26/11/2009

Mahindra & Mahindra Farm Equipment Sector – Tractor Business

International Audit case study

International Business Management

Prof. Jean Paul Lemaire

Matteo Lanzi

Weifeng Zhang

Naufal Kukkady

Donata von Schack

 

Loc

atio

n/F

ilena

me

/Uni

t/Aut

hor/

Ass

ista

nt (

Ch

ange

via

'Vie

w -

Hea

der

and

Fo

oter

')

- 2 -

Agenda

Present Company

External Analysis

Internationalization Assessment

International Development Strategy

General Presentation of Mahindra Group

The Mahindra Group Large industrial conglomerate in India One of the most reputable Indian industrial houses US $6.3 billion conglomerate with employee strength of over 75000 Ranked amongst Forbes Top 200 list of the World's Most Reputable Companies Leadership in utility vehicles & tractors in Indian market

Sectors of operation: Automotive Farm equipment Financial services Trade and logistics Automotive components After-market IT Infrastructure sectors

Headquarters located at Mahindra Towers in Mumbai

- 3 -

Mahindra group: Global footprint

- 4 -

Operations in 25 countries, 6 continents

Organizational Structure

Mahindra operates in a federal structure

The various businesses viewed as investments

They are evaluated only by financial performance

All its businesses except the newest ones are listed separately

Automotive and Farm equipment are listed together as M&M Ltd as they display great synergies

- 5 -

History

Incorporated by KC Mahindra and Ghulam Mohammad as a Mahindra & Mohammad to manufacture Jeeps under license of Willys

Mahindra & Mohammad became Mahindra & Mahindra Built on his expertise in the steel industry & began trading steel with UK suppliers

Listed on Bombay Stock Exchange

Entrance into world market as exporter of utility vehicles and spare parts

Restrictions of License Raj Forced to expand into other businesses, creating a tractor division

Created tech division (now Tech Mahindra) Continued to diversification since through JVs and Greenfield investments

Group divided into 6 Strategic Business Units: Automotive; Farm Equipment; Infrastructure; Trade and Financial Services; Information Technology and Automotive

Components (Systech)

New Managing Director Anand Mahindra introduced new logo

Successful launch of the Mahindra Scorpio (a wholly indigenously designed vehicle)

Ranked among top 10 Indian companies in “Global 200: The World's Best Corporate Reputations” list.

As well as one of India’s 40 largest companies

- 6 -

1945

1948

1956

1969

1982

1986

1994

2000

2002

2007

Code of Corporate Governance

A reminder of the underlying principles governing the conduct of the businesses

To achieve the best performance within the overall context of the prevalent economic environment

To secure maximum benefit for all the stakeholders

Benefit:

Successfully integrate the beliefs, values, culture and ethics of Mahindra Group to the system and process

Blue Chip Mantra

At M&M annual conference key priorities are defined

- 7 -

Governance

Good Corporate Citizenship Seek long term success, in alignment with the country's needs, without compromising ethical business

standards

Professionalism Seek the best people for the job and giving them the freedom and the opportunity to grow Support innovation and well reasoned risk taking, but will demand performance

Customer First Respond to the changing needs and expectations of the customers speedily, courteously and effectively

Quality Focus Make quality a driving value in the work, in the products and in the interactions with others Believe that the quality is the key to delivering value for money to the customers

Dignity of the Individual Value individual dignity, uphold the right to express disagreement and respect the time and efforts of others Nurture fairness, trust and transparency through actions

These values become the compass that will guide both personal and corporate actions of the group

- 8 -

Core Values

Farm Equipment Sector (FES)

- 9 -

Mahindra Tractors

World's top tractor brands; market leader in India

Core business

Mahindra Samriddhi

Offer a wide range of agri-related services

Mahindra Applitrac

Offer total farming solutions to increase mechanization level

Mahindra Shubhlabh Services Limited

Export seeds, vegetables and fresh fruits

Mahindra Powerol

Produce Diesel Generating sets and engines

Farm Equipment Sector (Tractors)

Among the top three tractor brands in the world

The first tractor company globally to win the Deming Application Prize in 2003

The first tractor company worldwide to win the Japan Quality Medal in 2007

Domestic operations No. 1 tractor brand in India, since 1983, with a domestic market share of around 41% Sells a range of tractors: Bhoomiputra, Shaan, Sarpanch and Arjun Ultra-1 High fuel efficiency and reliability 15 HP to 75 HP category tractors for the domestic market

