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‘We Are A Federation’
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Conglomerates in multiple businesses tend to attract conglomerate discounts on the stockmarket. Worldwide, there isn't another company whose business spans across so many areas. How will you make sure you do not overstretch the group?
Around the world, there is a very conventional view of conglomerates and their strengths and fragilities. The basic problem with a conglomerate is that it has multiple businesses under one legal entity. We are not a conglomerate. There is a financial theory behind why conglomerates are not meant to be optimum structures; it has to do with capital asset pricing. When investors got more sophisticated, their essential tenet was: we do not need management to diversify for us; we can create our own portfolio.
We (M&M) said we are going to give you a federation of focused companies, so we created six sectors. Because some of these companies were fledgling, as they grow, we will list them; that is a commitment.
Anyway, there is logic for groups to exist. What then constitutes a federation? It is a common way of doing business… the whole logic that (Tarun) Khanna and (Krishna) Palepu talked about. Our goal should be to convert the conglomerate discount that people talk about into a federation premium.
There is an aspirational value in aircraft, and the technology rub-off. But why two-wheelers and the automotive chain?
We articulated what we call for imagery, the Engine theory. We will have an engine that will have multiple pistons. Think of the pistons as verticals. The more pistons you have, the crankshaft grows longer and stronger. Think of automotive sector as one piston, tractor as another… Apart from utility vehicles (UVs) and tractors — which are our core businesses and where we will remain focused, control brands and be the drivers — we will get the crankshaft benefit — the horizontal — by entering into joint ventures in other verticals.
Hence, every time we are asked passenger cars, we have said yes. But we will not go into passenger cars on our own for reasons of resources, bandwidth and focus. We will always go along with somebody else, who brings a lot to the table and increases the chances of success (Navistar for trucks). Even with two-wheelers, we went with SYM, which we inherited from Kinetic.
Our ecosystem starts at the two-wheeler. Don't forget the second-hand car business (First Choice). To me it was always a no-brainer that used cars will be the entry level car. The used-car market will be, at a minimum, twice the size of the new-car market. We go from two-wheelers to trucks to everything in the value chain. That is why two-wheelers are very important for us.
Are the other businesses essentially meant to get you scale?
Yes, but they must also be profitable and robust in their own right. They are part of an ecosystem. We are trying to build a web, for two reasons. One, a web is difficult to emulate; two, when you have earthquakes or disruptions, a web absorbs it temporarily… Webs are more resilient, harder to disrupt.
Will aerospace integrate as seamlessly?
Aerospace is the ultimate halo for anything in mobility. In aerospace,
one of the theories we had was that when people move up the value chain from two-wheelers to vehicles, if you have a brand that is higher up, it is easier to get people to move in. One of the things we want to do, and make money from it in a reliable manner, is the offset business. The real opportunity for India today is in aircraft parts.
Which is the weakest area for synergy, even now?
It is a question of evolutionary scale. Both the two-wheeler (segment) and First Choice are in startup stage. They are like babies — they are not weak but need to be nurtured. Both will ultimately (go for) IPO. The goal in every Mahindra company is to be listed, because of the federation structure.
How difficult was it to convince the board about the auto parts business?
As a generic area, parts business was not difficult to get into. We had to go by a complete acquisition-based strategy. And at that time we were not the well-oiled acquisition machine that we are today. Then, given the dip that happened due to a meltdown in Europe (some of our acqui-sitions were in Europe), naturally the board was circumspect. But his (Hemant Luthra's) theory of buying profitable, well-run compa-nies has paid off; they are all rebounding.
Did the success of Fortuner surprise or did it feel like it was your cup of tea?
The Fortuner is only an indication of an economy with increasing wealth; people are looking for higher price points. Which is why Ssangyong is such a fit for us — it provides us the next (vehicle).
Rivals are going to target the UV business. What is your strategy to keep your share when the herd comes?
We have many plans that are being hatched. The business is complex but extremely exciting. Our strategy reviews, which we just conducted this year, are steroidal. I have never been at a point in time in my career where things have been more exciting. As to whether our strategies will succeed, who knows?
Your US foray with Scorpio is blocked by lawsuits. Is there a plan B?
It is the same old plan. It just got postponed a bit. The word ‘sub-judice' has even more meaning in America.
Which business, in your view, will be the most dominant in 10 years?
I never comment on that because then people lose their competitive juices. Three years ago when there was a little downturn in the vehicle market, Pawan (Goenka) was in a corner being shown a chart by Bharat Doshi (the group's CFO) about how more than 50 per cent of the profits were coming from non-automotive and non-tractor businesses. And he (Goenka) had the greatest pleasure last year when he said we are back. Who knows? Maybe aerospace will be the biggest.
In the long run, do you see M&M as an Indian group manufacturing globally or a global group with India as one geography?
We will be global but with Indian DNA. We will derive substantial competitive advantage from our home market. So, how you do business, frugal engineering, scale of opera-tions — all will continue to give us an edge.
(This story was published in Businessworld Issue Dated 24-01-2011)