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By pushing for EVs without localisation, we could end up exporting jobs: Pawan Goenka, M&M

To have almost 43% market share in a market as competitive a..

To have almost 43% market share in a market as competitive as India for such a long period means everything has to be right, says Pawan Goenka, MD, Mahindra & Mahindra. Goenka also tells Abhinaba Das of ET Now that since India does not yet have an ecosystem for making EVs, we should not end up exporting jobs. The auto industry today has become almost 100% local.

Edited excerpts:

It has been a very strong quarter for you, way ahead of expectations. What were the key drivers?

As you said, this has been a very good quarter, perhaps the best quarter as far as we can remember with 20% growth in auto, 40% growth in tractors, the highest-ever profit, highest-ever revenue and almost highest-ever profitability. We could not have asked for more. The question is what is driving it? It is not something that happened overnight. It is an accumulation of a lot of things that we have been doing over the years and was also helped by external environment.

It is not just because of what we did, it is also because of the environment. The tractor industry had an unbelievable quarter with a never-ever-seen-before growth which is aided by the fact that the crops have been good, pricing has been good, the rural infrastructure development, the whole focus, agriculture, the government's focus on farmers income and the various initiatives that we have which has driven the growth on the industry.

With all the products that we have launched in the last three years, the new platforms that we have, we are very well poised to take advantage of the opportunity that was there in the marketplace and that has played out very well for us with the product, with the pricing, with the kind of brand that we have built over the years and has given us a very good market share. To have almost 43% market share in a market as competitive as India is and that too for such a long period does require to have everything right. It cannot be just one thing.

It has worked well for us in the tractor businesses and we have been looking beyond tractors, beyond India. We have put in a lot of efforts in the last two years in acquiring certain overseas companies, in organic growth in Brazil and Mexico. We have always been present in the US. Even though these were not very big numbers this quarter, but they did overall add to the performance and helped us prepare for future.

The third thing is we are looking at mechanisation beyond tractor into farm equipment. Again, it is very small right now but something that has been growing very rapidly for us and could become very big business.

Let me touch upon the margin, I mean margins have been very,very strong and we have seen it shooting up to 25%.

If you look at our historical performance on margin for the last five-six-seven years, we are in a band of plus/minus 1%. We do manage it very well. It is not always one thing. It is not always passing on commodity prices. Sometimes an increasing volume helps us. Sometimes we take sales price increase but we overall try and balance the various inputs that come into defining the margin. Obviously, our endeavour will be to maintain the margin. We have done that in the past. I would expect to do it again but time will tell.

In your commercial vehicle business, you projected a growth of around 10-12% for CVs. Tata Motors volumes also give out very strong indications for the coming fiscal. Do you mean to say that finally the spends on infrastructure will start?

I think so. Clearly, that is driving the commercial vehicle growth and we have seen good growth for some time now. It is not just coming in this year. The HCV business will grow because of impending BS-VI from 2020 which will have a huge impact on pricing — one R 1-2 lakh — depending on who is to be believed. I would expect that FY19 and FY20 will be very strong years for HCVs.

On small commercial vehicle, there is a natural demand pull because of various initiatives that is happening in our industry. The hub-and-spoke model, the deliveries, e-commerce, all of that is driving the LCV growth and LCVs have been growing for quite some time now. Again, we are in for one or two very good years in the commercial vehicle segment as well.

What about SUVs? You are projecting something like around 15% and that is the upper limit?

15% is what we are saying. SUVs have performed really well in the last three years and India now has almost 28-29% of passenger vehicles sales coming from SUVs.

But competition is also very intense in that segment.

Very intense. Also one starts wondering what do you call a SUV anymore? Every product that is being launched wants to be called SUV and therefore the boundary of what is an SUV and what is hatchback is becoming blurred. One has to look at passenger vehicle overall to see how you perform in the passenger vehicle industry.

But in the backdrop of the broader economy, private investments are still not happening. If I look at private investments and greenfield projects, there is no big projects being announced. How long do you think this lull phase will continue?

If you look at investment in general, India had over-capacity till recently and normally one starts seeing fresh investments coming in when the capacity reaches about 80%. This is a year when many companies will cross that 80% threshold and I would expect new investments to be announced now. The kind of growth that we have seen in various segments, the slowdown that happened say two years ago had given a capacity gap in terms of excess capacity and that is what is now fulfilled with good growth in FY18 for many industries. In FY19, many industries are projecting very good growth.

