Indiaand MSATthe new link in the Global Automotive Chain

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India---and MSATthe new link in the Global
Automotive Chain
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SUMMARY

• Global automotive market
• Key trends in the Asian markets
• Sourcing opportunity from low cost countries
• Relative strengths the India perspective
• Mahindra Systems Automotive Technologies (MSAT)

3
Auto Market Profile

• Mature, overcapacity, pricing pressure
• Overall slow/flat economy conditions in US,
  Europe
  
• Flat/Moderate Growth in the Auto Industry in US
• Lower runs, need to cut down costs
• Outsourcing labour-intensive lines to low cost
  countries accepted as the way forward across
  industries comparative advantage
  
• India, China, Thailand identified as the prime
  bases for this move

4
Consolidation in auto industry has impacted
customer/ supplier relationships
Major global auto players and their share of
global production in 2002

Others includes at least 3 other major global
players i.e. Suzuki, Hyundai and Fuji Heavy
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Auto Component Market Profile
The market is highly fragmented. Even the leader,
Delphi with USD 17 bn sales has only a 4 share

share of business from parents (GM, Ford) at
65-80 and decreasing estimated share of auto
comp business
Total US 624 billion
Global autocomp market expected to grow at 3 pa
to USD 1.65 tn by 2015 (Source Global Insight,
MEMA, OESA, McKinsey analysis)
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Cost concerns are driving many changes globally

• T1 suppliers 2000 to 200 in 2 decades
• Current consolidation in the 2000 global T2
  community
  
• Vendor rationalization at OEM and T1-2 levels
• Migration of production to cost competitive
  locations with flexible local work rules and
  practices

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ASIA, DESPITE A BIG BASE, WILL DRIVE THE LIGHT
PASSENGER VEHICLE INDUSTRY GROWTH OVER THE NEXT
FEW YEARS
Absolute Growth (millions)
Light passenger vehicle sales in millions
CAGR (Percent)
3.2
9.4
63.8
62.2
60.1
58.1
56.2
54.4
1.1
0.9
W.EU
8.5
0.8
South Am.
1.6
1.6
North America
5.1
0.8
E. EU
6.2
5.3
Asia
2003
2004
2005
2008
2006
2007
Footnote Source Global Insight December 2003
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WITHIN ASIA, PRODUCTION GROWTH WILL BE LED BY
INDIA, THAILAND CHINA
Light passenger vehicle production in millions
CAGR
24.7
4.3
23.5
22.3
21.5
20.8
19.9
6.7
2.6
Others
11.7
S.Korea
India
(1.9)
Japan
11.7
Thailand
13.7
China
2003
2004
2005
2008
2006
2007
Footnote Source Global Insight December 2003
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• Global automotive market
• Key trends in the Asian markets
• Sourcing opportunity from low cost countries
• Relative strengths the India perspective
• Mahindra Systems Automotive Technologies (MSAT)

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Most Asian markets face declining prices which
drive OEMs to....
Car Prices (Indexed 100 to Year 2000)
India
China
Maruti 800
Honda Accord
Suzuki Alto
VW Santana
Footnote Source Auto car India, China Automo
tive Year Book
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...increase outsourcing and amount of local
content
INDIA EXAMPLE
Average outsourcing budget as a percentage of
revenue has been rising
Local content in most leading cars is now over 70
Percent
Local contentPercent
Global average 70
OEM
Models
Indica
Santro
Ikon
Palio
Corsa
Qualis
2000
1999
1998
International OEM entry and domestic demand boost
drive local vendor pool development
Note Maruti has nearly 90-100 local content
in most high volume models Source ACMA Infac
news reports McKinsey Global Institute
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• Global automotive market
• Key trends in the Asian markets
• Sourcing opportunity from low cost countries
• Relative strengths the India perspective
• Mahindra Systems Automotive Technologies (MSAT)

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Components from LCCs are cheaper by at least 20
per cent in some categories
INDIA EXAMPLE
USD
US made
Landed cost of Indian export
Breakup of costs for rear brakes
Comparison of unit costs
Difference Percent
20
-25
Wiring harness
Logistics
Overheads
15
Labor
Damper
525
-44
-67
Disc pad
Material
-27
Brake lining
US
India
Source Interviews McKinsey analysis
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Auto parts in India Increasing presence
Key Industry Statistics
US billion
CARG 15
CARG 17
Both Indian companies and Big Auto are partnering
in Indias progress towards the US 10 billion
milestone
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Quality is improving at plants in countries from
Japan to India
JD Power Initial Quality Survey Ratings
No. of problems per 100 vehicles
Compact Car, India
Midsize car, India
Mini car, Japan
2001
2003
2001
2003
2001
2003
Compact cars include Hyundai Santro, Suzuki
Alto etc. Midsize cars include For
k Ikon, Opel Corsa, Fiat Siena, Hyundai Accent
etc. Mini cars include Suzuki Wago
n R, Honda Life, Subaru Cleo, Suzuki Alto etc.
Source JD Power Initial Quality Survey India,
Japan, GM Internal Quality Score card
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This helps in boosting exports of fully built
vehicles parts
CAGR in Percent
Fully built cars
Car exports 000 units

