The Indian homegrown automotive industry draws a lot of parallels with the Sicilian mafia, a la Mario Puzo. Like the storylines of some of the late author’s popular sagas, everything revolves around the family for some homegrown automotive manufacturers.
Often, OEMs and suppliers share more than a ‘supplier-buyer’ link. Relationships in many cases stretch beyond professional & work based, and extra comfort are derived at the promoter and board levels through bloodlines and marriage.
The family in many cases also metamorphoses into a corporate entity. At times the extended family gets involved as the product idea or venture being tested is completely new and outsiders won’t play with fire. At other times, and in most of the cases, the extended family finds the opportunity too lucrative to resist staying out. Also, the main promoters often want the family involved so that there is a long lasting ‘comfortable’ relationship.
Hero MotoCorp: The Munjal Way – Everyone Marches Together
One of the earliest proponents of the family systems in India has been the Munjal family and its various ventures in the two-wheeler space, the most significant being Hero MotoCorp (earlier Hero Honda).
Hero MotoCorp has been a phenomenal success in the last three decades. By the early 1980s, the entrepreneur Munjal family already had a well-established business presence through the Hero Group owned Majestic Auto, Hero Cycles and Rockman Industries. However, it was the easing of manufacturing norms and opening up of the two-wheeler sector that would propel the group to new heights.
Understanding the potential for two wheelers in the Indian market, the Hero Group entered into a JV with Honda, Japan. Volumes were forecasted to be high as the Indian market was opening up for the first time and the choices in the market till that time were limited. At the same time, the Indian government required manufacturers to locally source a large percentage of components.
The Munjal family saw it as an opportunity to vertically integrate a large section of the supply chain. Over the next few years, many suppliers in the form of associate companies were set up, mostly in technical joint ventures with Honda’s Japanese suppliers. Many of these ventures were promoted by the Munjal extended family, friends and earlier business associates. A number of supplier ventures like Munjal Showa, Munjal Castings, Sunbeam Auto, AG industries and Munjal Auto Components were formed. Some existing hero Group companies like Hero Cycles and Rockman Industries too became critical suppliers to the Hero Honda venture.
In their book World Class in India, authors S Ghoshal and G Piramal estimate that in 1998, 15 years of the JV formation with Honda, 65% of all outsourced components of Hero Honda Motors were being sourced from Hero Group companies. The benefit to Hero Honda Motors was immense, as by 1996, the company had achieved 96% indigenization. Competitor Bajaj Auto was languishing at 57% indigenization levels at the same time.
While some supplier ventures like Hero Cycles and Rockman Cycles had been pre-existing, a number of these new supplier ventures had been formed only with the aim to supply the Hero Honda venture. Munjal Showa was one such venture, supplying shock absorbers to Hero Honda.
However, what this also meant was that Munjal Showa and some more similar ‘family owned’ suppliers had tied themselves irrevocably to the fortunes of Hero Honda. Their dependence on the two wheeler manufacturer would last for a very long time and in many cases exists till date.
Ghoshal & Piramal estimate that there were six major supplier companies who were part of the Hero Group and another twelve who were owned by family friends. And there were many more out of the 150 odd vendors who traced their roots and heritage to Ludhiana, an industrial town in North India where the Munjal family started off from.
Price negotiations often happened at family functions.
Such close relationships may be a nightmare in corporate governance for a publicly traded company like Hero Honda, but it was never a problem in the way the Munjal family conducted business. More importantly, it had the tacit approval of Honda who happily supported the new ventures with technology. Critical castings know-how was passed from the Japanese manufacturer to Sunbeam Castings to develop components that had not been previously developed in India.
Some of these suppliers also benefitted from the technology transfer from Japan by becoming suppliers to other Japanese OEMs as well. For instance, Munjal Showa developed a healthy relationship with Maruti-Suzuki to supply struts. The company is also exporting certain components back to Showa, Japan, leveraging the competitive cost production in India. Some others like Sunbeam Auto, Munjal Auto Components and Rockman Cycles also developed relationships with other Japanese OEMs in North India.
