The Hindu Business Line : `Mahindra Systech aiming at 25% of group turnover'

Mumbai March 8 Mahindra Systech, the automotive division of the M&M group, has been on a shopping spree, acquiring overseas automotive companies. It now plans to focus on Indian operations. Mr Hemant Luthra, President, Mahindra Systech, discusses the rationale behind it.

How vital is Mahindra & Mahindra's (M&M) foray into auto components?

Many years ago when I joined the company, Mr Anand Mahindra and I discussed strategy. The board said that we should have a materiality test, meaning that businesses should be material to the future of the company.

Thus, when we started this company, we said to ourselves that unless it has a billion dollars turnover in the next five years it won't have any impact. And now we are in a situation where in two years we have taken the company from $200 million to $800 million.

It is starting to look like an integral and important part of the M&M group. Today the group's turnover is $3.5 billion and we are looking at accounting for 20-25 per cent of it. We are confident that it will past the test. We are also looking at exports contributing to 25 per cent of total turnover in the future.

Your definition of being a `design to delivery' supplier for the auto industry!

When we do engineering services, a customer wants us to design a certain component and we design it. Now, the customer wants to know if you can also design the tools going into the various components.

The customer continues to ask us if we can further strengthen the relationship by designing the manufacturing process.

He concludes by asking if we can develop the first engineering prototype of the component or vehicle to developing the component itself. So, from engineering services, moving up the value chain you go all the way to components.

When you sell components, there are certain customers who would like a combination of new design and sale of components at a marginal premium price and we are in a position to give them that.

So, from engineering services, we create a demand for tools, process engineering, prototype, finished components, etc. Both ways the processes are linked, hence the design-to-delivery mantra.

The fact that we have designed the Scorpio and the Mahindra tractors gives us more credibility than any other IT major. If you look at Infosys, Wipro, etc., they may have great IT skills; in fact much better than we have. But do they have engineers who have worked on a computer alone or engineers who have touched, felt and built a vehicle?

Finally, it's a feeling of self-satisfaction when a vehicle is launched, as the engineers do feel proud.

Among the various services you offer, which is the most promising in the near future?

I think, the forgings, castings and the engineering services will be most promising and that is where we will add the maximum value for our shareholders.

The growth will show in the organic and inorganic routes, as a foreign customer is most likely to opt for forgings and other critical components from our international company rather than the local counterpart sitting 10,000 miles away.

On the other hand, if we do forgings in India and the machining in Germany and if the customer sees the same finished product coming out of the same warehouse like it was earlier, he wouldn't be worried about the whereabouts of the semi-finished products. That's why we are using an organic and an inorganic model.

In engineering services, if a customer gives us a project to design a particular component or body part, then an engineer sitting in the overseas market is more akin to the needs and requirements of the foreign client rather than an engineer sitting in India.

Therefore, you need a certain amount of taskforce within the client's vicinity for easy access and co-ordination during the project and a larger amount of people where the work can be implemented and executed at a much lower cost.

We have an edge in engineering services worldwide due to the low cost factor.

Will the cost change dramatically as the demand for Indian engineers goes up and therefore, the edge in offering the services narrow?

People have expressed concern, but I am less worried about it because the real top-of-the-line project leaders may catch up with the rest of the world, but not the 80 per cent of the engineering staff who do the hardcore work in the engineering services; their costs are dramatically different in India vis-à-vis Europe and the US. For a while it will remain the same.

With regard to the `Made in India' tag on forgings, castings and engineering services, is there a mind block in the West?

Not at all. In the engineering services, there are no disadvantages at all. In the components side, yes. We went the inorganic way by acquiring foreign companies as it makes a lot of difference to the West that the finished products are coming from Germany.

But the Indian brand equity in manufacturing is increasing though it may not be the same as it is in IT and engineering.

In today's world, cost reduction is the primary concern. If a German auto manufacturer is forced to reduce the cost of his car to the point where it's not beneficial for him to manufacture the car or components in Germany, then he will have to go to China, India, Mexico or Brazil where cost is the benevolent factor.

Moreover, our factories are capable of producing world-class products. Yet, we suffer from the overall `Made in India' tag due to the lack of infrastructure in the country. Can India meet `just in time' requirements of global automotive companies?

Will the company invest in its local subsidiaries for castings, forgings and engineering services divisions or continue to go through the inorganic route of acquiring more foreign companies?

Now, we have to invest in our own companies; you buy a company overseas to get easy accessibility to global customers. Every time you try and sell a component to a customer, you need a vendor certification.

It means that the company has the necessary quality standards and manufacturing processes. It takes time to get that vendor certification, but if you buy a company in Germany then you can ship the semi-finished product to Germany and sell the finished product via the German company to the customer in much less time.

Hence, we have to double our capacities here in India - both in castings and forgings. The existing production capacity of all our forging plants (domestic and international) is 275,000 tonnes.

To double the capacity, we are investing Rs 200 crore in forging plants, Rs 200 crore in casting plants and adding a new casting plant for the upcoming Mahindra Renault plant at a cost of Rs 200 crore.

The MUSCO steel expansion would envisage an investment of Rs 100 crore and stampings would add another Rs 50 crore, thus adding up to a total investment of Rs 750 crore in the next 2-3 years. The investment will be a mix of debt and equity in equal measure.

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