Monday 15 July 2019

Why selling a majority stake to M&M will be a good deal for Ford India With its ROCE of just 0.9% and accumulated losses of INR4,662 crore, Ford India should be happy even if it gets as little as INR2,000 crore in exchange for 51% stake.

In the Indian automobile industry, all market strategies and assumptions centre around one player, Maruti Suzuki. Ford might have missed that point altogether when it started placing big bets on its India business around 1998. In the next two decades, its ride has been bumpy save a few smooth patches.

While media reports suggest that Mahindra & Mahindra (M&M) is picking up 51% stake in Ford India, ET Prime dug deeper to check whether it will make for a good deal for the struggling company.

For starters, the deal is likely to bring about multiple synergies. If done right, together the two can increase their market share given their complementary product and market strength, a stronger balance sheet, and shared product-development plans. M&M’s strong sourcing skills can get further fillip.

A quick comparison of the two companies on key parameters sheds light on what’s on offer. Ford

Market share: 2.7% in passenger vehicles and 6% in utility vehicles in FY18. No. 1 auto exporter from India.
Network: more than 465 sales and service outlets in 267 cities as of July 2018.
Strength: knows the urban audience better.
Product portfolio: hatchback, sedan, and city SUV.
M&M

Market share: 7.6% in passenger vehicles and 25% in utility vehicles in FY18. Limited exports.
Network: 1,700 sales and service outlets across India.
Strength/weakness: strong in rural areas but does not figure in the mind space of urban buyers. Lost space in UVs to rivals but financially on a strong wicket, thanks to good performance in tractors and light trucks.
Product portfolio: rugged SUVs which do well on bad roads.
It is likely that the new entity will generate profits, obviously good news for both M&M and Ford shareholders.

If M&M does take a 51% stake, Ford India will become an associate company and will be accounted under the equity method, improving profitability at the parent company. But to enable such a deal, Ford needs to take the debt off its Indian subsidiary, which stood at INR8,500 crore in FY17. In return, M&M will get a majority stake in Ford India at close to 1x of book value, which stood at INR3,668 crore in FY17, or less than INR2,000 crore. For a company with a gross block of over INR15,000 crore, that seems cheap.

Just how did Ford’s India assets become so cheap? The answer is simple: poor performance.

Ford’s wobbly financials
Ford India had a return on capital employed (ROCE) of just 0.9% and accumulated losses of INR4,662 crore in FY17, according to ACE Equity data, making it a prime candidate for restructuring. Though the performance improved in FY18, the company is yet to make profit.

Ford’s problems are not confined to India alone.

Rating agency Moody’s downgraded Ford Inc’s rating from Baa2 to Baa3 with a negative outlook on August 29, reflecting what it called “the erosion in the company’s global business position and the challenges it will face implementing its fitness redesign programme”.

The equity markets also have a negative outlook towards the company. The stock has fallen 19% in the last three months, compared with 6% gains in the S&P 500. The stock's five-year performance also demonstrates the sharply falling fortunes at Ford. Moody's downgrade of Ford comes as CEO Jim Hackett has set out on a plan to restructure the business, cutting down the product portfolio and geographic footprint and reallocating capital to higher-return opportunities. In the Asia-Pacific region, Ford has made a loss of USD518 million at the earnings before interests and taxes (EBIT) level in the first half of calendar year 2018. It sees the region’s return on invested capital (ROIC) to remain below cost of capital but considers success in China as imperative, given it’s the world’s largest market.

The plan may bring a USD11 billion restructuring charge over the next three to five years, according to Ford Inc’s filings.

How Ford lost the plot in India
In May 1993, the passenger-car industry in India was delicensed and Mahindra-Ford, an equal joint venture (JV), was formed two years later. The JV launched the Ford Escort a year later, but there were differences between the two partners and by 1998, Ford had taken 72% control in the company and renamed it Ford India Private Limited.

