Trims business functions to manage with sales of 500 units a month.

Car block

Looks not appealing.

Pricing is an issue.

Differential excise duty just before launch upset plans.

Increase of euro-rupee conversion rate made materials costlier.

About half of Logan's parts are imported.

Murali Gopalan

Mumbai, Jan. 1

Mahindra Renault, the 51:49 joint venture of Mahindra & Mahindra and Renault of France, has redefined its business plan to keep in line with the production numbers of the Logan sedan.

“As of now, we have basically reconciled ourselves to the fact that we are going to sell around 500 units a month and have redefined our business plan internally to manage with this number,” Dr Pawan Goenka, President, Automotive Sector, Mahindra & Mahindra, told Business Line.

Leash on Spending

As a result, there has been a trimming exercise within the organisation – which means that critical functions such as purchases, sales and engineering have been restructured to manage lower volumes.

Similarly, there will be no big-bang advertising and publicity spend will largely be planned keeping in mind the numbers generated.

“Initially, the organisation was designed for far higher volumes of the Logan but everything has been trimmed now to the level that can manage 500 units per month,” Dr Goenka said.

These cost reduction initiatives will ensure that Mahindra Renault does not see an encore of last fiscal when its losses were closer to Rs 500 crore.

The Nashik plant was created with a capacity of 50,000 units annually but the Logan just did not live up to expectations. Sales have seen a steep decline in recent months owing to a combination of factors.

Criticism

Dr Goenka said branding was not an issue given the strong equity of both M&M and Renault. Similarly, on performance, it was his view that Logan owners were happy when it came to critical parameters, including space, fuel efficiency, comfort.

The staid looks of the car came in for criticism from experts and this could have affected its performance in the market.

“It was not meant to be a high-end styling car which may not have gone down with some potential customers,” he said.

Dr Goenka reiterated that the major issue for the Logan's tepid showing was pricing, where it was hit by the differential excise duty regulations that happened just two months prior to its launch. “It was tough and there was no way we could react on time,” he said.

In addition, the euro conversion rate to the rupee also shot up from Rs 52 at the time the Logan hit the roads to over Rs 70, which impacted material costs. This was a lethal blow especially when nearly 50 per cent of the Logan parts are imported.

“Had it not been for the excise duty and the euro, we could have priced the car more aggressively and sales numbers would have been a lot higher,” Dr Goenka said.

The problem now is that there is really no solution to the euro and it is not easy to contemplate higher localisation of parts at the current volumes. The only way out, he added, was to manage material costs.

The partners did discuss the possibility of trimming the Logan to four metres so that it could qualify for the lower excise duty of 8 per cent, against 20 per cent, but this was not so simple either.

The Logan is for all practical purposes part of the Renault system and any modification will be an expensive option and should ensure that there is adequate return on investment.

Dr Goenka reiterated though that it was not as if the current situation was a matter of life and death.

All is well

“There is no tension between Renault and M&M and neither is there any finger pointing. Frankly, this is not such a big problem as some people see it. We would have loved to sell 2,000 cars but will have to manage with the present numbers.”

By the end of the day, each company would move forward with its product plans, he said.

Dr Goenka also dismissed speculation of any imminent split between the partners. “We are morally and legally liable to provide suppliers spare parts, morally and legally bound to service the cars, fix problems, etc. We just cannot walk away,” he added.

Related Stories:
Renault to continue with M&M for Logan, says Ghosn
Mahindra in talks with Renault to trim Logan
Mahindra Renault venture posts Rs 490-cr loss
Reviving the Logan will be an uphill drive

(This article was published in the Business Line print edition dated January 2, 2010)
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