International operations Spread across six continents and in around 25 countries State-of-the-art manufacturing plants in India and China, as well as plants in USA and Australia

Combined capacity to produce more than 170, 000 tractors a year More than 1000 dealers world-wide 25 to 125 HP category tractors for international market

- 10 -

Area of Reference

- 11 -

62

1

3

Tractor categoriesDomestic Market:

15 HP 25 HP 75 HP 125 HP

International Market:

Number of Plants

5

- 12 -

1994 M&M FES starts its expansion by entering Bangladesh and Nepal (throughout M/s Karnaphuli and M/s AGNI Incorporated Pvt. Ltd. serving as distributors, after-sale service and training) as well as the American market (Incorporation of MUSA and focus on hobbyist segment <100hp)

Opening of second assembly line in Calhoun, Georgia (USA) to cut costs both for dealers and M&M as well as to improve (after)sale services.

Entering markets of China (JV with JMCG, with a 12,000, 18-33 HP complementary production capacity and an established distribution network), Chile (throughout M/s Gildemeister) and Sri Lanka (M/S DIMO)

Entering markets of Australia (opening of assembly and customer support centre in Acacia Ridge, Queensland), Africa (local dealers network), Serbia and Macedonia (throughout M/S AGROPANONKA MTZ FINKE and Intermotors).

Opening of third assembly line in Red Bluff, California (USA)

Entering the Iranian market throughout an alliance with ITMCo in order to access the 80% market share and assure high quality customer service thanks to the vast network hold by the partner

Entering the Turkish market throughout a partnership with ITCE Group in order to touch the 80% of the farming community made by small and medium size farmers.

Opening of 4 assembly plants in Chaad, Mali, Nigeria and Gambia that import SKU from India in order to deliver to African farmers affordable but still high quality tractors

2003

2004

2005

2006

2007

Expansion

- 13 -

2008 Entering markets of Botswana, Egypt, Niger, Congo, Yemen, Argentina and Cambodia

Opening of fifth assembly plant in Ghana, Africa in partnership with ZoomLion Ghana Limited to ensure the technology transfer, provide employment opportunities and create a platform for skills training and capacity building of local artisans.

Second JV in China with Jiangsu Yueda Group (Jinma brand). This strategic move let M&M access a huge distribution coverage (Yueda has footprint in more than 60 countries including USA, Russia, South-America and Africa), a larger manufacturing base both in terms of product line (now up to 125HP) and of economies of scale

Brand building campaign in USA designed to touch upon the various aspects within the life of the typical Mahindra customer.

2009

Swaraj Brand

2004 M&M acquires 43,3% of the Punjab Tractors Limited, establishing its position of leader in the Indian tractor market. This acquisition let M&M acquire a wider customer base (with decreasing market share), a richer product portfolio also on an international basis and higher distribution coverage.

Consolidation of stake to 64,4% and displacement of production at PTL in order to utilize its large manufacturing base

Consolidation of stake to a complete merger. Under M&M’s management the sales of Swaraj brand increased by 57% and its market share went from 7,3% to 10,7%

2006

2008

Expansion (continues)

Financial performance F2009 results include PTL numbers from 1st August 2008

Raised Rs 400 Crore in Non convertible debentures even in a hostile market

Domestic market share increased to 40.8% as result of merger

Growth of 25.1% in domestic market in comparison to 0.6% of growth of entire industry

Significant costs reduced as result of merger

Maintained good ratings despite the current economic scenario

- 14 -

Record increases in raw material prices, followed by industry wide price increases

Increasing labor cost

Continued high interest rates for tractor loans

High NPAs & resulting stringent lending norms remain a concern

Tractor industry exports likely to remain depressed

- 15 -

Main challenges

Loc

atio

n/F

ilena

me

/Uni

t/Aut

hor/

Ass

ista

nt (

Ch

ange

via

'Vie

w -

Hea

der

and

Fo

oter

')

- 16 -

Present Company

External Analysis

Internationalization Assessment

International Development Strategy

Agenda

Sales are directly tied to farm income and crop production projections Commodity prices, weather, crop production expenses (fertilizer, fuel, pesticide), credit availability

