How M&M is future proofing itself from powertrain disruption

M&M is making bold moves, especially in the context of investing heavily in its auto business and expanding into the EV market. However, there are several factors that could impact the success of its plans.

By Prerna Lidhoo calendar 16 Jun 2024 Views icon5589 Views Share - Share to Facebook Share to Twitter Share to LinkedIn Share to Whatsapp
How M&M is future proofing itself from powertrain disruption

Mumbai-based Mahindra & Mahindra (M&M) finds itself at a pivotal juncture, dividing its attention between the hypercompetitive internal combustion engine (ICE) vehicle market that provides the bulk of its current revenue and profit, and the fast-emerging electric vehicle (EV) market to which OEMs are increasingly turning. While many automakers see ICE as a legacy business that is soon likely to become irrelevant, M&M has taken a different approach.

The company is meticulously crafting its strategies to streamline operations, channel hefty investments into the burgeoning EV business, and improve production capacity to solidify its market position. Meanwhile M&M’s MD and Group CEO Dr Anish Shah has made it clear that ICE is here to stay. It remains a crucial part of the company's product lineup. M&M believes that ICE vehicles are expected to remain important for consumers for the next five to seven years.

This is reflected in the company’s business plans. Of the Rs 27,000 crore plus that M&M plans to invest in its automotive business in the next three years, Rs 14,000 crore will be kept for the ICE vertical – primarily for bringing out new and refreshed SUV models. The funds will also help take the total annual capacity from 6 lakh units (49,000 units per month) to over 8.64 lakh units or 72,000 units per month.

Similarly, of the 23 all-new models planned, nine are internal combustion engine-powered SUVs, seven are light commercial vehicles, while the remaining seven are battery-powered EVs. “Out of the nine SUVs, six will be all-new products and three will be mid-cycle enhancements. "So (we have a) very aggressive plan towards ICE vehicles over and above our Born Electric portfolio. The seven LCVs have electric versions as well. So a lot is happening to make us future-ready,” said Rajesh Jejurikar, ED and CEO, Auto and Farm sectors at M&M.

Pulling Up Its Socks

India’s automotive sector, particularly the UV segment that provides nearly all of M&M’s passenger vehicle sales, has become extremely competitive in recent years with the entry of a large number of new players.

Brands such as Kia, MG, Hyundai, Tata Motors and even Maruti Suzuki have bet aggressively on the UV segment in recent years, making it much harder for M&M to hold on to its sizable market share in this category.

M&M has responded to the increasing competition by increasingly shifting its focus to the automotive and farm equipment business. In recent years, the company has trimmed its portfolio by exiting companies such as SsangYong, GenZe, GippsAero, Mahindra Susten, Mahindra CIE Automotive, Mahindra Sanyo Special Steel and Mahindra First Choice Services. 

The strategy seems to be paying off. Over the last two years, the company has more than doubled its automotive output to 4,72,775 units, even as the demand for SUVs shot through the roof.

From a monthly production capacity of 19,000 units at the end of FY20, it has consistently increased output to 39,000 units by end-FY23 and to 49,000 units by end FY24. It now has a monthly production target of 64,000 units for FY25 and 72,000 units for March 2026.

According to this roadmap, by March 2025, there is to be an increase of 5,000 units each in the monthly production capacity of three models – the new Thar five-door SUV that is slated to be launched by mid-2024, the recently launched XUV 3XO compact SUV, which drew 50,000 bookings in the first hour of opening, and the all-electric XUV400. Another 8,000 units/month of capacity is also scheduled to come online for electric vehicles by March 2026.

This rising production has also boosted the company’s financials, with consolidated net profit up 25% at Rs 11,269 crore for FY24.

EVs - The Opportunity

The second major chunk from the Rs 27,000 crore investment is going towards M&M’s electric vehicle business.

It plans to plough in around Rs 12,000 crore in Mahindra Electric Automobile, aiming for a penetration of 20-30% for electric vehicles in its portfolio by 2027.

M&M has ambitions with its "Born Electric" vision, which focuses on launching five new electric SUVs, to become a leader in India's EV market. According to Jejurikar, the Indian market is full of “very functional EVs,” rather than models that can, “wow the customers,” and the company is banking on its Born EVs brand to build excitement in the market. “The charging infrastructure will come up and with that, backed by ‘wow’ products, the penetration of electric vehicles will rise. People buy ‘wow’ products. There’s no rational reason to buy a Thar. We do believe that when you have the right proposition, people are going to buy it. And that’s what we think will happen with Born Electric,” he said.

Given that the battery accounts for nearly 30% of the total cost of an electric car, the company is already scouting for partners to localise the production of battery cells in India.

“We wouldn't do it alone,” said Jejurikar. “We would do it in a partnership. And there could be multiple constructs to that partnership. But it is something that we are very actively looking at. It certainly won't be a full investment by us. It will be with multiple sets of strategic or financial investment options.”

Once the partner is finalised, M&M will invest additional money into the cell localisation initiative beyond the Rs 12,000 crore lined up for investment in its EV business, MEAL. However, the investment will be shared by M&M and its prospective partner, upon finalisation of the same.

Separately, M&M has already signed a commercial agreement with Volkswagen Group to source unified cells that will power its upcoming Born EV range. Both companies are exploring a wide range of subjects from cell localisation to joint vehicle architecture development for compact EVs, but nothing has been finalised beyond the sourcing of the motor and batteries from the German automaker. M&M will also be sourcing battery cells from companies like BYD, Ferasus, LG Chem beyond VW to broad base its supply base to power future EVs. However this aggressive strategy also attracts some risks in both the ICE and the EV businesses. 

