Vivek Chaand Sehgal, chairman, Samvardhana Motherson Group, speaks to Shobha Mathur about the many benefits of setting up five-year plans, acquiring companies globally, and also its three-pronged growth engine formula.
06 Jan 2015 | 7061 Views | By Shobha Mathur
Vivek Chaand Sehgal, chairman, Samvardhana Motherson Group, speaks to Shobha Mathur about the many benefits of setting up five-year plans, acquiring companies globally, and also its three-pronged growth engine formula.
The Samvardhana Motherson Group had recently announced plans for setting up 14 new facilities with a capex of Rs ...
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Vivek Chaand Sehgal, chairman, Samvardhana Motherson Group, speaks to Shobha Mathur about the many benefits of setting up five-year plans, acquiring companies globally, and also its three-pronged growth engine formula.
The Samvardhana Motherson Group had recently announced plans for setting up 14 new facilities with a capex of Rs 932 crore. Can you elaborate on the roadmap for the future?
We give a five-year heads-up and every five years we come up with a plan. In 1999-2000, we came up with the first five-year plan and projected what would be the target for 2005. We were a Rs 100 crore company then and we said that in five years, we will grow 10 times to Rs 1,000 crore, not only our topline but our bottomline will post a 40 percent return on capital employed.
In 2004-05, we actually did Rs 1,029 crore and saw ROCE (return on capital employed) of 39 percent. In 2005, we came out with a plan for 2010 for making Motherson Sumi Systems Ltd (MSSL) a billion-dollar company. In 2010 we crossed the target of $ 1.5 billion and were good on the bottomline side also. The same year we gave the 2014-15 target of making MSSL a $ 5- billion company. We crossed $5 billion last year with one year to go and now are working on our bottomline. MSSL is always talking of five-year targets. In four months, we will announce our Vision 2020 target. We feel there is a tremendous amount of buoyancy in the market and people are worried about certain countries per se but our customers are doing very well.
2020 is a year where we will be talking about the markets of the USA, China and India – these three geographies are very exciting for us. The USA is a very mature market and we are being asked by our customers to come in and open up new sites and new plants over there.
All our products are very good and German customers are our main clients and constitute almost 65-70 percent of the total. We are getting a lot of traction from them because they are the ones who want us to come into the US and that augurs very well for us.
We are not very big fans of taking over companies in the US because they have their own problems. The US can be a double-edged sword because there are many things that are hidden. We will definitely be going in for new greenfield sites over there and are already supplying a lot from Mexico to the US; now we are going right close to where the plants are and setting up right close to them.
China is another important market for us – German and American cars are doing very well there, so we are pretty much in sync to deliver exactly what the customer wants. As regards India, it beats my mind as to the total capacity available and already existing for six million cars. If you add up the capacity that is coming up in new plants, it goes up to 12 million cars which means the carmakers are looking at something more than the current three million cars capacity.
Everybody is setting up huge capacities, so in 2020 you could be talking of nine million cars, which is a phenomenal market and the third largest in the world. India is changing and people are going up the value chain. The Maruti Dzire and the Swift are the largest selling cars in the Indian market and they do around 28,000-30,000 cars per month compared to the Alto which sells about 26,000 cars. This means there is tremendous amount of traction for people going up the value chain and it catapults the growth of cars. So bigger and better will be the cars that will be desired as people move up the value chain and at a volume that carmakers are looking at.
How is SMG planning to consolidate its most recent acquisitions of Scherer & Trier in Germany for plastic parts, of wiring harness in Mexico and US as well as the joint venture with Magneti Marelli? How will SMG's overseas plans pan out?
About 60 percent of our market is overseas and 40 percent is in India. What is important is that at two million cars, not much technology is coming to India. It is mostly through joint ventures and self-discoveries but when you are going to a target of nine million by 2020, you will face tremendous competition from some real big global players in India. So if you do not own the technology then you are finished.
When we went outside, we were in a position to get the technology and become the owners of technology. We had no other option but to go out there. When you buy the business outside you own it, spend on R&D, and use it over there. Whenever you need it in India, you can bring it here – so Motherson is actually ahead of the curve. What we are doing is not only acquiring these companies and owning the patents and IP but we understand what the future demand will be and are ready for the time to Make in India.
How does SMG plan to leverage the Make in India vision?
If tomorrow a bigger SUV is headed for India, they don’t have to import that. Motherson already has the technology and is already supplying to the same car company in Germany, so why can’t we supply in India? So Make in India would need the cars to be made in India also and the correct signs are already there.
There is a dramatic shift that is taking place and if this continues under the Make in India vision, then obviously Motherson is one of the biggest beneficiaries for the simple reason that we have those technologies. Today if you look at the Audis, BMWs or Daimlers, they are all being done by Motherson. We already have the knowhow and capability to design, finish, produce and supply to the carmakers.
Are there more acquisitions on the radar and which products would be targeted this time?
Imagine there is a big picture which has some gaps. Whenever a customer asks us to take over a particular company, we become the owner of the IP and the technology and it is in our best interest to further that as much as possible. One of the reasons why this company could have gone into a bad shape is because of its size. It cannot go to India or go to China but in Motherson’s case we are already present in 25 countries and for us to take that technology and service customers in 25 countries is relatively easier. In that sense the leveraging takes place, the availability of that knowhow is in our own power. So it is a phenomenal lever to pull up.
