World to see flight to value for money: Anand Mahindra

Here is a verbatim transcript of Anand Mahindra's exclusive interview on CNBC-TV18. Also watch the accompanying video.

Q: It is a difficult year to co-chairing you will be laying out the agenda so to speak on the many conversations that you have in the forum and yet I think personally it will be one of your most challenging years, considering the kind of downturn we have seen in the automobile industry back home. And just the fact that business has suddenly become so risk-averse without the emphasis of growth going away, so you are in a catch-22 situation?

A: No, I think catch-22 sounds very negative it sounds like you are going to be stuck no matter which way you turn, I don't think that is what really going to happen. Look at this as replete with opportunities, which is why I accepted doing the co-chair. Initially, I thought this was not a year to move away from home, keep you nose to the grindstone. Then I thought in the similar fashion that you did that this is a very unique year; there is a loss of leadership as you said everywhere and let's get on the same page as far as the definition of leadership is concerned- it is about creating a common vision that makes ordinary people do extraordinary things. The roadmap is important that is why saints became saints; they gave you the ultimate roadmap to after life. But everybody is looking for a roadmap.

In a sense we are in a boat - and I am speaking globally - we are in a boat without a rudder. The wind has died, there is no sail, the only way you get together and move is if you row together providing you have paddles in the boat of course, and that is what WEF is all about. It is about people finding a common way of working together and to work collaboratively. So, I thought if I was going to do this any year it would be now and I believe out of this will come enormous opportunities to redefine a new roadmap for business, so that is a long way of saying that this is a time full of opportunity and at every step we take has to be done collaboratively, with other players in the world.

Q: How will you remember 2008 - it has been by far for most people of this generation the most difficult financial year ever. We have seen spectacular collapses, institutions that were regulars at the WEF will no longer be there, they have just been wiped out. So, in that sense it has left most people bereft of any explanation of why, what to place of course there are bunch of technical explanations. But what is it- would you put it as simply as greed, loss of leadership was because people seem to loss any sense of proportion?

A: If you look at what happened in the last five years, it was a time of astonishing growth not just for India but for the world in general. And at times like these, peer pressure, greed do get the better of some people, we are not alone as you know Madoff is a well-known name but just yesterday Nicholas Cosmo again in US and another USD 400 million scam put down to greed. So, we have to recognize that what happened at Satyam was simply another manifestation of a global phenomenon of greed, it's an outlier, it's not systemic. What we do need to ensure though is that we do now re-root capitalism and we have to ground it in values.

A year ago when anyone came to Davos and started saying that we have to speak about capitalism with values may it was whether it was Angelina Jolie with her bleeding heart lectures. Today that is moral tone of Davos and I think it is a very good thing. I think it is something that India can take the lead in by and large I believe Indian management is more value driven than most other countries in the world and that is an opportunity once again. So, as I said everywhere I turn I see opportunities.

Q: What would you list as key challenges facing you personally, M&M, and then as representatives of global business in 2009?

A: To start with M&M, we incidentally had our own global management conference just last month in December and that was my task. What do you do, how do you create a roadmap? How do you shine a flash light in what otherwise seems to be a very dark environment.

Essentially what I did was I outlined five global trends that I saw. Then I moved them to how they would apply to India and then how India and M&M could take advantage of those opportunities that I saw in the commingling of those trends. I did say before that things are going to get worse before they get better both abroad and India. But I said that around the world consumers were going to migrate to value-for-money purchases. This is not an ordinary recession in the world; this is been sighted as the worst recession since the 1930s.

If you look back the psychology that that engendered in people for a long time after the depression was one of thrift, was one of value for money and I believe that is going to be the broad trend going forward. Then I applied it to India. So guess which economy specializes for value for money goods and guess where Mahindra & Mahindra's focus on all its goods have been. Similarly I talked about the fact that companies all around the world had like CFOs like our own Bharat Doshi who has been crying from the rooftops even during good times that manage for bad times, margin of safety, lower your breakeven, so that is going to happen around the world, and so people are actually going to outsource more not less despite any other efforts to the contrary by Obama. That is going to be opportunity for India, there is going to be more outsourcing.

Commodity prices as result of recession are going to revert to more normal levels, so once again a huge opportunity to go back to basics. I outlined things like these and then I applied them to India and talked about how value for money, commodity prices going down, outsourcing, all of these were opportunities. Then I finally said growth in the world is going to go to those economies which have nowhere to go but up, where there is aspiration at the very bottom of the pyramid and you get substantial growth just as people try to satisfy basic aspirations.