However, Hero MotoCorp (Hero Honda) is still the largest customer of most of these family units of the Hero group.
This close ‘family relationship’ had a cascading effect on the growth and prosperity of the family. While these kinds of relationships should have raised about a hundred red flags in terms of corporate governance, Hero Honda’s rapid growth did not give any one the opportunity to complain. And many times, it was this close proximity to suppliers that was helping Hero Honda. Despite paying royalties per vehicle to Honda, Japan; Hero Honda could aggressively price its motorcycles while maintaining high levels of quality. This was because of close co-ordination with suppliers and the same corporate philosophy of chasing volumes driving the OEM and suppliers alike.
However, the company has not been relaxing in terms of readying for the future. Since its separation with Honda, Hero MotoCorp has taken various initiatives to increase OEM-supplier coordination in order to streamline the supply chain. In the FY2013, the company helped its suppliers to expand capacity to meet the increasing demand for the Maestro scooter brand. Moreover, the OEM also helped the suppliers and upgraded the facilities to cater to the production of newly launched models – Ignitor and Passion Xpro. Hero also initiated quality improvement projects with the supply chain partners to ensure better quality products.
More importantly, to tackle the increasing pressure of competition and slow down in two wheeler industry, Hero MotoCorp set up a department called ‘Achieving Cost Excellence’ (ACE) to help the suppliers to optimize the cost while maintaining the quality.
TVS Motor – Together We Grow but Not Necessarily with Each Other
In contrast to Hero Moto, TVS Motor’s promoter’s extended family run component ventures are not dependent on the two-wheeler manufacturer. In most cases they were not even created to supply TVS Motor.
The Sundaram-Srinivasan family’s oldest components venture is Sundaram Industries, which was established in 1943 and supplies Rubber Products for automotive and industrial applications.
Many of the other TVS ventures came into existence through joint ventures with global suppliers who provided relevant technology to the group. TVS formed Wheels India with a JV with Dunlop Holding UK to manufacture steel rims; Lucas-TVS with UK-based Lucas Industries to manufacture automotive electrical systems; Brakes India again with Lucas Industries to manufacture braking equipment; Sundaram-Clayton with Clayton Dewandre Holdings for the production of aluminum die castings; and Sundram Fasteners to manufacture various components such as high tensile fasteners, powder metal parts, cold extruded parts, iron powder, radiator caps, gear shifters, etc.
During the seventies and eighties, the group formed Sundaram Brake Linings to manufacture asbestos free friction materials, including brake lining and brake pads; Axles India with Dana Holding Corporation to manufacture Axle Housings for Commercial Vehicles; Turbo Energy Limited with BorgWarner Turbo Systems to manufacture Turbochargers; India Nippon Electricals with Kokusan Denki of Japan to manufacture to produce electronic ignition systems: and Delphi-TVS with Delphi Corporation to manufacture Diesel Fuel Injection Equipment.
The company also formed a wholly owned subsidiary, Sundaram Auto Components, which first started manufacturing rubber components for automotive & electrical applications, and later mold manufacturing and painting for automotive, electrical and appliances industry.
After the economic liberalization in 1991, the Group formed two more JVs including Sundaram Dynacast to manufacture zinc alloy die cast components for various sectors including automotive; and India Japan Lighting with Koito Manufacturing Company Limited, Japan to manufacture lighting equipment for automobiles.
In contrast to Hero Moto, drawing a pattern through this history is futile. Clearly, the TVS group has treated its component businesses separately from the two-wheeler manufacturing businesses. In the past two decades, the group has focused on expanding its subsidiaries/JVs to diversify its product and customer portfolio both in the automotive segment as well as in various other segments.
Most of the group’s companies derive only a small part of their revenues from TVS Motor. In terms of customers, most have a healthy, diverse presence in the market.
La Familia – metamorphoses into Keiretsu
There are many ways of defining Keiretsu. It is a term in Japanese and the most common meaning is of a set of companies with interlocking business relationships and shareholdings. Japanese manufacturers often practice Keiretsu extensively, Toyota being a prime example. Toyota counts very large suppliers like Denso and Aisin as part of its family and the company has equity holdings in the suppliers. The suppliers get almost guaranteed business with Toyota and work extensively with the carmaker to develop future technology.