• Exports From India
• Suzuki exports Alto and Zen to Europe
• Hyundai Atos to Europe and Mid East
• Ford Ikon to Africa
• Exports From China
• Honda for Japan by 2004
• Exports From Thailand
• GM Opel minivans for Europe
• Subaru for Japan
• Honda compact for Japan
• Toyota pickups for Japan, South East Asia

India
China
Thailand
9
28
36
Auto Parts exports US Million
India
China
Thailand
36
43
16
Footnote Source Dun Bradstreet Auto Sector
Update, Economic Times, China Auto Year Book
2003, Thai Auto Year Book 2004
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• Global automotive market
• Key trends in the Asian markets
• Sourcing opportunity from low cost countries
• Relative strengths the India perspective
• Mahindra Systems Automotive Technologies (MSAT)

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Framework to measure country competitiveness for
different categories
Factors of competitiveness
Metrics to measure competitiveness factors

• Factor costs
• Labour
• Capital
• Factor productivity
• Labour
• Capital
• Factor availability
• Skilled labour
• Raw material

What are the factor advantages that the country
enjoys?
How competitive are different countries?

• Domestic industry maturity
• Size
• Growth
• Presence in global markets
• Supplier base
• Current advantage (Metric Share of world trade
  in the sector)

What are the structural factors advantaging the
country enjoys ?

• Creating competitive environment (Metric Maximum
  stake permitted for foreign entities)
  
• Demand stimulation
• Taxation
• Tariff protection
• Enabling factors
• Infrastructure
• Labour reforms

What are the Government policies which influence
the industry?
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Example auto components sectoral assessment on
factor advantages
Factor costs
Factor availability
Capital
Talent availability
Labour
Skilled labour wage rates
Overall rating
No. of engg. graduates
Country
WACC
Survey score
US/hr
Per cent
10Favourable 1Unfavourable
000 per year
India
1,078
China
1,337
Mexico
598
Poland
27
Thailand
251
Weighted average cost of capital
Source Country specific publications
Bloomberg McKinsey analysis World
Competitiveness Yearbook 1999
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Example auto components sectoral assessment on
structural factors
Overall Rating
Country
Domestic industry size
Export volumes
Share of world trade
Per cent, 2001
US billion, 2001
US billion, 2001
India
China
Mexico
Poland
Thailand
Significant structural advantages from
forecast high growth in demand and emerging
supplier base Significant structural advanta
ges due to strong emerging supplier base
Source Country specific publications World
competitiveness year book McKinsey analysis
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Example auto components sectoral assessment on
government policies
Country
Demand stimulation/competition
Government policies
Overall Rating
Import duty
Indirect tax
Infrastructure
Labour reforms
Per cent
Per cent
Survey score
Survey score
10Favourable 1Unfavourable
10Favourable 1Unfavourable
India
China
Mexico
Poland
Thailand
Source Country specific publications World
competitiveness year book McKinsey analysis
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China- market profile

• Auto
• Fastest growing market 47 yoy for last 3
  years 1.9mn units in 2003
  
• High cost of car manufacture- because of high
  import content (30-40)
  
• Low auto financing levels 10-15 (compared to
  75 in India)
  
• Low level of exports- 1 of production
• Autoparts
• Huge, low cost labour pool offers advantages
  in the low skill, mass production, lower end of
  the value chain.
  
• Fragmented component production, large no. of
  small scale players
  
• Higher level of imports 30-40
• Low exports primarily in tires, glass, small
  engines
  
• Most global majors present scaling up capacity
  rapidly
  
• 3 bn aftermarket mostly (56) in mechanical
  (engine and drive) parts.
  
• Risk areas intellectual property, quality,
  timeliness of supply, overcapacity

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Thailand- market profile

• Auto, Autoparts
• No home-grown car maker to protect has welcomed
  overseas assemblers
  
• Second largest pickup truck producer in the
  world nearly 1mn units - 50 of ASEAN vehicle
  production.
  
• Government support
• investment incentives
• low import taxes
• able to capitalize on lower labor costs.
• Location able to access the domestic market
  while gaining entry into the ASEAN,Oceania
  regions for exports.
  