The problem in the West in essence was one of affluence and of plateauing. To give a provocative thesis about the greed and where it came from - I believe in the West when you reach this level of affluence and when all around you everybody is more competitive, low cost in the traditional industry you have to invent new mechanisms for growth. That is where the financial services industry got its turbocharger from. If you are on Wall Street, how do you get reasonable growth unless you invent a new game, that game unfortunately had a very short life.

So in my opinion you are going to go back to looking at economies which will just need basic growth and will deliver them doing good old fashioned things. Making people little wealthy or little more affluent, taking them out of poverty. The net of all this is that people and capital are going to move to India because there is capital and I called it pregnant capital in my presentation because I said these were the PE that had raised money just before, these were the banks who have liquidity but are treading on ice wondering where to give the money.

Eventually if we are going to look at 5% plus growth anywhere in the world, it's going to be India and China. So when you put it all together my advice to our company was: three hours just to make the memorable reboot, which means go back to basics, lower your cost structure, make sure you have the lowest cost, reinvent, frugal innovation; you don't have invent rockets and reignite, which just meant keep that flame burning to look around the world for opportunities because we will have opportunities to buy assets again, to buy market positions in a measurable manner very soon.

So it was a fairly upbeat presentation and I believe in it. It was said with conviction.

Q: Before I get into cross-questioning you a bit more on what you laid out in your presentation, does that mean that you believe that the automobile industry in India and world over, will revive in the next 2 or 3 quarters. Can you put it to that kind of timeline or do you think like pretty much everything else it will get worse before it gets better?

A: It is going to get worse before it gets better but once again you have to look at which geography, which company you are talking about. Companies in America which had huge legacy cost, for them to reboot to use my own jargon, is going to be a far more disruptive process than it is for India. We are starting from ground up. There is very little rebooting that we have to do in that sense. So if you look at American companies - they have much further to go.

In Europe I believe rebooting means consolidation rather than having too many multiplicities of companies, so the job differs. In India, I believe it is simply just taking a pause, holding your breath, using the current climate to lower your raw material prices, to recalibrate your capital expenditures wherein an expansion. But two weeks ago somebody asked me a similar question and I said hang on for two weeks. Let's launch the Xylo and then I'll tell you and my theory at that time was - the theory of migration to value for money and I said my belief that if we give the right product at the right price, there is pent-up demand. There is huge rural demand - we know that - 65% of the population of India is truly decoupled and I am happy to say - and knock on wood - so far that the response we have got has been amazing. In some areas our dealers have had to put up Shamiyanas to accommodate the people lining up for test drives and enquires. So that tells me that there is very robust demand.

A large percentage of India is decoupled but they are waiting for bargains because they have been told everyday on channels like yours and CNBC Awaaz - hang on, real estate prices are going to come down; hang on, interest rates are going to come down; hang on, raw material and steel prices are going to go down. So everybody is waiting for that mythical bargain and if they feel that they are getting a product at the right price, they are all going to come out of the woodwork. So for India, the revival at least on the passenger car market will come in the next three-months - that's my belief. Commercial vehicles will take a little bit of a longer time. They are more jigged to the manufacturing economy. But otherwise, India will recover faster even than China as far as the auto industry is concerned.

Q: How much of your sales' hopes are pinned on the Xylo? You spoke about value for money and I think that's been an overarching credo in India for a long time now. We have never been like you pointed out, affluent society and for us bargains have always been bestsellers. So can we expect more sort of work on the product line towards that and can you give us any more details to that product?

A: We don't have to work on that line - that's been our line.

Q: I know but I am saying, are we looking at any super additions to the product line that might better fulfill this whole value for money?

A: I have to say honestly that there was nothing that deviated from that philosophy because that was our positioning. That was our lifeline even before the crisis. So there is nothing and I emphasizing nothing that we are doing different. We are just delighted the world is gravitating towards that kind of proposition.

As far as Xylo and pinning our hopes on it - no - the highest selling vehicle we have had for a long while is the Bolero. It is a product that just refuses to lie down and it keeps getting refreshed. It is like a phoenix - it keeps coming up. It is something that is actually the largest seller and we haven't seen much of a dent in it. Why was it the largest seller? I don't have to tell you - according my theory - value for money. It was a great product with very low operating cost. So I am glad everybody including our own company is waking up and smelling the coffee and seeing that we were on the right path and that we just need to be more dedicated to it.

Q: How long before the Xylo becomes your best selling car according to you?

A: All of us are far too superstitious now to say anything. We are just keeping on knocking on wood wherever we find it but we are very pleased with how things have gone so far.

Q: So you won't give me a number?

A: No, absolutely not.