Coming from Japan, Honda was exposed and understood the Keiretsu way of working. Another manufacturer who knows a thing or two about having equity holdings in its suppliers is Suzuki. The Japanese carmaker was entering India at the same time as Honda was debuting as a motorcycle manufacturer.
Maruti-Suzuki: Handholding the Family
A large chunk of Maruti-Suzuki’s success in India is driven by the high quality and low prices it is able to extract from its core suppliers. However, the going was not that easy in the initial days.
Maruti Udyog (now Maruti-Suzuki) was set up in 1982 and the first cars started rolling out by end of next year. Like all new manufacturing entities set up with a foreign collaborator, the Government of India demanded high localization levels within a small time period. Localization was also critical to ensure that Maruti – the people’s car – stayed the people’s car. It was critical to localize fast except the local supplier base did not exist, at least not in-and-around Gurgaon.
Attracting new entrepreneurs was not easy and even if new players did enter the market, getting them up to speed with supplying components to a Japanese manufacturer’s exacting, often finicky, standards was like daydreaming tough.
Maruti decided that taking a significant, but not controlling, equity stake in supplier partners was the right way to go ahead. The equity stake and technology help gave vendors confidence about the business potential and the seriousness of the hitherto unknown Japanese manufacturer.
Thus were born the first bunch of Maruti-Suzuki suppliers like Sona Koyo (Steering Systems); SKH Metals (Earlier Mark Auto, now owned by Krishna Maruti; supplies fuel tanks; Jay Bharat Maruti (Sheet metal components); Asahi India (Automotive glass); Denso India (electronic components, starters); Machino Plastics (molded plastics components) and Bharat Seats (Seating systems).
Maruti-Suzuki arranged technology transfer or technical joint ventures for the band of new suppliers. The company invested extensively to get Indian component vendors up to the right quality levels while keeping costs in check. In many cases, Maruti-Suzuki even deputed its own employees in supplier plants to keep the quality in check. At the same time, selective employees were being sent to Japan every year for enhancing their skill set of production, quality assurance and Japanese management and supply chain methods.
The next bunch of Maruti-Suzuki supplier ventures formed in mid 1990s when the company’s volumes started growing aggressively. This was also the time when the company started introducing new models. The new range of suppliers were developed with the aim of changing into a multiple sourcing model for high value components like seats. This was also the time that global suppliers started getting attracted to Maruti-Suzuki and set up supply ventures. Suppliers entering at this time included Climate Systems India (Radiators); Caparo Maruti (Stampings); Krishna Maruti (Seats); Nippon Thermostat India (Thermostats, sensors); and Mark Exhaust Systems (Exhaust systems).
In recent years, particularly with the launch of the Swift in 2005, there has been a rapid progression in technology. With this progression, Maruti-Suzuki has started developing a new range of supplier ventures to supply new components or meet new technology requirements. At times, this has put pressure on the existing suppliers to tighten their belts.
New supplier ventures include Bellsonica Auto Component (Chassis modules); FMI Automotive Components (Water pumps); Krishna Ishizaki Auto (Interior and exterior mirrors); Inergy India Automotive Components (plastic fuel tanks); Manesar Steel Processing India (steel handling); Suzuki Powertrain India (Diesel engines – now merged with MSIL) and Magneti Marelli Powertrain (diesel engine components).
With Maruti-Suzuki’s huge volumes, its core group of suppliers has grown at a fast pace. With Suzuki bringing in Japanese manufacturing processes and efficiencies, these suppliers are also some of the most efficient ones around. With increasing competition, Maruti Suzuki has switched its approach to target costing in order to price its products lower than competition. This put downward pricing pressure on the suppliers leading to diminishing margins. The strategy proved valuable when the automaker started launching global models like Swift in India in 2005, and was able to price the models very competitively.
