Contract manufacturing could be a possibility going forward.
01 Jan 2021 | 6364 Views | By Murali Gopalan
It was an unexpected New Year announcement from Mahindra & Mahindra and Ford Motor Company on shelving their much anticipated joint venture. A press release issued in the wee hours of January 1 stated that the decision was a result of “fundamental changes in global economic and business conditions”.
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It was an unexpected New Year announcement from Mahindra & Mahindra and Ford Motor Company on shelving their much anticipated joint venture. A press release issued in the wee hours of January 1 stated that the decision was a result of “fundamental changes in global economic and business conditions”.
Clearly, Covid-19 has had a big role to play in this surprising decision and it is the consequent disruption caused that prompted both companies to “reassess their respective capital allocation priorities”. Ford has indicated that its independent operations will continue both in Chennai and Sanand, Gujarat while “actively evaluating its businesses around the world, including in India”.
M&M, in its turn, has stated that this decision will not have any impact on its product plan. The company believes that it is “well positioned in its core true SUV DNA and product platforms with a strong focus on financial performance. In addition, Mahindra is accelerating its efforts to establish leadership in electric SUVs”.
Both companies were allies first in the late 1990s when India had opened its gates to investments from multinational car companies. M&M then decided to go its own way as part of a conscious effort to focus on its core business of SUVs which paved the way for the Scorpio. Ford likewise continued as a standalone entity till the two decided to team up again late last year.
Implications of shelved JV for Ford in India
What does the shelving of the JV imply for Ford in India? While the release specifically states that it will continue to be present in the country, it is no secret that the company continues to be a marginal player. It was precisely for this reason, as well as the need to spread its presence in emerging markets with cost-effective products, that the American automaker had decided to forge the alliance with M&M.
“Capital allocation priorities” are the three key words in the press release which clearly implies that investments would now have to be better planned with greater levels of circumspection. This is true for both companies as they set about rebuilding their business models.
M&M has already made known its decision to cut back on unprofitable businesses where returns are way too low or just not good enough to justify investments. It was keeping this in mind that it decided to put an end to fresh funding in SsangYong Motor of South Korea which was acquired for nearly $470 million nearly a decade ago. Today, it is in dire need of money to square its debuts and the biggest challenger is to find a new buyer.
M&M had, at one point in time, indicated its intent to be in the mobility space where, beyond the core business of SUVs, it would also look at two-wheelers, cars and trucks. The script has not clearly worked according to plan and the company is now keener on taking one thing at a time with SUVs being the focus area.
This was the reason why it exited the Ford JV two decades earlier and got back into an alliance once again, albeit with a fresh set of priorities. With the proposed partnership now shelved, it remains to be seen what lies ahead. According to industry experts, even while the JV has been called off, there is no reason why the two companies cannot contemplate a contract manufacturing model.
As they point out, Ford is working on its C-SUV based on the next-generation Mahindra XUV 500. This is due to debut early next year while the M&M offering will be out earlier in the first half of this year. In this backdrop, it makes perfect sense for Ford to look at a contract manufacturing pact with M&M where the C-SUV can be assembled at the latter’s Chakan plant.
Experts also believe that Ford will likely source engines from M&M going forward. For instance, the upgraded EcoSport due this year will be powered by a Mahindra’s 1.2 TGDI motor while the C-SUV will use the same 2-litre petrol and 2.2 diesel engines that will power the next XUV 500.
Whither contract manufacturing?
While contract manufacturing makes perfect sense, what about the viability of the two Ford facilities in Tamil Nadu and Gujarat? Both have surplus capacities right now and the company will perhaps continue to focus on its export business given that domestic numbers are little to write home about.
In this backdrop, there is no telling what could happen in the future. Will Ford go the way of General Motors and call it quits if the India story goes completely awry? For now, it has reiterated its intention to operate as a single entity but the future could always throw up more challenges and uncertainties.
Ford will definitely focus aggressively on its other big global JV with Volkswagen where the partners will work on vans and pickups as well as autonomous driving and electric mobility. This is largely intended for Europe and perhaps the US too.
It is too early to say if this partnership can be worked out in India too given that the Volkswagen Group is just about getting ready for a new innings with Skoda leading the way. This is for the India 2.0 programme which will see the launch of a slew of cost-effective cars from a new platform.
From M&M’s point of view, it was banking on this JV with Ford to access emerging markets where its strengths in frugal engineering would complement this effort. While the American automaker had its presence in these markets, the real fillip would have come with the right costing structure which M&M would provide.
With the JV now buried, it is not clear what this will imply to M&M’s aspirations on extending its presence beyond India to a host of emerging markets across ASEAN, Latin America and Eastern Europe. The Indian SUV maker was also hopeful of greater costing efficiencies emanating from sharing common platforms as well as joint sourcing with Ford.
Clearly, there were big global plans with the alliance which would have been a win-win for both companies. Ford’s new CEO, Jim Farley who took charge a couple of months ago, was spearheading the finer aspects of the JV in his capacity as President of Ford New Businesses. Today, as CEO, he will need to decide how best Ford can navigate its India innings without M&M.