Large companies (John Deere, AGCO, and CNH) produce a full array of products, smaller companies generally make a single product line

Production of diesel engines is the major separator between large and small companies → large amounts of capital and expertise required

Big companies have large economies of scale – annual revenue of about $350,000 per employee

Small companies can be successful by making specialized equipment - annual revenue per employee of about $150,000

World tractor market is becoming more consolidated

In developed countries like the US and most of

Europe very mature with few key players

Largest tractor markets are the US, China

and India

- 17 -

Farm Equipment Sector

M&M‘s positioning in the Farm Equipment Sector

Four principles: business leaders, innovative, global potential, financial returns

Strategic acquisitions and Joint Ventures to survive and prosper in an increasingly consolidated market with global reach

Competitiveness, efficiency, distribution competence & network, manufacturing strength, market knowledge, access to markets

Major products: tractors, self-propelled harvesting combines, tractor attachments, equipment used for crop production and farm animal management

Tractors account for about 30% of the market, combines 25% Strong and durable tractors for small and medium farmers - Product range going up to 125HP Low cost manufacturing in China and India for exports

Mature Markets US

Largest export market Niche market of hobbyist segment Sales of MUS decreased by 32% due to crisis/recession and changing exchange rates Refocus from declining US market on Africa

EU Obtained qualification to sell under MCTCL brand Niche position in US, probably has no other option in other mature markets like EU

- 18 -

Strategic positioning

Strategic Markets

Home Market India

One of the largest tractor markets in the world by volume, low penetration Market leader with 40,8% market share, sales increased by 25% despite flat industry National tractor market is fragmented with 13 national players Merger with Punjab Tractors - consolidation, enforced market leadership, cost savings, economics of scale, sourcing

benefits, productivity increase

Present and entering into other emerging markets China

China demand for tractors increased by 32% between 2003 and 2008 Further consolidating its position through strategic JVs – Mahindra Yueda Tractor Company Yueda is Nr 4. in Chinese tractor market according to volume Broadened product range 16-125HP, low cost manufacturing, large additional distribution network Domestic presence increased to serve demand for tractors 1st JV - Company growth in 2007 +21% - launched Mahindra tractors in China Now selling under Mahindra Feng Shou brand not MCTCL Feng Show brand anymore Launched customer support initiatives to differentiate Increases its offered product range in China from up to 40HP to 50HP

Africa offers opportunities to expand exports & set up assembly plants Largest export market besides US, 5 assembly plants New markets could be Egypt, Botswana, Niger, Congo & Brazzaville Extended product offer up to 80HP Test market for launch of new model in South America and Australia

Middle East, East Europe, South America & South East Asia exploring opportunities to extend export

- 19 -

Strategic Markets

India: Agriculture priority area for Government Population base dependent on farming and allied industries, like in many emerging markets Government support prices for crops in India Union budget credit allocation to agriculture → to offset liquidity crunch, strict lending norms or farm loans

due to higher NPAs, high interest rates for tractor loans, increasing raw material/tractor prices F-09, the Government of India has proposed to allocate Rs. 2.8 lakh crores / $ 62.2 Bn for agricultural

credit Strong focus on irrigation projects and investment for development of rainless areas with an outlay of Rs.

20,000 crores/ $ 4.4 Bn

China: Abolition of tax on agriculture Subsidy for tractor purchase

Political instability Present in many target countries (Nepal, Africa)

Integration of Indian and global economy Financial markets, political regulations (pollution

and emission requirements) Rupee appreciation – hedge risk

- 20 -

Political-Regulatory Pressures

Transition from many, small subsistence producers Fewer and larger commercial producers - larger farm operations overall More non-farm employment

World population of 9.1bn in 2050 → raise overall food production by 70% between 2005/07 and 2050 Production in the developing countries would need to almost double Demand for cereals is projected to reach some 3 bn tonnes by 2050, up from today’s nearly 2.1 bn tonnes

Food and animal feed, bio fuel (political regulations) Production of biofuels (ethanol & biodiesel) tripled since 2000 → is projected to double again within the next decade

90% of production increases to come from augmenting yields and cropping intensity, only 10% by expanding arable land

Developing countries: ratio at 80/20 Land-scarce countries: achieve growth by improving yields