Actually we are waiting for the customer to tell us what it wants us to acquire and, even as we speak, around three to four due diligence operations are underway. In fact we now have a due diligence team in-house. Our strike rate is less than five percent – for every 100 companies that come in, we acquire five of them. Acquiring a company is very dangerous as one mistake can land you in trouble. What really makes sense for us is that our group companies can actively provide support to this new joint venture or acquisition.
In fact, there are so many opportunities out there. When we took over Stoneridge, that acquisition opened up the gates to the US market. Wiring harness and plastic components are a natural ally for us but if it is a new vertical we can go in for an acquisition only if the carmaker tells us. For a Rs 40,000 crore company, the last thing is to be dreaming. Different solutions are given for different needs.
In 1993 when we listed on the stock exchange, we had a turnover of $ 3 million and closed at $ 5 billion last year, growing 1,800 times. The ability to satisfy the customer is excellent in Motherson.
How is the market for acquisitions and mergers globally? Has it seen a change since the last downturn of 2008-09?
When Europe is in trouble, the euro weakens and then German cars will sell more. But the moment Europe is in trouble, I am happy because every effect cannot be the same against the entire economy. There is some pain in Europe and they have a lot of things to sort out for which they are working hard. People said the same for the US in 2008 and that it will never recover. Last year the fastest and the largest growth was recorded in the US, from 18 million units pre-2008, it is even higher now.
The fact of the matter is that there is tremendous amount of need with seven billion people and 85 million cars in the world, there are more buyers than the cars produced. I believe in 2020, India will have very robust automotive production and many people tell me exports will be a very big aspect of it; it is only a matter of time that India will pick up.
Today people are picking up the higher-value cars but tomorrow when the interest costs come down then people will start buying the A-plus segment cars. We are very confident the three markets of the USA, China and India are going to do very well. But Europe is not going to die or become a pauper market either and is going to do very well too.
South Africa is a very interesting country and has got a huge demographic advantage – incomes are going up and there are strikes for wages. Motherson is present there in two cities – Durban and Rosslyn – and is being asked to look at other cities. We have the first-mover advantage in South Africa. Brazil started off very well but there is a slowdown, so it has to now come back to the global scene or it will be forgotten for the next 4-5 years.
Brazil is also where we are hoping that the government will move very fast to bring security but our exposure is not much there. Indonesia is doing very well and Asia will come back in a very big way and we are looking at these countries also and are in touch with possibilities over there. You will hear about these in the next five years.
I think you cannot write off any country – we are present in Thailand and Indonesia which is a prime candidate as they have a lot of capability.
There are three engines of growth for Motherson – by getting new parts, we sell more to existing customers; we sell these parts to other customers and then sell them to a different country or the same country or different carmakers. So there are huge opportunities and we always look at ways and means to grow them. When we acquire a particular company and gain the technology for a particular product for us to use these three engines of growth, it is a phenomenal opportunity. That is why we are growing at a much higher rate than the carmakers.
Considering that you have an ambitious growth plan ahead, what are the proposed investments?
I think an average of between Rs 1,000-1,100 crore is the kind of investment but take it with a pinch of salt because I cannot really predict.
Most of our acquisitions are not very well paid for – we just acquire the basic company per se that is very debt-free and no crazy money is involved. This investment will go towards acquisitions, R&D, expansion with maintenance capex about 40 percent. Upgradation will be a key area as machines are pretty old in an acquisition. All funding will be through internal accruals.
How do manpower costs compare globally with India?
By and large when we take over a company, we do not shift that plant from there. We don’t believe in labour arbitrage or shifting because salary costs will come down 2 percent. That’s a specialty of Motherson and whichever company is acquired, the customer is paying you for whatever is the wage cost over there and we keep it that way. So it is different from what other people do.
Generally as a rule, the workforce is expensive globally but they are worth it. They are much more well-read, efficient and productive. We find other ways to make up for these deficiencies.
What are your future plans?
We have euro 9 billion (Rs 69,705 crore) worth of orders and are setting up the most brilliant plant in Zitlaltepec in Mexico for Audi. It is the largest plant of the Motherson Group where one shed will be 40,000 square metres; it is a big plant with a massive paint shop. There will be full assemblies there to support 100 percent of Audi’s requirements. We are very excited about it as we have just broken ground and sheds are coming up. Audi will shift some of its SUVs 100 percent to Mexico. That plant will have huge numbers and demonstrate the trust Audi has reposed in us to ask us to go to a third country. We will be doing bumpers, internal parts, cockpits and a lot of parts. Audi has a global benchmark for painting and every car has something unique.
Within two months, we will inaugurate a US plant for mirrors in Detroit. It has a state-of-the-art paint shop coming up. We believe that it is a phenomenal facility and are looking forward as a lot of new plants are coming up. A new lighting plant is being set up at Sanand in Gujarat through a joint venture with Magneti Marelli. It’s growth time so we are travelling to new plants.
What is your outlook for the auto industry for 2015?
This year the auto market will be very good as the government is moving in the right direction. The moment the interest cost comes down, there will be massive gains and numbers will grow.