The relationship between Maruti-Suzuki and its core suppliers has also changed significantly within a decade of economic reforms. While most suppliers were previously bound to supplying parts to only MSIL, this one-to-one concept changed when the OEM started sourcing parts from two or more suppliers. At the same time, the suppliers started exploring business with other OEMs. This has helped suppliers to diversify their risk and supply to a number of OEMs rather than one. MSIL does not have controlling stake in most of the JV/Associates allowing the suppliers to easily build relationships with other OEMs, while maintaining a healthy relationship with MSIL.
The relationship with Maruti-Suzuki has also encouraged suppliers to enhance their design capabilities and develop components through in house R&D or through technology collaborations. However, this was a culture change for many suppliers as they were till then used to Suzuki providing the designs and vendors being responsible for manufacturing only.
Overall, the Maruti-Suzuki family relationship with its suppliers has proved to be very beneficial for the OEM as well as suppliers. Technology, efficient manufacturing system and typical Japanese stress on quality have turned the suppliers into some of the best companies in the Indian automotive industry.
However, such ‘family arrangements’ are not always successful. Virtually guaranteed business often makes suppliers complacent and has a negative impact on productivity and quality.
Imitation is Suicide
With a view of replicating Maruti-Suzuki’s model, Tata Motors set up a separate components manufacturing arm. The core idea was that with growing passenger vehicle volumes for Tata Motors, a dedicated components manufacturing group would be beneficial and achieve the right balance of quality and costs.
With this in mind, the Tata Group formed Tata Auto Components (TACO) in 1995. This was an umbrella group with several individual companies under it, manufacturing various components. These individual companies formed joint ventures with global suppliers such as Toyo, Ficosa, Johnson Controls and Yazaki. These joint ventures gave TACO access to technology and products. Although TACO manufactures a wide range of components, its biggest customer is still Tata Motors.
However, despite a diversified product portfolio that included vehicle interiors, exteriors, engine cooling systems, seating, wiring harness, batteries, sheet metal parts, and suspension systems, TACO has been unable to enjoy benefits similar to that of ‘family suppliers’ of Japanese manufacturers.
Most TACO companies suffered from quality problems that limited their appeal to other OEMs. In most cases, business from Tata Motors was virtually assured and that made suppliers too lazy to correct their flaws. Even though TACO’s topline grew at a 35% CAGR for over a decade post 1997, by 2008, 13 out of 20 TACO companies were running at losses.
In order to improve its cash flow, TACO initiated a major restructuring program under which it consolidated some of its unprofitable non-core businesses and focusing on its core competencies. The company liquidated its loss making Germany-based subsidiaries, TACO Kunstsofftecknik GmbH (TKT) and TACO Grundstuckverwaltungs GmbH (TGV). The company also exited from six other non core businesses (JVs) including Tata Visteon, TC Springs, Knorr-Bermse, TACO Faurecia, TACO Sasken Automotive and TACO Mobility Telematics. The company also closed its global offices, decreased headcount, and reduced its focus on exports.
TACO accumulated losses exceeding its net worth in FY 2008 and FY 2009 and was classified as a ‘sick industrial company’ and hence had to file a BIFR report. Apart from this, two TACO joint ventures – Tata AutoComp GY Batteries and Tata Yazaki Autocomp – also had to report to BIFR for the financial year 2008, 2009 2010, as the JV’s net worth eroded by 50%.
TACO’s problems were mostly created by its over dependence on Tata Motors for volumes. With Tata Motors volumes on a downward trend, TACO came under automatic pressure. Quality issues ensured that penetration with other vehicle manufacturers was low.
At time the platform selection worked against TACO as well. The group companies were supplying extensively to the Tata Nano, which has failed to take off in the market. Other platforms like Toyota Etios / Liva and GM Beat proved to be disasters in the market as well.
The company disinvested from two other JVs in 2012 and 2013 including Tata Yazaki Autocomp and Tata Johnson Controls by selling TACO’s stake to the respective partners. As of 2014, TACO is far from the intended course and is a prime example of the ‘family’ structure not working well everywhere.