Ford gains little from venture with Mahindra, say experts

According to analysts at Nomura, a production capacity of this size would ideally require a capital expenditure of Rs 5,000-Rs 6,000 crore, which M&M is getting an access to with a minimum investment.

By: | Published: October 8, 2019 9:14 AM

Even as the joint venture (JV) between Mahindra & Mahindra (M&M) and Ford is seen as a strategic alliance to save costs and maximise profits, experts believe while the Michigan-headquartered firm has very little to gain, it’s a win-win deal for M&M, given that it will get access to Ford’s assets, technology and global network without much investment.

Last week, both the companies announced a new JV, which will see both carmakers co-develop, market and sell vehicles in India and other emerging markets. While M&M, which will operationally lead the JV, will have a 51% controlling stake, Ford will hold the remaining.

M&M will invest Rs 656 crore for its stake in the JV, through which it will get access to Ford's production facilities at Chennai and the Sanand, which together have a production capacity of 4.4 lakh units annually.

According to analysts at Nomura, a production capacity of this size would ideally require a capital expenditure of Rs 5,000-Rs 6,000 crore, which M&M is getting an access to with a minimum investment. Besides, the management control will remain with M&M alongwith the right to appoint the chairman and other key members, giving it an upper hand in the decision-making. Moreover, M&M will also develop new products on its own apart from the JV; it is unclear whether Ford will do the same.

“The only logic we see to this deal is that M&M needed to help Ford in its global strategy to reduce investments in non-core markets to ensure its commitment to a long-term strategic alliance which can benefit M&M through technology access and product development in the future,” analysts at Jefferies said.

Over the last year, Ford has been globally exiting or reducing investments in a number of non-core markets which were not profitable. In February, the company decided to exit the heavy-duty trucks business in South America while also discontinuing models like Fiesta and Focus in the country. Thereafter in March, Ford exited its Russian JV with Sollers, resulting in impairment charges of $450-$500 million. Three months later, the company said it would eliminate about 20% of its workforce across Europe and close to six factories as part of the global downsizing.

Mahindra has been for long planning to increase its exports to various market, which the company will be able to achieve with the help of Ford’s global network. “Ford is the largest exporter of PVs (passenger vehicles) from India and M&M will leverage its global reach. We believe the deal is positive for M&M as it reflects management’s yet another effort to fill capability gaps in product development,” analysts at Edelweiss wrote. Besides, Mahindra will also get a licence for all the products that Ford is selling in India alongwith a contract of all Ford India dealers with the same terms and conditions.

While Ford is likely to gain from Mahindra’s network and understanding of the Indian market, where it had limited success so far with limited acceptance of Ford-branded cars in India, it is unlikely that new products with Ford badge would make much of a difference in terms of market share gains. Gaurav Vangaal, country lead, production forecasting at IHS Markit, said even when sales of Ford had been sluggish, the company had created its own identity. “Ford will have limited benefits with this deal as it is giving out most of its assets. Secondly, the company will now sit in the rear seat, which will disappoint many brand loyalists,” Vangaal told FE.

Meanwhile, it is still not clear to what extent Ford will able to leverage the JV for its exports business. “Ford’s commitment to source from the new JV for export markets is also not clear despite Ford India’s current high reliance on exports,” analysts at Jefferies wrote.

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