The Hindu Business Line : `Our tie-up with Renault could be extended beyond Logan'

MAHINDRA & Mahindra Ltd (M&M) recently announced a 51:49 joint venture (JV) with Renault to make the latter's Logan car in India. For M&M, it is a return to car manufacturing after weaning off the erstwhile Mahindra-Ford joint venture to focus resources on the Scorpio project.

Dr Pawan Goenka, Chief Operating Officer (Automotive Sector), M&M, spoke to Business Line on some aspects of the Renault joint venture.

The joint venture has been described as a one-product relationship and also an alliance. Why is that so?

One-product relationship is to say that neither partner is committing that everything we do, we will do together.

That's because we are only getting to know each other. Buying 250 engines per month for the Scorpio is one thing, making 50,000 vehicles is another.

Right now, since there is no plan for Renault to make anything more than the Logan in India, there is no reason for us to worry if the relationship goes beyond Logan or not. But tomorrow if Renault decides that vehicle `X' makes sense for India, we will sit down and review that.

If we agree that it is still good to do it out of the same joint venture, there is no reason why we cannot extend this one product relationship to multiple products.

There was a news item attributed to Renault, which said the company was planning a compact vehicle as well for the Indian market...

Today, it is clearly a relationship for the Logan platform.

The partners are spending Rs 700 crore for the joint venture. Why is M&M still paid a fee for making the Logan?

The joint venture is making the investment in all product-specific toolings, dies and fixtures.

These assets will be located in M&M's manufacturing facility. M&M will be using its existing assets and assets created by the new investment to manufacture the vehicle.

A suitable manufacturing charge will be levied on the joint venture for the labour cost, other variable costs and use of M&M assets.

This model is not much different from what was done with Ford, where a similar manufacturing charge was made by M&M on the joint venture. We do not know if Renault has a similar arrangement anywhere else.

Will you use the fee paid to M&M for progressive ownership of the joint venture assets?

The transaction for the joint venture formation and investment in the joint venture is totally independent of the agreement for manufacturing levy.

So, there are no plans for these assets to revert to M&M at a later stage?

No.

The joint venture will produce only such vehicles that get the concurrence of both partners?

That's correct.

If you graduate to a product superior to the Scorpio it can't be rolled out from the joint venture plant?

There is a distinction between assets that are specific to a product and assets that are specific to getting in capacity. For example, the body-shop building is paid for by M&M, but the jigs and fixtures are paid for by the joint venture. So, if we make something else those jigs and fixtures cannot be used anyway.

We will have to use our own or different ones, in the same building which is owned by us.

Would the joint venture's assembly line be flexible to take on anything other than cars?

Even though you can design an assembly line to do cars as well as ladder frame vehicles, such as our Scorpio and Bolero, it is better to keep a line dedicated to either.

On the assembly line that we will set up, we can do any car, not just the Logan. But right now, the capacity is planned only for the Logan.

Is there the likelihood of M&M's auto component initiative supporting this joint venture?

We bought a gear manufacturing business, others are in the discussion stage. So, clearly if we are able to supply gears from that business to Logan, we will. But our philosophy is to keep the component business at arm's length.

Renault has said it would be sourcing components...

They will be sourcing components but that doesn't mean it would necessarily go to our auto component business.

A day after you announced the Renault joint venture, Toyota unveiled the Innova in India. Is that a segment which interests M&M?

Right now in India, people don't really distinguish between a SUV, MPV and a MUV. To a purist Innova may be a totally different vehicle from the Scorpio. But the buyers will be comparing the two. As of now we don't have a product in the Innova segment, but we are closely watching. It is something we will keep a tab on.

Would the experience from the Renault joint venture be of use for that?

Absolutely.

Is it difficult in today's automobile industry to be a focused UV player?

I don't think so given the current state we are in. We are growing 25-30 per cent based just on the UV business and the peripheral expansion we have done into 3-wheelers and so on. It is very difficult to absorb a growth that is faster than that.

If we grow at more than 30 per cent, we will find it difficult to cope.

At least for the next 5-10 years I don't see ourselves as handicapped because we are a dedicated UV player. There is so much overseas market available for a well-placed UV product. This year, in the first 11 months, we grew by 75-80 per cent though the overall numbers are small.

I see us growing in the overseas market at that rate for the next 2-3 years.

So our growth potential is not limited due to UV focus. In the next 5-10 year planning cycle I don't see any constraint.

To what extent will the Renault joint venture help you in overseas markets?

Clearly we get a higher credibility if we were to tie-up with Renault or use their distribution channels for exporting our products. In a way they are putting their stamp of approval on it.

To that extent it will help us meet our export aspirations. Renault does not have a product in the Scorpio's price range in their product line-up. So, we do see a possibility that by going into their distribution channel we will fill a gap and not compete with any Renault product.

M&M diluted its stake in the Ford joint venture as it wanted to preserve funds for the Scorpio project. Given UVs remaining your focus still, how do you plan to address any such future scenario in the Renault joint venture?

In our investment planning we have accounted for all the investments required for Logan in the planned lifecycle. Therefore, it is unlikely that any other major investment will be needed by the two partners.

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