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Vivek Law
MUMBAI, July 17: Even as the market continues to mark down the LML scrip on fears that if it parts company with Piaggio it will not be able to sustain its technological strength in two-wheelers, a close look shows that reality is somewhat different. The fact is the company has ploughed a hefty Rs 50 crore into R&D on its own over the past two years and is not really so dependent on a joint venture partner for technology -- which can additionally be acquired at a price from other sources.
As a result, it is likely to continue giving Bajaj a run for its money in the scooters segment -- where it has a 27 per cent market share compared to Bajaj Auto's over 64 per cent.
LML's is a rare case where an Indian company is trying to do what only foreign joint venture partners have done so far: used their partners to gain market entry and then go it alone. The Singhanias of LML recently moved a Kanpur court to force Piaggio sell its 23.6 per cent stake in the company following the death of Piaggio promoter Giovanni MUMBAI, July 17: Even as the market continues to mark down the LML scrip on fears that if it parts company with Piaggio it will not be able to sustain its technological strength in two-wheelers, a close look shows that reality is somewhat different. The fact is the company has ploughed a hefty Rs 50 crore into R&D on its own over the past two years and is not really so dependent on a joint venture partner for technology -- which can additionally be acquired at a price from other sources.
As a result, it is likely to continue giving Bajaj a run for its money in the scooters segment -- where it has a 27 per cent market share compared to Bajaj Auto's over 64 per cent.
LML's is a rare case where an Indian company is trying to do what only foreign joint venture partners have done so far: used their partners to gain market entry and then go it alone. The Singhanias of LML recently moved a Kanpur court to force Piaggio sell its 23.6 per cent stake in the company following the death of Piaggio promoter GiovanniAgnelli last December. The Singhanias contend that under the agreement with Piaggio, if any of the original promoters died, the others had the right to buy out their holdings.
LML's bid for independence began in February, 1995, when managing director Deepak Singhania restructured the joint venture with Piaggio and divested it of any role in the day-to-day running of the company.
The company also simultaneously launched a massive effort to make itself less dependent on Piaggio for technology. Three years later, after pumping over Rs 50 crore into R&D, the company has indigenised almost all the components that go into its existing scooters. It has also redesigned the four-stroke engine which Piaggio had sent to make it fuel-efficient and suitable to Indian conditions.
The company has already obtained designs from Piaggio for as many as 40 variants of scooters. Of these, only two variants have been launched in the local market. The remaining variants are proposed to be launched over the next five to sixyears, which means that LML has a cushion of technology already available to it from Piaggio and should be put into use in the medium term.
The company has a full-fledged design team of its own and feels that this team would be more than capable of developing designs for new two-wheelers once the existing variants are exhausted.
To top it all, LML has tied up with a Korean firm for providing technology for motorcycles. The Korean company also provides technology for scooters and this source could be tapped if the need arises.
One sign that the company's in-house R&D is already delivering results is that it has begun to innovate. LML has, for example, developed a speed alarm system for two-wheelers which earned it an award for technological innovation. It has also developed a music system that can be fitted on a scooter. These gadgets were developed at the Industrial Electronics unit of LML at Kanpur, which is proposed to be hived-off as a separate company. On the financial side, the company had embarkedon a Rs 450-crore capital expenditure plan to take up its production capacity to eight lakh vehicles a year. Of this, about Rs 230 crore has already been spent. The balance funds are to be raised through debt. If the company needs to raise equity, the Indian promoters are said to be willing to inject the required funds even if Piaggio refuses to do so, as this would automatically take up their stake in the venture, which is the current aim.
The other fear of the market is that work at the company could be affected owing to differences between the two partners. For Piaggio could stall key decisions. However, despite being equal partners in the venture with an equal stake of 23.6 per cent each, the Singhanias have four representatives on the board, three working and one non-working. Piaggio, on the other hand, has three representatives. There are three independent directors.The reason why Piaggio is reluctant to let go is that it stands to gain immensely from the venture.
The company is giving sleeplessnights to rival Bajaj Auto. Increased sales would mean increased royalty payments to Piaggio.
Exports are also lucrative for Piaggio. LML exports 1,000 scooters per month as against Bajaj's 400-500. The exports have so far been routed through Piaggio's dealers and industry sources say that the margins are unbelievable. A scooter ends up selling for as much as five times the cost at which it is procured in India from LML. There is, hence, tremendous reason for Piaggio to hang on to its Indian venture.
And while LML had decided to chart its own course in the long run, two events in past year seem to have accelerated its resolve to eject the Italian partner from the joint venture.
First is the death of Giovanni Agnelli. Following his death, his father and mother (who are separated) have come to own about 60 per cent of Piaggio in Italy. The interaction of the Indian promoters with the father is, according to sources, almost negligible. In fact, they have hardly ever met.
This has posed two threats toLML. One, the fear of an unknown entity entering the company in the event of the father or mother selling off their holdings in Piaggio itself, as also interacting with a co-promoter with whom there is no rapport whatsoever.
The second problem relates to the delay in the launch of the motorcycle range. LML is impatient to enter the market at the earliest and the fact that it has gone and tied up with a Korean firm shows that it was not satisfied with Piaggio's technology.
Sources disclosed that the Korean-models might well be launched before the Piaggio-designed motorcycle models, which were on display in January this year at the recent Auto Expo in New Delhi.
The delay is believed to have miffed the Indian promoters and they decided to invoke a provision in the joint venture agreement to seek technology from a third party in the event of Piaggio failing to provide the right technology for a particular product.
The courts will decide whether Singhania is well within its rights to seek to buy out thePiaggio stake in LML. But industry observers say that LML would be only too happy to be on its own, quite in the same manner as an MNC taking up its stake in a venture when the role of the domestic partner diminishes.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
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This story was printed from Net Express located at http://www.expressindia.com. Net Express provides a portal to India, with news from The Indian Express and The Financial Express along with sites on travel and tourism, the entertainment industry, the power sector, the environment and much more.
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