Mahindra-Ford tie-up highlights the difficulties of fringe players in India

India's utility vehicle giant Mahindra and Mahindra and US car maker Ford on Thursday announced they will be collaborating together to build a new mid-size SUV for the Indian market, which will be built on an existing Mahindra platform and powertrain.

This followed ongoing discussions between the two companies to develop and cross-sell products for the Indian market. They have already signed a host of MoUs (memorandum of understanding) between them; including those to develop and supply a low-displacement petrol engine for use in Ford's present and future vehicles, joint development of a telematics control unit, development of a mid-size electric sports utility vehicle as well as a platform for a compact SUV and small car. There is also talk of Mahindra completely subsuming Ford's Indian subsidiary in a joint venture, which will have the ownership of the American company's assets including its two factories.

Also Read: 2019 Hyundai Venue unveiled in India; check out price, features

This is not the first time the two companies have come together. Ford's first foray into India itself was a partnership with Mahindra in 1995, when the two together produced and sold the Escort sedan. That tie-up lasted just three years as Ford wanted to script its own journey in what it perceived was one of the most promising markets in the world. While that promise still holds true--India is tipped to emerge as the second largest passenger vehicle market in the world next only to China as early as 2030, besides market leader Maruti Suzuki and South Korean car major Hyundai, companies have found it increasingly difficult to gain traction in the domestic market.

Consider this. In the passenger vehicle segment, the top three companies, Maruti Suzuki, Hyundai Motor and Mahindra and Mahindra, command nearly 75 per cent market share; the other 18 companies have to make do with the remaining 25 per cent. Maruti Suzuki's 50 per cent-plus share is a huge anomaly. In most other markets, leaders have far lower shares - 17 per cent for VW in China, 17.6 per cent for GM in US, 28 per cent for Toyota in Japan, 21.4 per cent for VW in Germany, and 12 per cent for Ford in the UK.

"India is not an easy market for new players. It is heavily skewed in favour of market leaders. The top three players command among themselves 75 per cent market, leaving crumbs for the rest," says Jagdish Khattar, Founder, Carnation Auto and Former Managing Director at Maruti Suzuki India Ltd. "At least for the next few years, these top players are also the ones that will continue to grow faster than the market. So, it is easy to understand the pessimism."

Even as a sector, automobile is not the most profitable. According to data compiled by the Centre for Monitoring Indian Economy, the net margins for two-wheelers, passenger vehicles and commercial vehicles in India in 2015/16 were 8.5 per cent, 3.43 per cent and 0.26 per cent, respectively. In a list of 150 sectors, they stood at 24th, 69th and 108th positions, respectively.

This pushes any player like Ford with less than 5 per cent market share to the fringes. Beyond a point, many find it difficult to sustain operations in a market as less rewarding as India. In 2017, Ford's compatriot General Motors grabbed headlines when it decided to exit the domestic market after staying here for over two decades. All it had to show for the effort was accumulated losses of over Rs 3,000 crore and market share of under 1 per cent.

Others like Ford, Volkswagen and Renault Nissan have also found the going tough. Compared with market leaders, these companies operate on inconsistent and wafer-thin operating margins. In a market where the winner takes all, those who lead are companies that are largely self-sufficient as others struggle to get funding from parent firms.

The joint collaboration between automakers is considered to be a win-win situation globally in a highly dynamic scenario where the industry is fast moving towards electric vehicles. Mahindra's scale in India, which is almost three times the size of Ford India, will enable Ford economies of scale in manufacturing, and will help in bringing the cost of its products down in the domestic market. Similarly, Ford's larger research and development prowess will help Mahindra in bringing more efficient and refined products that meet global standards, an area considered to be its weakness.

Alongside Mahindra and Ford, the Volkswagen group in India is also realigning its business under the Skoda brand that now gets to lead its strategy. Despite its girth globally, VW is the largest automotive player in the world, it has less than 2 per cent share in the country and negligible profits. The new alignment that also includes a healthy dose of fresh fund infusion from the parent company is expected to--like in the case of Mahindra and Ford--better utilise the group's common resources and develop products more tuned to the Indian market.   

Yet, everything that looks good on paper may not pan out as brilliantly on the ground. The Indian automotive market is replete with examples of joint ventures and collaborations but very few have actually been successful. In recent times, tie-ups between Bajaj and Nissan for a low-cost car to rival the Tata Nano, Nissan and Ashok Leyland for small trucks and Tata-Volkswagen for an India-centric common vehicle platform have all failed. Mahindra's own track record in collaborating with global players is patchy. Its diversification into the passenger car segment in a joint venture with French car maker Renault in 2005 with the Logan was a damp squib and ended just 5 years later. Similarly, its commercial vehicle joint venture with Navistar around the same time also did not achieve the desired results and ended in 2012.

The competitive intensity in India, with the entry of Kia Motors and MG this year and Citroen next year, is not likely to soften any time soon either. Just like in politics, rivals joining hands is more desperation and less strategy.  

Also read: Air India hires Jet Airways' cabin crew for international operations, plans to lease 5 aircraft

Also read: Jet Airways crisis: SBI-led consortium stare at 60-80% haircut