• High level of automotive material imports-
  opportunity for alliances, JVs, other suppliers
  

FTA has already been signed between India and
Thailand
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India- market profile

• Auto
• Relatively small size (approx 1 mn units)
• Divided between Local (Tata, AL, MM) and
  Global players (Hyundai, Suzuki, GM, Ford etc)
  
• Expected to be one of the drivers of Asian (and
  Global) growth over rthe next decade
  
• High level of auto financing
• Autoparts
• Industry approx USD 5 bn in 2004 fast growing
  could touch USD 33-40 bn by 2015
  
• Fast growing exports - approx USD 1 bn in 2004
  could touch USD 20-25bn by 2015
  
• Competitive disadvantage in Power costs and
  Taxes
  
• Low cost labour pool
• Higher degree of Engineering skills when
  compared to other LCCs
  
• Global levels of environmental standards

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Key Opportunities for India

• Engineering Services India offers a vast pool of
  skilled, low cost workforce
  
• Finishing In the non-proprietorial space, India
  has a clear edge high quality gear production,
  Forging and Machining of engine components,
  design to assembly of aggregates
• Materials Strong supply base for quality steel
  also a growth in the Composites market.
  
• Contract manufacturing With potential ranging
  from material to services and market, it is also
  an ideal base for contract manufacture
  

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Key strengths of the Indian Auto component
Industry

• design skills at competitive costs - and quick
  turnaround
  
• conversant with global automotive standards
• competency with wide range of machinery

Human Resources

• access to variety of technologies (Japanese,
  Korean, US, European) strong domestic technology
  base

Technology

• Access to cost competitive inputs
• efficient supply chain

Procurement

• Large, growing domestic OE base
• Production base for foreign OEs

Market
Indian Autocomp market expected to grow at 10
over the next decade- Mckinsey Analysis/ ACMA
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• Global automotive market
• Key trends in the Asian markets
• Sourcing opportunity from low cost countries
• Relative strengths the India perspective
• Mahindra Systems Automotive Technologies (MSAT)

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MSATMahindra Systems Automotive Technologies
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Guiding Principles

• Scope Auto centric Full service supplier
• Drivers Technology, Scale, Skill
• Market Global market focus
• Facilities Leverage existing presence
• Acquisitions 50 in each entity
• Org. structure Vertically aligned

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Building Blocks -basis

• Domain Knowledge
• Art to Part

• Purchasing power
• Contract Sourcing

• In house skills
• Complement with MA
• Supplement with Greenfield

USP Strategy
MES Mahindra Engineering services
SSBU Strategic Sourcing Business Unit
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• MES
• Mahindra Engineering Services

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Strategy

• Aim for Full Service Supplier
• Leverage on MSAT, SSBU for sourcing of parts
• Acquire overseas for Market coverage and
  Proximity
  
• Acquire locally for Design, Prototyping skills

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Opportunities

• Design Support- Chassis and BiW
• Prototyping
• Testing- components.
• Offsite placement in India
• Parts Sourcing Tool Design
• CAD/CAM jobs Engineering changes data
  migration
  

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Scope
Design and Development
Concept
Validation

• Preliminary
• Design
• Packaging
• Detailed Design
• Prototypes
• Value Engg
• Fine tuning

• Ideation
• Renderings
• Exterior/Interior
• Scale model- POP
• Tape Drawings
• FRP See Through
• Digitizing
• Surfacing

• Prototypes
• Testing
• Fitment
• trials
• Field trials
• Approval
• certification
• Market
• feedback

Implementation
Mfg.. Support

• Tool
• Development
• Vendor
• Development
• Process Implementation
• Pilot batch

• Process
• refinement

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• SSBU
• Strategic Sourcing Business Unit

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Business Structure
SSBU
Strategic Sourcing
Global Sourcing
Vendor Management
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Strategy

• Primary focus servicing of MM requirements
• Contract sourcing for Global OEMs
• Vendor base build
• Strategically few
• Quality assured players
• Supplying Parts and Systems

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Opportunities

• Leverage on MSAT growth
• Contract sourcing for Global OEMs
• Focus on players who do not have a sourcing base
  in India
  

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• MSAT - Production units

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Business Structure
Business Verticals
Sheet Metal
Engine parts
Gears
Axle parts

• PSSL
• Musco - Kanhe
• Hydroforming

• MM facilities
• Local Acq
• Overseas acq

• MUSCO
• Siroplast

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MSAT Building Blocks
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MSAT Value Proposition

• MSAT, as a single, integrated entity with a
  cohesive strategy offers the following unique
  value proposition
  
• Full Service Supply From Engineering Services to
  Steel with the Sourcing support of SSBU, MSAT
  becomes a robust Tier 1.
  
• Partnering The model adopted moves the
  relationship up from Vendoring to Partnering-
  From Art to Part, Design to Delivery