Dr Pawan Goenka – Executive Director & President (Automotive & Farm Equipment Sectors), Mahindra & Mahindra
Dr Pawan Goenka, executive director and president (Automotive & Farm Equipment Sectors), Mahindra & Mahindra, speaks on a number of issues ranging from the ongoing slowdown, supplier quality, technology and acquisitions. Hormazd Sorabjee meets him.
Is the ongoing slowdown in the industry the worst you've seen in a long time?
Yes, it is. We have had two slowdowns in the last 12 years – 2008 and 2002 – and this is probably the worst of the three. It certainly seems like a very bad slowdown. In 2008, we seemed to pull out of it much faster, thanks to new launches and no one gave up on investments, especially multinationals. But this time even new launches are sort of drying up.The way I see it, the developments in 2008 were an over-reaction in India to what was happening globally. Fundamentally, there was nothing wrong with the Indian economy for it to slow down and that’s the reason we emerged out of it very fast. Moreover, the government was in a position to provide some kind of a stimulus package and they did it very fast. That helped us to come out of our slowdown very quickly; this time around, things are different.
Have we hit the bottom? Is the upcoming festive season going to be make or break?
I hope we have hit the bottom because the ability to continue at this pace for several months is not there. As you know, the auto industry has a cascading effect, both upfront and at the backend, in terms of economy impact and job losses. Therefore, it’s very important that we come out of this in the next three to four months or the overall impact might be fairly severe.
If we don’t, how long will the slowdown last?
I wish I could predict that but all forecasts over the past 4-5 months have gone wrong. The festive season always is something to look forward to and we hope that it will wipe out the last 3-4 months of the slowdown. Clearly, if there is some kind of intervention by the government or some turnaround in the economy, that will help but I don’t see any signs of that happening right now .
What, in your view, should the government do?
What we need is short term and medium term consistency. The medium-term concern, which doesn’t help today’s problem, that I have is that the policy has to be steady, not change every year. The investments that we make in the auto industry are long term; it takes 4-5 years for them to fructify. We invest thousands of crores based on the current regulations, kinds of vehicles and engines and fuel. So if rules change every 28th February, then we don’t know what to do.As regards the short term, we need something on the lines of what was done in 2008 which helped industry significantly. Today, we have varying excise rates which is very confusing. We need a simple excise regime and some kind of reduction temporarily in excise duty. My belief is the reduction in excise duty will not reduce government revenue, which is what it is concerned about, because you will get increased volume if you are able to reduce prices by 3 or 4 percent. Beyond that, government buying, which is stopped completely, would also help. Interest rates, of course, cannot be done only for the auto industry but that is a big driver.
But it looks like they will go up again?
Unfortunately, yes. One of the biggest drivers for the auto industry is infrastructure projects. At the moment, with the ban on mining and with nothing happening on construction, the automotive sector is adversely affected.There are a lot of these little things that can be done and I fully appreciate that the government cannot do anything right now which will reduce revenues and, therefore, we will not be proposing anything that will reduce revenues.
M&M has been affected by the 30 percent excise duty right now on SUVs and you are aware of the proposed 3 percent implemented on the ground clearance issue and the way you have countered it. One gets the impression that it was more a case of revenue generation than really penalising an SUV.
I agree that it was done to generate revenue. Perhaps, the thought at that point in time was that the SUV segment is the only one which is doing well, so let’s get it from the SUVs. But the effect clearly has been absolutely reverse because the SUV segment that was growing at 50 percent has begun to slow down and overall revenues have fallen, not increased. One hopes that the data is being analysed by the finance ministry and it would see merit in going back to where we were, at least in terms of rationality of regulation. We cannot tax a vehicle based on a shape and ground clearance and that is what we have been saying from the very beginning.
Do you feel that this has highlighted how vulnerable M&M is as a company because it is skewed towards SUVs? Would you have been better hedged if you had a broader portfolio of, say, regular passenger cars?
In a sense, the definition of what an SUV is and what constitutes a passenger car is getting blurred; it’s more in our minds and in the consumer’s mind that many vehicles that are being called SUVs today are closer to a car than a SUV. So we are taking a broader view of what we call our domain, the SUV domain. We are looking at an entry-level crossover sub-four-metre vehicle that is also an SUV. So, our overall approach is that we continue to remain in the segment that is broadly called SUV which means higher ground clearance, among other things. If we widen the product portfolio to go above and below where we had been in the price point, we have to manufacture vehicles that address a much wider percentage of the target audience. For that, we would launch vehicles that are in the lower price point of the smaller vehicles but still be sort of SUV in nature.
Are you concerned that everyone is now getting on to your game — the Duster, EcoSport and Terrano and these have global technology on their side?
No doubt the SUV segment has become more competitive but that should not surprise us because when a segment becomes larger, other OEMS get interested and enter it. We have had a free run, so to speak, for nearly 12 years from the time we launched the Scorpio. That’s enough time for us to catch up in terms of technology and quality and if we don’t do that, we do not deserve to be at the top.Every product that we have launched is a significant improvement over the previous product. Our upcoming products will certainly be further enhancements on what we have done so far and therefore if we are not right up there, with the multinational products being launched, we don’t deserve to be selling in large numbers. Therefore, our technology has to be competitive, as also our pricing, quality, fit and finish, and the brand has to remain strong. That’s what we are striving for.