Q: I think a question on Kinetic is due here and I come to it because suddenly deeply entrenched risk aversion - we are seeing it with banks not just in India but across the world. I know they keep claiming on the bases of numbers that they are lending more but I think everywhere they are doing a rethink on what projects they want to finance, whose credit they want to take on. You have gone out there time when M&A was turning down and done this transaction at a time when the two-wheeler industry was doing very poorly. You have every negative on your side. Do you at any point in time as you see things getting worse, rethink that transaction?

A: Let me tell you why and connect it to a conversion we just had earlier and that's about roadmaps. If you truly believe in your roadmap, then you don't simply abandon something because there is a temporary trough that you are going through. That means that you're original vision was probably flawed. We obviously did a lot of thinking, a lot of homework. Our real entry into two-wheelers was not Kinetic and many people overlooked that. It was when we acquired Engines Engineering of Italy. To my mind all our experience in the auto industry has shown that you are successful only when you have very robust frugally innovative product development. We had zero in the two-wheeler business. the moment we acquired Engines Engineering and that was a long process - not a very expensive acquisition but it took a while because it was owner managed then we were confident that we had the keys to the kingdom if you will. Then you go out and look for manufacturing assets once you have product development in your wallet so to speak and then there was a choice - do you put up a facility or are assets available?

If you look at the price we acquired Kinetic for; there is a very simple logic it works here. It was less expensive to acquire the asset, manufacturing and all then it was to put up a new factory. In addition we inherited an ally, a collaborator SYM which is a very good collaborator; the products were good, what the products needed was the real support in M&M in quality and procurement which is hopefully getting.

But finally going back to the roadmap just about six months ago somebody asked me - "why are you doing this?" And this was before oil prices shot-up and I had just mentioned that "we are not doing it because we have the domestic market in our focus." So if another question is going to come - do you want it to be 1-2-3? We do not have that kind of goal right now. We want this to be a global play.

My hunch was that in a world completely traumatised by climate change scooters particularly and two-wheelers offer us two things; (1) a very climate friendly vehicle to introduce in global markets before we go in with our another products. You enter with products that are going to be suddenly back in vogue, a renaissance in two wheelers and shortly one month later there was CNN features saying that sales of scooter in the US were up 100% and Wall Street yuppies those who still at job by the way were going to work on scooters. So I see that as a green machine (2) it offer Mahindra a bottom of the pyramid strategy. So we are starting at the bottom of food chain and then taking all our customers through the ladder right up as you know hopefully in a while to heavy trucks.

So there is a clear conviction and then as you know we take our time, we didn't rush into; we bored you all in media without giving you an answer. But we took our time, we took very measured steps and we took affordable steps so I have not worried at all, I think its done extremely well and I think they are going to be around for a long time and we are going to do it slowly, carefully but hopefully successfully.

Q: Eventually your market is as you have described is global for two wheelers but for the time being it's India and in that sense you expect matters to get worse or better for the two-wheeler industry?

A: Who is at number two in two wheelers now? It's Honda - not a Hero Honda, I am talking about Honda scooters and they are the second largest and they have gotten there on the back of scooters. So I am saying that even in India the fastest growing segment of two wheelers last year was scooter. It just happened to be all in Honda's bag that's why it was overlooked as such and everybody focused on the battle between the other players. But the one who quietly went to number two was just purveying scooters. So I actually think that even in India the right scooter with the right quality backing with the right service network has a chance to revival.

Q: While we are talking on autos and before we come on to broader issues - the bailout that the big three in the US has seen has raised eyebrows across the world as private enterprise getting bailed out by the government. One understands that while there was a lifeline sent banks because of what the extraordinary circumstances that the financial industry went through. I think a lot of people have argued that this bailout was totally unjustified because the poor performance of these companies simply reflects their poor management over many years. Do you feel in any sense that the playing field is been unlevelled a bit because these companies have even thrown a lifeline to help survive over the next few months or maybe a couple of years as well whereas otherwise in the natural cause business they would have gone out of business. I understand the concerns on employment and all the impacts on the American economy and all of that. But as an automobile company do you feel that that's not fair; if you are not competitive you should been left to your own fate?

A: It's very hard from an intellectual point of view to deny what you ended up saying. If you believe in a free market system then you have to let the casualties of that system become casualties rather than propping them up. On the other hand I talked to you little earlier about how the real focus now has to be on rerouting capitalism and values. When you think about that then how you ignore that you are talking about people's lives and jobs and the American have one singular argument and they say that for a long-time they were not on a level playing field. They claim their legacy cost, pension cost that the US economy imposed upon them hobbled their feet. So in a sense it's a very difficult argument.