has a waiting period of 10 months and is still getting 200-plus bookings per day. We are not saying we want to be number one, but we may end up being number one. And we may end up being number one because the products we choose to bring to the market may be immensely successful. New products will get added and they will be well positioned like the Thar."

"We should not be making strategic choices based on a desire for market share. We have to make our choices based on where we have the best right to win, make products that really connect, which will sell and bring market share for us," he adds.

Experts point towards the company's dependence on diesel powertrains, the delay in development of petrol engines and their relative lack of success as reasons for its current struggles. The company's sales split shows diesel still accounts for a big chunk at 87 per cent in 2020, against 95 per cent in 2017. Share of petrol variants went up from 5 to 13 per cent during the period. During the same time, share of diesel in the overall industry has fallen from 40 to 17 per cent, while for petrol it has grown from 56 to 76 per cent. It has also completely lost its first-mover advantage in electric vehicles with share of Mahindra EVs now accounting for just 5 per cent of industry volumes in 2020, compared to 100 per cent till 2018. "Mahindras SUV share has decreased in the last four years from 31 to 18 per cent, while its share in MPVs first increased from 2 to 16 per cent between 2017 and 2019 (coinciding with the launch of the Marazzo), but then went down to less than 2 per cent in 2020," says Ravi Bhatia, President, JATO Dynamics. "Its diesel penetration rose from 17 to 28 per cent in the last four years, while share in sale of electric vehicles decreased from 100 to 5 per cent."

"Their petrol variants have not done well as consumers don't trust them with that variant. Maybe they should have simply bought it from some other company to inspire confidence," says Gupta of IHS. "Companies like Maruti and Tata did the same in diesel when they bought the technology from Fiat and openly communicated it to consumers."

The company scoffs at any criticism of its petrol engines and says its late entry is not a disadvantage.

"Most of the heavy lifting in terms of investments in platforms is done. We have invested huge capital to be ready for BS VI and create a gasoline portfolio. Today, we have among the best gasoline portfolio in the industry. Several global OEMs want to buy a Mahindra gasoline engine. Nobody would have believed two years ago that global OEMs would want to buy a Mahindra petrol engine. Everybody used to say we are only into diesel and cannot do anything else," says Jejurikar.

On electric vehicles as well, the company recently came up with a blueprint. It is consolidating its step-down subsidiary - Mahindra Electric Mobility Ltd - into the parent firm to help categorise operations in two focused verticals, including Last Mile Connectivity and Electric Vehicle Tech Centre. This would mean the company would now go a tad slow on electrification of personal vehicles and focus on electrifying its B2B-oriented LCV portfolio for last-mile connectivity.

"We have broken up into boxes where in box one we intend to scale up offerings in the last-mile mobility space, and the other is driven by technology innovation to prepare ourselves for 2025-2030 when we assume a large amount of the market will move to electric. We should be prepared for at least 30-50 per cent shift," says Jejurikar.

In the interim the company would also launch the electric versions of its two compact SUVs - KUV100 and XUV300.

While the overall strategy may sound a bit incoherent and would need to deliver in the market, what provides the company with a bit of a cushion at this time is its leadership position in the domestic tractor segment. So is its strong standing in the light commercial vehicle space, something it has carved for itself in the last few years. While the overall commercial vehicle segment is struggling, LCVs and pick-ups are relatively better off. It is a market leader in both these categories with a share of over 41 per cent.

"One should also look at the company as a whole and they are solid as a rock in tractors and light commercial vehicles. Tractor sales have also been very robust this year so that has helped," says Aditya Makharia, Vice president, Equity Research at HDFC Securities. "They are facing some reverses in the core SUV segment, but a strong product pipeline is coming up, which should help them recover some of the lost market share. It is difficult to say how much."

Partnership Woes

Beyond the company's current struggles with out of sync products, its legacy of failed partnerships, collaborations or even acquisitions could be a major dampener in the future. Mahindra has been very active in seeking partners and the attempted tango with Ford was after it had already tried it out once in the 90s. Thereafter, it joined hands with Renault in 2007 in an ill-fated attempt at making compact sedan Logan, which petered out in just three years. It also formed a partnership with US-based Navistar for its commercial vehicle business, which ended in 2013 partly due to financial troubles of the partner in the US and also because the JV was bleeding in India. Its forays into the two-wheeler segment or its global aspirations in developed markets like North America have not borne fruit either. Neither has its acquisition of troubled South Korean firm Ssangyong, which it bought in 2013 and is now desperate to get rid of. It could not exploit its early mover advantage in the EV space either, courtesy the acquisition of Chetan Maini's Reva in 2010.

This is also an era where more and more automobile companies are joining hands to share the cost of R&D for electrification, connected and autonomous technologies. Alliances such as Renault Nissan or the more recent Stellantis (Peugeot Citroen and Fiat Chrysler) are examples of that. So are big groupings such as Volkswagen Group that draws from platform synergies among its various brands like VW, Skoda, Audi and Porsche or the Hyundai Kia group. Even in India, market leader Maruti Suzuki has joined forces with Toyota to cross-badge products and develop vehicles together in the future. "There is very little that the company brings to the table itself, but it would want more and more from its partner," says Gupta of IHS. "Margins in India are also very small compared to the rest of the world so you dont even make enough money to justify the investments one needs to make for the future."

Mahindra has always said it should not be blamed for the JV with Ford not working out and remains open for alliances and collaborations. "This particular one was a very unique situation, because of the agreement happening pre-Covid, and then the impact of Covid on the current overall business plan - the investments would have been significantly more than what was initially envisioned," Goenka had said on January 1. "That doesnt mean that Mahindra will not look at opportunities for JVs and alliances in the future."

"In todays times, things are moving fast. We are going to continue to look for tie-ups, be agile in doing that and have specific objectives, making sure we meet those," Anish Shah, current Deputy MD and CFO, who will take over the reins from Goenka in April, had said at that time

While the partnerships may not have endured, Mahindra did benefit from each one of them in terms of technical know-how, something it has used judiciously to develop cars on its own. For example, the first-generation Scorpio of 2002, credited for resuscitating the company, used many of the global best practices and manufacturing processes it learnt during its first tryst with Ford. Navistar gave it the foundation for the commercial vehicle business, while Renault taught the company manufacturing efficiencies. "Each JV had an objective. We think that they did work out in a way and we are here today because of a lot of things that we got from those JVs," Goenka had said earlier.

"Our relationships with each of our partners has always been very strong, which is why we could think about another stint with Ford two decades after our first partnership," says Jejurikar. "There are always reasons why partnerships don't continue beyond a certain time period. But we always cherish our relationship and part on good terms with the door always ajar for possible future collaborations."

Coming up in FY22 are two make or break products for Mahindra - the new Scorpio and the XUV500. More are in the pipeline, but for the future of the company a lot rides on how these two perform in the market.

@sumantbanerji


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