India to be a global sourcing hub for Volvo Trucks

In India’s commercial vehicle segment, Eicher is perhaps not a name to be reckoned with if one goes by the numbers the company tots up. According to SIAM data for the last fiscal, the company’s recorded sales of about 26,000 units in the current fiscal, that's about five percent of India’s CV segment.

Its mainstay has been the light commercial vehicle segment where its platforms spawn buses and trucks. However, it has had its success in the heavy CV segment as well with a product called the Jumbo which sold in good numbers.

Then just over two years ago, in what must rank as a very significant development, the Eicher Group which has a components and an design unit hived off its entire CV unit to the Volvo Group.

The design services business, interestingly, is what the company had obtained through an acquisition in the US. In mid-2007, Eicher acquired 100 percent of the equity shares of Hoff and Associates, a Michigan-based company along with its 100 percent-owned subsidiaries in Beijing and Shanghai in a transaction worth $ 3.5million. This was a key development that, seen in perspective, now helps Eicher in its latest attempt to be a global hub for the Volvo Group.

As with all such developments, the Volvo Group’s key aim when entering into a tie-up with Eicher was to leverage India’s low-cost base. Combine this with India’s engineering talent and you have a combination that provides a global player with a compelling value proposition. And with the CV sector in the evolved markets going through several challenges on the emissions, new markets and opportunities front, the rationale for looking at offshoring the assembly of engines is clearly the need to free up resources, both financial and human, to focus on the challenges that CV makers like Volvo face in mature markets.

However, apart from the cost challenge, the deal with Volvo gives Eicher’s engineering talent much-needed exposure to global powertrain designs and processes. Today, powertrains are designed almost wholly in virtual space, which would have hitherto been relatively new for Eicher. The tie-up puts this kind of learning on a higher plane. For Volvo, this tie-up gives the company a full-fledged manufacturing unit. Par Ostberg, president, Trucks Asia, Volvo Group and chairman, VE Commercial Vehicles, put it succinctly when he says, "This investment by VECV in its Pithampur plant gives the Volvo Group a complete facility in India for manufacturing and assembling the new medium duty engine which will be introduced in the Volvo Group’s trucks and buses worldwide over the next few years. Additionally, these engines will also be used for Eicher’s range of heavy-duty commercial vehicles. ”

This latter development gives Eicher a chance to upgrade its skills and familiarisation with engines that power Volvo’s products. The Volvo Group has several truck divisions including Mack, Renault and UD (see interview with Peter Karlstern, president, Volvo Powertrain Group).

Tapping Eicher suppliers Needless to say, Volvo will tap Eicher’s established and extensive supplier base in India with efficient purchasing channels. VECV already makes 40,000 engines per year in its existing Pithampur plant. The new investment in Pithampur will result in an annual production capacity of an additional 85,000 engines. In addition to production of the base engine itself, the facility in Pithampur will also conduct final assembly of engines for India and all of Volvo Group’s global markets with Euro 3 and Euro 4 emission requirements.

The very high quality and durability requirements of the Volvo group, such as a million kilometre duty cycle for such an engine, will allow Volvo to give the Eicher brand heavy-duty customer a new level of reliability. For Volvo, the decision two years ago to set up a joint venture in India enabled it to enter what is clearly a growing market. It is plausible to believe that going forward, VECV will look to providing engines to local Indian players. For Eicher, the JV is a ticket into the big league. The spin-offs will be seen down the line. To take a example from the passenger car segment, Hindustan Motors was able to upgrade its engine facility and was able to bag contracts for companies such as Ford India which used it in its Ikon model. Local manufacture helped Ford reduce costs of its engines.

For Eicher, which has not really achieved its real potential, this is a key breakthrough. Even though the CV markets in both emerging markets and developed ones have different aims, a convergence of sorts is likely going forward.

Labour costs and a limited talent pool will continue to put pressure on limited HR resources. The opportunity lies in taking steps and collaborating in order to comply with Euro 5 and 6 requirements. It is a process that should ideally start now.