Is there still a learning curve for Indian companies on aspects such as vehicle interiors? That’s where many Indian companies, not only Mahindra but even Tata, have suffered because we just don’t have the supplier eco-system like they have say in Korea?
I agree. A part of it is because of our ability to design the right interior and part is because of the supplier ecosystem. We have come a long way from the days of the Bolero and the Scorpio but are still falling short of what is available outside India, in terms of interior and fit and finish quality. We need to go outside India to get the right interior design, fit and finish and quality, and for that we are working in Korea and Italy for future products to see how we can get these aspects right.
That leads me to SsangYong. Can we expect some more synergies in this quest to go more global? Is SsangYong giving you that kind of platform?
There are certainly a lot of benefits that both companies – SsangYong and Mahindra – can get from each other and we are getting those benefits right now in terms of the future products and engines. Some of the products we are doing are for Mahindra and SsangYong are on common platforms, so too are the engines. We are able to use the Korean eco-system because now we understand it well having worked with SsangYong. Yes, we are able to take advantage of SsangYong's strengths in areas like interiors.
What about joint development of engines? India being a predominantly diesel market, Indian manufacturers really don’t have any petrol technology and M&M does not have a single petrol engine in its line-up. Is that a cause for concern and will that be addressed?
The writing is on the wall. We cannot remain a diesel-only manufacturer – that will not work just in India, even for the global aspirations that we have. In fact, I do see some slowdown in diesel, perhaps in Europe also, compared to where Europe is today in terms of diesel. Therefore, we must have a strong petrol platform of engines available. We are currently working on two engines – three- and four-cylinder – coming out of the same platform that would be like any other modern petrol engine and would become mainstream for us in terms of a petrol-driven UV range that we have, starting from vehicles much smaller than what we have today and going on to vehicles larger than what we have today.
So they have a petrol option as well?
Not just a petrol option, but a petrol engine. The petrol engine that we have today was really derived out of a diesel engine and therefore it has some compromises that come along with diesel engines. The new petrol engine that we have is not derived out of the diesel engine; it will be an independent ground-up petrol engine development and as good as any other petrol engine available in the market.
Not all joint ventures with M&M have gone down well but the SsangYong JV seems to be working rather nicely. Do you still have an appetite for acquiring a company that is on the block if it helps you scale up or make a leap ahead globally?
We have the appetite, the current slowdown notwithstanding. There is no change in our plan for investment, both in terms of organic development through capex and inorganic development through acquisitions. We are always on the lookout for companies that kind of align with our long-term strategies, those that give us value and add value. We will not go out and buy something just because it’s nice to buy – it has to have a proper alignment with us.
The general perception is that Aston Martin was on the block and a nice buy for M&M but the fit did not seem to be there.
As regards Aston Martin, the value that we would have gotten if we had bought it would have been the brand that comes along with it. Clearly, the gap between our current products and what Aston Martin does is too huge for us to get in the synergy benefit from the acquisition. SsangYong is a much better fit with what we are doing in Mahindra and therefore the synergy value from SsangYong is much higher than what one would get from Aston Martin.
What about other acquisitions like say Mitsubishi, Mazda or Peugeot? Some of these companies may come up on the block and would be looking at something as big. Or is it that in the current scenario, it’s just better to be prudent and really not overextend?
One has to be careful as far as the size of acquisitions go and we need to take a realistic view that if the acquisition takes a little time before there is a financial turnaround, we should not have a situation where our core business is adversely affected due to lack of funds. Therefore, I cannot say or draw a line that we can acquire a company up to $250 million, $500 million or a billion dollars but there has to be a line that we will draw somewhere to say we cannot have an acquisition bigger than that.
Coming to products, even the XUV500, which really just kept going on and on, seems to be sort of sputtering right now? Is it that cars are getting more expensive? What is your future strategy?
Right now, for most of our products, I would say that the overall state of the industry is affecting us because our products like the Scorpio, XUV500 or Bolero are not in direct competition with some of the latest launches. Therefore, it’s the economy and we are doing things to try and come out of that. The most important in this is the pricing and we are actually holding the price over the last several months. In the XUV500, we are able to do this ground clearance thing which helped us to reduce Rs 30,000 on the pricing; we are looking at similar things on other products. We are also trying to improve brand communication. We will not do anything irrational just to be able to sell few more vehicles and will not discount or do irrational price reductions because that doesn’t help in the long run.My view for the future of the auto industry in India is that it has not changed and I think it’s a very optimistic view that we will continue to grow in double digits in the long run. So we working on lots of new products right now – at least 3 or 4 new platforms that will come out in the next one-and-a-half to three years. I am really excited about the new products that we have that will redefine our overall product range. We cannot just be focused on the large SUVs; we have to look at small vehicles. For example, the Quanto is a small vehicle but more of a derivative coming out of a large vehicle.
But it hasn’t done well. . .
It started off well but didn’t get enough time before a new product hit the market. If we had another 3-4 months, we might have been in good shape but now we are working on smaller products that are developed ground up as smaller products and not by taking a large product and reducing its size. In the long term, we have to face the competition and there will be high customer expectations on pricing, technology and fit and finish. We have to do all of these things and if we don’t, we have no business being in this sector.
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