It was in 2010 that Ford stepped up its investment, with the launch of the Ford Figo to target the mass market, and in 2013 it was among the earliest companies to take advantage of lower duties on sub-4 metre SUVs when it launched the Ford EcoSport, which was a success.

Encouraged by good sales and also to increase exports, Ford planned a new plant in Sanand, Gujarat, which was inaugurated in March 2015. The plant cost INR6,400 crore at the time.

According to its FY16 annual report, Ford has an annual installed capacity of 500,000 vehicles (Chennai: 200,000; Sanand: 300,000) in India. It sold only 90,000 vehicles in India in FY18.

Clearly, Ford expected too much out of the Indian market.

Deepesh Rathore of Emerging Markets Automotive Advisors says India is a tough country to understand for American managers.

“When Ford first entered India, it wanted customers to taste an international brand. The company was learning and expanding. Then it got some success with the Ford Ikon and thought it could make things work and needed to [bring] more products,” says Rathore. That’s how Figo came into the scene. It was a good product, selling 6,000-7,000 units a month at its peak. Ford had rejigged an outdated platform and made a car that met the Indian requirements in terms of pricing and features.

“Then came EcoSport and it worked. But the failure after that meant Ford had a major problem, and local managers have not been able to address it. For 20 years, Ford has accumulated losses. This is also a time when all auto manufacturers are facing disruption [with the ongoing investments in autonomous and electric vehicles],” Rathore points out.

Responding to ET Prime’s query on a possible stake sale to M&M, a Ford India spokesperson says, “We are confident in our strategy to build a sustainable, profitable business in India and would not like to comment on rumours or speculations.

“We at Ford India are excited about the transformation in our business and remain committed to India. FY18 was financially one of the best years in the history of Ford in India. Our domestic revenues recorded USD1 billion. We also reached the coveted milestone of one million Indian customers.”

In March, Mahindra and Ford signed five new memoranda of understanding to accelerate the development of key products for consumers in India and emerging markets. Teams from both companies continue to work together on the projects. “We look forward to sharing more information about the ongoing projects at an appropriate time,” the Ford India spokesperson adds.

Ford has been scouting for joint ventures and alliances to provide platforms for lower-priced SUVs. A beginning has been made in China with the expected launch of the Ford Territory (a midsized SUV just above the EcoSport) in 2019 based on the JV partner JMC’s platform. In India too, according to the pact signed between M&M and Ford in March 2018, the two will jointly develop a midsized SUV on the former's platform.

M&M and Ford have also agreed to evaluate co-development of a compact SUV and electric vehicle, along with sharing powertrain portfolios. There was no mention of cars maybe because Ford at the global level has reduced car investment from 37% to just 11%. But it’s unlikely that M&M won’t be interested in a greater presence in cars, given its previous two alliances with Ford and Renault were for cars.

An e-mail sent to M&M seeking comment for this story went unanswered.

In Maruti land, breaking through is never easy
All auto analysts who said Maruti would steadily lose market share in India have been proven wrong. Even with their deep pockets, global players have not been able to fight Maruti.

In FY18, the top six companies held 90% market share, leaving little room for a No. 8 player like Ford. Even in the top six, Tata and Honda are not making profits.So, Ford India turned to exports to make its books look better, and because India is a low-cost manufacturing centre. It is India’s top passenger-vehicle exporter, and two-thirds of its vehicles produced in FY18 were sold abroad. But it is exposed to multiple uncertainties and in April-August 2018, export volumes were down 12.5% y-o-y.

The bottom line: Ford needs M&M
Given it is running low on gas, Ford might just want to cut its losses in India. Joining hands with an Indian manufacturer like M&M could help the combined entity plug the loopholes bothering the two companies.

Between the two companies, Ford needs Mahindra much more. Also, a 51% stake at a discount, possibly under INR2,000 crore, makes for good deal for M&M.

But both companies need to agree on the right products. Remember, M&M’s earlier ventures with Ford and Renault failed because they couldn’t agree on the products and the corresponding investments.

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