Global recessionary pressures - Indian economy slowed down BUT impact on rural economy minimal Lower levels of mechanization → significant growth potential

Commodity prices Fuel prices (60% of cost of running tractor) and preference of petroleum as most tractor have diesel engines

- 21 -

Socio-Economic Pressures

Market consolidation in every area of farming, demand for increased efficiency will in the long run demand for larger machines as soon as capital and level of development are sufficient

In developing markets the hobbyist segment is marked by competition from second hand retailers Need to diversify in more upscale products at some point to cover full portfolio

Acquisition & retention of technical and managerial talent Need to remain innovative and anticipate changes in technological demands

Alternative fuels mandatory M&M has already reacted and customizes by providing alternative engines

- 22 -

Technological Pressures

- 23 -

Re

ve

nu

e G

row

th

Global Presence

Competitive Map

Competitive Positioning

- 24 -

20 50 150100 300250 350 550450400 600500HP

Competitors

- 25 -

Stabilizing world economy Growth of Indian economy

World demand for agricultural equipment forecasted to rise by 3,8% annually to $112 bn in 2012

Need for increased mechanization in emerging markets

Replacement related demand in industrialized countries

Mostly linked with technology upgrades

- 26 -

Competition from world leaders increasing, they strive to profit from promising emerging markets

Introducing machinery specifically designed according to needs of emerging economies Have leverage and innovative experience which will be hard to compete with A global footprint

Overall thrust on agricultural development by government in India Government’s emphasis on rural economic development and support to the agriculture sector

will create opportunities for growth in farm mechanization

Outlook

Loc

atio

n/F

ilena

me

/Uni

t/Aut

hor/

Ass

ista

nt (

Ch

ange

via

'Vie

w -

Hea

der

and

Fo

oter

')

- 27 -

Present Company

External Analysis

Internationalization Assessment

International Development Strategy

Agenda

Internationalization

Anand Mahindra , the new CEO restructured company into 6 businesses in 1994 to deal with India’s liberalization and globalization

Farm equipment sector Automotive Automotive components, Financial services, Infrastructure development, Software

Reengineered business processes, brought in new people, invested in information technology, and

reduced head count.

M&M corporate launched the Operation Blue Chip in 2002 Focus on achieving global competitiveness FES was identified with global potential Emphasis on innovation Emphasis on customer centricity

- 28 -

“I believe that business families should behave like aggressive private equity companies. They must

allocate capital, demand performance, create synergies, sustain value systems, and implement good

governance practices, but they should let professional managers run the companies.”

Encirclement Strategy

- 29 -

Segment Scope

Diversity

International Diagnosisv

- 30 -

M&M: expanding international presence and first establishment of multinational hubs (USA, Australia)

- 31 -

Key Functions Specific features

Production

• 20-125 HP reliable tractors

• Lean and agile: production of SKU in India and assembling in local facilities

Marketing

• Emerging markets: M&M ties up relationships with established local distributors network (e.g. in Sri Lanka, Bangladesh and Nepal with one of top10 corporate houses)

• Mature markets: Investments to adapt brand image to customer lifestyle (Mahindra USA brand building campaign through sponsoring

Finance• Rated AA- by CRISIL for long term ,highest rating for short term• Been Able to raise capital in International Markets

Strategy

• M&M enters particularly strategic markets through JVs (China and Iran) or Partnerships (Turkey)

• M&M has managed to balance the global downturn by focusing on emerging economies

International Diagnosis (continued)

M&M in a great position to serve emerging markets - lower levels of mechanization

First mover advantage Expertise in this field Leverage its education programs and power supply

expertise Local

International market: FES plans to expand aggressively into newer markets and strengthen its presence in existing markets

In the long term growth opportunities may be capped if M&M remains in its field of small tractors, especially if big players enter the market. Diversifying within area of expertise seems to be a sensible move.

- 32 -

Opportunities for international Expansion

Loc

atio

n/F

ilena

me

/Uni

t/Aut

hor/

Ass

ista

nt (

Ch

ange

via

'Vie

w -

Hea

der

and

Fo

oter

')

- 33 -

Present Company

External Analysis

Internationalization Assessment

International Development Strategy

Agenda

- 34 -

Recommendations

Thank you for your attention !!!!!!!!!!!

- 35 -