So you expect investments to kick in by FY20?

I would expect announcements to start happening now and investments to happen in FY20-21.

Do you expect the crude oil prices to be the party pooper and especially I mean if I look at the automobile industry per se?

It can be. I do not think that we have reached a level of crisis in oil prices. Earlier my threshold was $70. $70 has been breached now and there is nothing magical about $70. So, somewhere around there. If it reaches $100, then it is definitely going to be a concern and the concern is that we deregulated prices that we have on petrol and diesel. Our pump prices are going up very rapidly and are the highest ever that we have seen.

Even when crude was $130, we did not have the Rs 85-86 kind of petrol prices. So that is going to start having an impact.

There are many other positive factors, that will offset this negative because demand is not driven by a single factor.

Which are the key factors?

First of all, the overall economy. Number two, affordability. The affordability in India for automotive products is very high. If you look at our income levels and the cost of owning a decent vehicle, compared to say 5 or 10 years ago, the affordability is very high. So, that is a very big positive. The rural infrastructure investment will drive commercial vehicle growth. The aspiration in the rural segment for owning a vehicle and therefore growth in the rural segment also is very high.

All the macroeconomic factors which affect demand are on the positive side. Only if the oil price, inflation, commodity price, interest rate, go in the wrong direction, then it will pull down demand. If one or two of these factors go wrong, we would have enough other positives happening that will offset the one or two negatives.

But oil prices pose a big risk to the macros. Whether it is the fiscal deficit or the current account deficit (CAD). What sort of a rub-off effect do you think it will have on inflation?

I would not want to second guess what actions the government will take on this. When oil prices were going down, there was a headroom for the government to increase the duty or taxes on the oil and manage the overall revenue for the government.

Now that the crude prices are going up, a reversal of that probably will have to be done. If the oil price increase leads to pump price increases for diesel and petrol and is passed on completely, then it is going to have impact on inflation and therefore overall economy and consumer confidence and the government will have to do something about it.

Do you expect the government to cut excise duties?

I do not want to second guess the final decision but as a layman I would think that the excise duty that was put on when the prices were coming down will probably have to be reversed to some extent at least.

Theoretically speaking, we have embraced price mechanism for petrol and diesel but with the government owning most of the petrol companies, do you think there is any argument there because at the end of the day, these are decisions that are taken more by the government and less by the OMCs?

As far as the OMCs are concerned, they are working on a pricing formula. Therefore, pricing formula is something that is given and I do not think they have a leeway to decide what the pricing should be. Whether the excise duty that is imposed on petrol and diesel should be cut is where the leeway is and that is more to do with other arms the government.

Do you think electric vehicles is the right answer for high diesel and petrol prices and what are the challenges before we make that grand switch?

I believe in electric vehicles and therefore in some sense the oil prices going up is a positive because that makes electric vehicles more justifiable. We should not count on oil prices to make EVs more viable because that is always a transitionary thing going up and down. We need to make electric vehicles viable independent of what happens to oil prices and I do not think we are very far.

We are almost there in terms of making the prices viable as long as two-three things happen. Number one, the current level of incentives that the government has, should continue for three to four years more. I am not asking for more incentive, what we have right now is fine but that need to continue for three-four years more so that the volumes go up to a level where it becomes sort of self justified.

Second, we need to work on infrastructure for charging which is happening and needs to perhaps happen a little bit more rapidly.

The third one is incentivising the localisation of all the components that go into electric vehicles.

If these three things happen, then the prices will also come down. , , affordability will become much better and I think three to five years from now we will not need any government incentives to be able to justify electric vehicles.

2030 is too early for all vehicles to go electric

Would you say that the roadmap of 100% EV in public transport and 40% in personal mobility is a realistic target?

It is too early to define a target like that. We are just starting and we are almost at zero and from there to talk about when we become 100%, is too early. We need to start implementing. We need to wait for a year or two to see how the whole EV cycle works and the affordability justification, the product performance, the customer acceptability all of these things and then we can talk about when 100% should happen. Whether it happens in 10 years, 15 years or 20 years, right now it is just a date and I would want to see a little bit more volume, a little bit more of portfolio on the road before we can talk about a roadmap.

One thing for sure is that EV will be a big disrupter. What are the big challenges that you see in this transformational journey over the next three-four years? There is a fear that there could be job losses when we switch to a completely new mode of transport.

