The Hindu Business Line : M&M sees potential for tractor business in China

MAHINDRA & Mahindra Ltd, which recently disclosed plans for a joint venture with the Jiangling Motor Co Group (JMCG), attaches considerable potential for its tractor business in China.

It also foresees cost savings of 5-15 per cent through sourcing tractor components, including from the vendor base supplying to its new Chinese plant.

Mr A. Choudhari, Executive Vice-President, said the company had been searching for overseas markets having good overall size, growth potential and similarities in characteristics and products with the Indian market. The move was partly driven by M&M's US tractor sales crossing $100 million in just a few years' time and the Indian market, though touching nearly 2,20,000 units in FY05, promises only stable growth for the future.

The domestic market hosted cost-effective tractor manufacturing. But in sales, zooming from a shrunken base in FY05, its growth rate may slacken to 10-12 per cent in FY06 and 5-7 per cent thereafter.

"China won hands down," he said of M&M's search. The market there for geared tractors should be 70,000 units this year. Models up to 35 HP account for 26,000-27,000 units and those above 50 HP are pegged at similar numbers. Below this is an estimated 7,00,000 power tillers and a million belt-driven tractors, wherein the Chinese market differs from India.The Chinese Government's ongoing drive to bridge rural and urban incomes provides a direct 25-35 per cent subsidy on the price of a new geared tractor while agricultural income tax, currently at 8 per cent, will be nil in two years time in north-east China and nationwide in five years. Farming enjoys a minimum support price cushion. "Prospects for the geared tractor market is excellent," Mr Choudhari said.

Jiangling Tractor Company (JTC), assets of which the proposed joint venture would acquire, became available as its parent, JMCG, wanted to focus on automobiles. This year, it would sell 2,500 tractors, but at its peak JTC sold 14,000. Its Nanchang plant in south-central China has a single shift capacity for 12,000 units.

Additionally, it can assemble 7,000-9,000 tractors, which M&M can ship out in CKD form from India. But what heartens Mr Choudhari is that JTC has dealers at 150 selling points and a tractor brand `Feng Shou' with good standing in north-east and central China. "Feng Shou sold at 5 per cent premium," he said.

On the transaction value estimated at $10 million, Mr Choudhari said,

"We are aware they spoke to a couple of other parties, but with M&M they found a serious player. Besides, JMCG wanted to de-focus from tractors." Further, the product range fits well, JTC spanning 18-33 HP, M&M starting in the middle and into 35 HP plus.

Asked if JTC's power tillers and belt-driven tractors merited introduction in India, he said that would be examined. A similar wait-and-watch underlines M&M's stance regarding the US market, where JTC has a dealer-brand called Lenar.

But he conceded that JTC may be a source for M&M's US market for which roughly 5,000 tractors are currently purchased from Tong Yang of Korea and Mitsubishi of Japan. JTC's T628 compact tractor project, also lands that company in a fast growing segment of the market.

Looking at alliances: Besides examining acquisition opportunities, M&M has begun talking of alliances to grow its global tractor business. Of interest would be alliances that fetch marketing synergy, shared distribution channels or common brands.

These tie-ups needn't be with the top three players (M&M is fourth globally) alone, it can be with others, senior officials said.

They said alliances are not sought because acquisition opportunities are fewer. The cycles of the global tractor business with its phases of consolidation and spin-off remain.

More Stories on : Outlook | HCV/LCV/Tractors

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