This was done to achieve product and distribution synergies that will drive down costs for both companies
The all-encompassing deal between Mahindra & Mahindra (M&M) and Ford will lead to 40 percent savings on product development costs for both companies, lower fixed costs at manufacturing centres, cut down on raw material prices, and boost electric vehicle plans of Ford, a top official at M&M said.
The two companies on October 1 agreed to place almost all of Ford’s India assets under a new joint venture company, with majority control with M&M. This was done to achieve product and distribution synergies that will drive down costs for both companies.
For instance, investments needed for creation of a new platform would reduce 35-40 percent, or by Rs 500 crore (as per M&M's estimates of Rs 1,200-1,400 crore spent on development by it alone), for both companies. There will also be material cost savings to the tune of two-to-three percent, besides lower fixed cost per vehicle due to better utilisation of manufacturing capacities.
Explaining the cost benefits, Pawan Goenka, Managing Director, M&M said, “Normally, the company would spend Rs 1,200-1,400 crore on one new platform. A 35-40 percent savings on that works out to Rs 500 crore. (On sourcing) When we are working on the same chassis, the number of components coming out of the same pool doubles. If we achieve two-to-three percent savings in material cost, it is a massive benefit. (On manufacturing) When I produce 80,000 units instead of 40,000 units, the cost per vehicle falls significantly. I am running the same product in three shifts instead of one.”
M&M will gain access to 400,000 units of capacity created by Ford India, which is half of its own total capacity of 800,000 units. For a price of Rs 657 crore, it can produce its own vehicles from Ford’s Chennai and Gujarat plants at a cost of around Rs 16,500 per vehicle. The company incurred a cost of Rs 4,000 crore, or Rs 1.06 lakh per vehicle, five years ago to install a capacity of 375,000 units at Chakan.
“We are going to treat this capacity as fungible. If it makes commercial sense to manufacture an M&M product and platform in one of the two Ford plants, we will do that. We have our Nashik, Haridwar and Kandivali plant running at full capacity. The only place where we have excess capacity is Chakan. Ford is using the Chennai plant to full capacity, but has (spare) capacity at Sanand and we will make full use of it for future growth,” Goenka added.
Both companies are discussing joint products for India and international markets. These include a mid-size and compact SUV, a van and an electric sedan. Sources said that Ford will likely convert the Figo into an electric vehicle on the same lines as the Aspire sedan with the help of M&M. The Ecosport, however, will continue with its internal combustion engine.
Ford’s electric vehicle technology is expensive and unsuitable for the Indian market, while M&M has developed a cost-effective, sub-Rs 10 lakh fully electric products.
With the poor history of cross badging in India, especially in the case of Renault-Nissan, Suzuki-Toyota and Volkswagen-Skoda, both M&M and Ford are being cautious.“If we took a Mahindra product to put a Ford badge on it and vice-versa, it won’t work. When you design a product for Ford, it has to have Ford’s DNA in it and vice-versa. The customer would not be comparing the brands because they are two distinct brands, different products and sold at varied price points. And that is why we are going to plan products according right from the beginning,” Goenka stated.LIVE NOW... Video series on How to Double Your Monthly Income... where Rahul Shah, Ex-Swiss Investment Banker and one of India's leading experts on wealth building, reveals his secret strategies for the first time ever. Register here to watch it for FREE.