EVs - The Risks

The Indian electric vehicle market is still nascent, with infrastructural and regulatory challenges related to the provision of tax breaks and government incentives. Currently, battery-operated ‘pure’ EVs attract a lot of incentives and tax breaks, but there is pressure to extend some of these to hybrid vehicles, which combine ICE and a small battery set-up.

M&M's decision to prioritise pure EVs over hybrids could limit its appeal in a market where hybrid technology is gaining significant traction.

For Shah, government incentives for hybrid cars don't make sense and the company sees hybrids as an extension of EVs. “It's a slightly different powertrain. And to the extent that it's required, we'll be ready with that. If there's a significant change in hybrid technology that causes it to be much more like an EV, then that's something we'll move into much faster."

He added that governments around the world are providing incentives to EVs to promote faster transition. "That incentive will come down because at some point we're not going to need them anymore. In hybrids, there's no material change in emissions. Yes, there's some benefit from a fuel efficiency standpoint but that's still very marginal. And it's more expensive to build because it has got two powertrains which is also the reason why governments around the world have largely stopped providing any incentives for hybrids in the last 20 years," he said. "The question is, is an incentive really required for hybrids?"

Jejurikar, too, doesn’t feel hybrids are a big threat at this point. "We don’t see hybrid-wanting customers actively cannibalising us, except in very few segments at an appropriate time. Depending on how the category is moving, we will look at hybrids whenever we need,” he said.

All said and done, there has been a surge in demand for hybrid vehicles in India and the market could also potentially see a correction on taxes for hybrids. This comes against the backdrop of Toyota's aggressive push in the segment, snapping up about 78% of the market, while Suzuki Motor Corporation has also expressed an intent to bring a cost-effective hybrid car, and is hoping for the GST to be lowered on hybrid cars, to be able to leverage more volumes on affordable hybrid cars with better mileage.

Jejurikar said that a lot of people are comparing India’s EV market with those of the rest of the world and that is not “the right thing to do.” Penetration of EVs in India is only at 2%, while in some of the global markets, it is reaching a saturation level at “15%, 20%, 25%,” he pointed out.

Despite all this, Shah is not entirely averse to the idea of hybrids in the future. "At this point, we feel good about our focus on EVs. We'll be ready for hybrids. We're looking at hybrid technologies closely and we'll continue to act upon them. I know there's been a lot of debate on hybrids but government incentives are typically to enable an industry to transition to a place that's better for the economy. Electric vehicles (EVs) have no emissions. They have got much lower fuel import because they don't use fuel," Shah says.

Besides local, regulatory factors, the EV business could also face some global headwinds. Trends around the world show slowing EV demand, influenced by factors such as the lack of charging infrastructure, discontinuation of subsidies, range anxiety, cost disparity, etc.

If the market does not grow as anticipated, M&M could face overcapacity and underutilised assets, leading to financial strain or a longer return on investment for its EVs. The effect of slowing EV sales can also be felt closer home as month on month sales have started declining even in the Indian market. In FY24, approximately 99,000 electric vehicles were sold with a penetration of about 2.3% versus 88,000 hybrid vehicles accounting for 2% of the market.

Rising UV Competition

The second major risk the company faces is in its traditional stronghold of ICE-based SUVs and UVs.

While M&M's recent product launches like the XUV 3XO have shown promise, the company's ability to sustain and grow its market share amidst rising competition remains a challenge. Rival Toyota has grown on the back of better-than-expected demand for the strong-hybrid Innova and Hyryder, while Punch, in addition to Harrier and Safari, have been the growth drivers for Tata Motors. Maruti Suzuki, too, has also seen a strong comeback, thanks to a revival in the sales of Brezza and additional volumes from Fronx, launched last year.

Moreover, for M&M, the base is catching up and the booking momentum is also coming back to reasonable levels. It also remains to be seen how some of the models launched between 2021 to 2023 perform, although the five-door Thar is expected to bring in incremental volumes.

Despite this, the company remains confident. CEO Anish Shah, who believes in doing few things, but doing them well, is confident that the company’s EV and overseas strategies will help launch its next phase of growth. “The company will look at capitalising on its market leadership and maintaining the growth trajectory. The listing of subsidiaries such as Mahindra Electric Automobile (MEAL) and Mahindra Accelo, the group’s recycling business for the energy and mobility sector is also on the cards,” Shah said.

Most analysts too seem to share the management’s optimism. “M&M continues to have a steady pipeline in place, with robust demand seen in the SUV segment,” a recent Geojit Financial Services report said. “Volume growth and market share gains, along with robust cash generation, should aid long-term performance of the company. However, a rise in input costs and lower realisations in some of its new launches are expected to impact margin in the near term.”

According to BOB Capital Markets, the company’s focus on lowering the wait period and aggressive launch programme of nearly 24 launches in the next six years with clear policy of focus on growth over earnings augurs well for M&M. “Some of the risks for the company come from accelerated launches by competitors in the high-end automotive segment and commodity inflation sustaining for longer-than-expected in the high-end segment,” Milind Raginwar, Research Analyst at BOB Capital Markets says.

Under the leadership of Anish Shah and Rajesh Jejurikar, M&M's strategic vision is clear, and so far, they have delivered. It will be interesting to see how long they can sustain it amid growing competition and a slowing market. The company's success hinges on its ability to navigate complex market dynamics effectively. As M&M readies itself for the next phase of growth, one can only hope that its high-stakes future strategy pays off.

This feature was first published in Autocar Professional's June 1, 2024 issue.

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