Another marriage of frugal engg with high tech

Wednesday 12 December 2007, 00:00 AM by Viktor

It is yet another marriage of frugal engineering with high technology. The joint venture announced on Monday between Swedish multinational, Volvo A.B., and Eicher Motors follows the same pattern as three other partnerships that were forged in the recent past ? Ashok Leyland-Nissan Motors, Mahindra & Mahindra- ITEC, and Force Motors-MAN A.G.

The mantra behind these joint ventures was efficient, low-cost manufacturing using high-end global technology and the Volvo-Eicher tie-up is no different. For Volvo, Eicher was the best and possibly, only effective pick available in the high potential commercial vehicles market, already the fourth largest in the world.

Eicher has a good share of the light and medium commercial vehicles market, especially in cargo movers, and a minor share of the heavy duty vehicles market that is dominated by Tata Motors and Ashok Leyland. The company's hold on the light vehicles market is a legacy of its earlier tie-up with Japanese major, Mitsubishi Motors, but its foray into the medium and heavy vehicle markets have been with products entirely engineered on its own.

Eicher's engineering skills, though not on the same level as Tata Motors?, were validated by the reasonable success of its offerings in the medium and heavy commercial vehicles segments.

Interesting base

This seems to have been a big attraction for Volvo whose top brass including CEO, Mr Leif Johannson, termed Eicher's low-cost engineering skill base as 'interesting' and blends well with Volvo's own sharper focus on the medium duty vehicles market worldwide.

The Swedish company has adopted a twin-pronged strategy in India of having a presence in the high-end, low-volume heavy duty vehicles segment with its own products and developing a local partnership for the high-volume, mass market medium duty commercial vehicles segment.

The idea obviously is to bite into a good part of the high-growth segment where Volvo's own products are out-priced.

Next level

For Eicher, the tie-up offers the chance to take the business to the next level. Operating in an industry that is dominated by two giants, Eicher has been pragmatic enough to realise the limitations to its growth while being on its own.

The tie-up with Volvo will offer the company engineering expertise, technology and possibly even new products as, for instance, from the Nissan Diesel stable. Nissan Diesel was recently acquired by Volvo.

The domestic market is set to witness competition of a high order with the entry of Nissan Motors, Navistar (ITEC), MAN, Daimler Benz and Scania, in association with L&T. Eicher, though strong in the light and medium duty vehicles segment, cannot stand on its own in the face of such competition in the heavy vehicles and even specialised off-the-road trucks.

Shareholder sentiment Of course, shareholders of Eicher Motors have reason to be displeased with the structuring of the deal which, in the long term, may not be a bad one after all. The market had been expecting an outright takeover of Eicher Motors by Volvo (or any other partner for that matter).

Such a deal would have lead to an open offer giving minority shareholders the chance to sell-out at a good price.

The deal finalised now leaves Eicher Motors anaemic with just the two-wheelers business, which is at best a fringe player, and a 54.4 per cent share of the joint venture with Volvo.

But all is not lost for Eicher Motors shareholders though. If the history of automobile joint ventures in India is anything to go by, shareholders can hope for the day when the joint-venture becomes a wholly owned unit of Volvo A.B. That will be payback time for those willing to stick it out.

Source : Business Line (Online Edition) (12/10/2007)

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