Well anytime we have a change in technology, there is a fear like what we have right now because things are getting disrupted. It does not mean that we are going to have job losses but it certainly means that we will have different kind of jobs. Electric vehicles will mean more IT jobs, more electronics jobs.

Many employees will get redundant in the process.

That is correct. When you talk about servicing, the kind of servicing infrastructure that we need for IC engine, we will not need for electric vehicles because the reliability of electric components perhaps is very high and less is the need for servicing and so there will be a disruption. So, we need to be careful about this. We should not end up exporting jobs which is very important and auto industry today has become almost 100% local. Still some high-end vehicles components are getting imported, some CVs are coming in but if you look at the mass market, it is 100% local and that has happened over a period of 20-25-30 years.

If I go back to the 1980s, 1990s, there was a lot of imports which has now been taken care of. If you are not careful, we can go back to that level where everything is getting imported and we are doing assembling. We need to be very careful in not letting that happen. If that does not happen, then overall, we will be alright in terms of total jobs being created by the auto industry because we will lose jobs in engine components and engine machining but then we will create jobs in terms of making motors, in terms of assembling batteries and more or less, we will probably balance out.

But is there a real fear of losing jobs?

That is my concern. That is a real fear if we try to move at a pace which is faster than localisation that we can do. Therefore, while on one hand, it is a good to move up very rapidly in electric vehicles, on the other hand, we do not have the ecosystem for doing everything locally. If we try and move very rapidly, we will end up importing.

But when you talk about a 2030 goal, is it too early or is it in line with what you are expecting?

I do not think anybody is talking 2030 anymore. I do not think so. I think we are backing off to saying let us get started and then we will see where we are. If we try and do 2030, we will end up importing a lot and probably exporting jobs in the process.

Turning to SUVs, you are looking to launch three new models in this financial year. You have laid out almost Rs 15,000 crore capex for a three-year period. What is the kind of bump up that you see in SUVs over next two to three years?

Let me put it this way, the three products– U321, the S201 and G4 Rexton — are what I would call white spaces in the sense that they are not replacing something that we have today and therefore whatever volume that we get from these three products will be additional volume for us and not a replacement volume

Whether it is 2,000, 5,000, 8,000 or 10,000, that will be a growth over our current volume. Right nowm, we are selling 22,000-24,000 SUVs in a month. The volume that we may get from these new products lets us say is 5,000. If it is 5,000, then that is 20% growth. If it is 10,000, it is 40% growth. So, it is a pretty good potential for us.

Two of these three products are in volume segment, one product is in premium segment and therefore obviously premium segment means smaller volume but there is a good volume potential from this. It will all depend on how we position the product, price it, how the product performs and therefore I will not want to put a specific number.

You just rolled out the TUV300 and you also rolled out the KUV late last year. What have been the learnings from the launches? It did not quite meet your expectations. Going ahead, how do you play the game?

With every launch, even a successful one, there is learning. It is very difficult for me to describe what those learnings are and some of it is perhaps confidential information that I would not want to share with everyone else, But let me say that with every launch we become wiser and we try and take that learning into the next launch.

Some of it is in product. Of course, that learning is already built in because we are just now giving the final touches, but equally important is how we position the product. Good positioning and bad positioning or right positioning and wrong positioning can kill a very good product. Therefore to me, the marketing of the product and the product itself goes hand in hand in making the product successful.

It is also very important for us to get the pricing right and pricing right does not mean pricing low. Pricing right means pricing right because if you price it too low, you are actually creating a negative image of the product and if you price it too high, then of course you do not sell it. We need to get that right balance of pricing also and unfortunately there is no formula that can tell us what is the right pricing.

It is a view that we take and every time for every product that we have launched since the days of Boleros and Scorpio, the night before the launch we always sweat to figure out what the right price would be and sometimes we get it right, sometimes we get it wrong.

If I look at your alliance with Ford, how does that play out in the overall scheme of things?

The Ford alliance is something where we are looking at eight or nine different things where Ford and Mahindra can work together and benefit each other. For example, looking at our purchase prices for various things and finding out whether there is some learning that Mahindra can have from Ford and vice versa. That is working quite well.

But a specific thing that we have talked about is a common platform for SUV that we will launch towards end of 2020, early 2021. That is a very big deal both for Mahindra and Ford because we will have significant saving that will come in product development and significant reduction that will happen in materials cost because of larger volumes. We are also looking at Ford sourcing Mahindra engine for some of their platforms both within India and even markets outside India.

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