Foreign Firms flock to auto market

Despite high, and almost inevitable, rate of JV separations, attractive dowry prospects keep drawing suitors.

More trucks and buses have been sold this year in India than cars, giving the commercial vehicle (CV) segment a growth that beat forecasts.

Optimism derived from this data gave Munich-headquartered MAN SE the confidence to fork out Rs 1,050 crore to buy the stake held by its partner of five years, Force Motors of Pune, in Man Force Trucks. The decision was announced last month.

The German company will tread solo in the Indian CV market, which, analysts say, is poised to grow at a compound annual rate of 12 per cent. With its technological prowess and vast product range, MAN, one of Europe’s largest CV makers, will expand business while keeping an option to join forces with sister concern Scania, another European truck maker with a small operation in India.

In a similar case of a JV ending but with the Indian partner buying out the foreign one, the Munjals who run the 55-year-old Hero Group bought out Honda Motor Corporation in the sector’s most successful joint venture company, Hero Honda. This paved the way for the Indian group to develop its own research and development (R&D), enter the two-wheeler segment and export market, which were earlier restricted.
Over little more than a decade, 13 foreign automotive companies (see table) have dissolved their partnerships with Indian companies before deciding to venture solo, setting up their own manufacturing, sales and distribution shops.

Despite a spate of failed JVs, more partnerships were formed over the past decade than were broken. New JVs, for development of products and engines in trucks, buses, motorcycles and construction equipment, were formed.

JVS TO GO ON

Analysts say no clear conclusions can be drawn from the data. The Indian market holds significant importance for automotive companies experiencing saturation in Western demand. This means JVs in the automobile sector will continue to be formed. “Foreign companies know the Indian automotive market cannot be counted in the same breath as other international markets, as the demand dynamics is different, owing to different consumer aspects,” said a Mumbai-based analyst. “The key is to bring a local partner on board, understand the market movements and establish the auto component supplier base before you achieve full control of the operations.”

A recent JV break-up that got wide attention was of Mahindra & Mahindra and Renault. The Indian SUV market leader bought Renault’s 49 per cent stake in the JV after its only model, the Logan car, failed to clock encouraging numbers.

RIDING PILLION HAS BEEN TOUGH

How auto joint ventures have fared in the last decade

JVS THAT BROKE PRODUCTS REASON YEAR*

Force Motors MAN Trucks Operational restrictions 2011
Hero Honda Splendor, passion Operational restrictions 2010-11
Mahindra Renault Logan Sliding sales 2010
Bajaj Renault Nissan ULC Change of plans 2009
Swaraj Mazda Trucks Indian partner exits 2009
Mahindra Renault Nissan Change of plans by M&M 2008
Kinetic Hyosung Aquila, Comet Steep pricing 2004
TVS Suzuki Fiero, Shaolin Technology issues 2001
Premier Fiat Padmini, Uno Labour strike 2001
Premier Peugeot Peugeot 309 Mounting losses 2001
GM Hindustan Motors Opel Astra GM buys stake 1999
LML Piaggio Vespa 150NV Ownership issues 1999
Kinetic Honda Zoom, Marvel Ownership issues 1998
Yamaha Escorts RD 350, RX100 Failing demand 1996
Hero BMW F650 Poor consumer response 1995-96

CURRENT PARTNERSHIPS PRODUCTS

Tata Motors Hitachi Construction equipment
Tata Marcopolo Buses
Tata Fiat Cars
Ashok Leyland Nissan LCVs
Ashok Leyland John Deere Construction equipment
Ashok Leyland Continental AG Infotronics
Ashok Leyland Alteams Components
Bajaj Kawasaki Bikes; now in limited form
Bajaj KTM Bikes
Hindustan Motors Mitsubishi Cars
Toyota Kirloskar Cars and SUVs
Honda Siel Cars and SUVs
Mahindra Navistar Trucks
Volvo Eicher Trucks
Automobile Corporation of Goa** Buses
Garware Hyosung Bikes

*Year the JV fell apart; **Tata Motors, Government of Goa

“When perspectives change, initial agreements fail to benefit both companies in an alliance. JVs (eventually) fall apart,” said Abdul Majeed, leader automotive practice, PricewaterhouseCoopers. M&M scrapped the Logan name, made a few changes and launched the Verito, an SUV, which is doing better than its predecessor.

OWN AMBITIONS

Among reasons why partnerships come apart, say experts, are lack of brand exposure and sales growth, insufficient funds, lack of focus on segments, reluctance to part with technology, labour trouble and independent ambitions.

In the Hero Honda case, the partners split to follow individual strategies. While the Munjals have unveiled a new brand identity, Hero MotoCorp, to start establishing the company’s presence abroad, Honda is preparing to corner a larger share in the Indian market, the second biggest in the world for two-wheelers.

The length of a partnership depends, in some cases, on whether both players are willing to dig in their heels and invest money. “Start-ups have long gestation period and require considerable monetary commitment from both partners. Foreign companies entering India have deep pockets, unlike their domestic counterparts,” said Jagdish Khattar, chairman and managing director, Carnation Auto, a car servicing company, and former managing director of Maruti Suzuki.

“How long a JV can sustain depends on how much appetite Indian companies have for burning money. They often decide to sell off their stake.”

The Premier-Fiat JV of the late 1990s illustrates his point. The Indo-Italian JV produced the affordable Uno hatchback from the Kurla plant in Mumbai. However, the car did not sell as much as both companies had hoped for, resulting in under-utilisation of the plant, with Fiat losing money. A labour strike also crippled the factory, shutting production. Fiat’s brand and that of Premier took a hit, inducing the Italian car maker to shift to Pune for a new facility, where it brought Tata Motors on board. The Fiat Tata JV still makes cars.