OEMs increasing focus on non cyclical businesses to combat slowdown

Much has been said about credit contraction and declining volumes in the automotive industry. The sales figures announced by the Society of Indian Automobile Manufacturers (SIAM) for the month of July too doesn’t particularly put up a different story. What is striking however is the sheer lack of anticipation of inflationary pressures and commodity cycles, which caught most OEMs and vendors in a tight spot. Auto indices have crumbled and the fluctuations at the capital markets look like it will continue for a while.

The recent overhaul of Tata Motors’ plans to finance the JLR acquisition is an exemplary indicator of how concerned manufacturers are on matters of equity dilution. Core manufacturing processes are by their orientation, susceptible to macro economic factors and often follow a cyclic pattern. That is by far the most populist corporate defence, intended to pacify shareholder anxieties, and often quoted on annual reports.
Automotive leaders do not see an immediate end to the downturn in volumes, typically in the finished product segment. And that perhaps is a bigger threat than a temporary lull triggered by credit constraints and raw material cost escalations. Again, all things kept constant, moderating margins are primarily a function of declining volumes combined with high input costs and the lack of a foreseeable insight on those dynamics is a grave concern. ‘In these times, I would not call figures for the next three months, leave alone the next fiscal,’ affirmed President, PCBU, Tata Motors, Rajiv Dube in response to media queries on sales targets for the recently launched Indica Vista.

Lean processes, cost cutting and maximising operating efficiencies are some of the proven tools adopted by manufacturers to combat downturns. But the results are too little and often materialise too late. One would be only too optimistic to rely solely on internal austerity to combat external factors that are threatening medium to long term vision and profit maps. In that context, strategic diversification into allied automotive verticals has emerged as the most preferred option for a number of OEMs.

Some of these activities include maximising revenues from sales of spares, automotive finance and insurance, manufacturing and sales of engines and gensets, engineering design services, automotive retailing and offering sales and servicing solutions to institutions such as defence establishments. On the supplier front, a parallel can be drawn in their efforts to reach out to the aftermarket and maximising revenues through overseas acquisitions.

Most of these business are fairly insulated from cyclic pressures and the prospect of integrating resultant cash-flows within the balance sheet of the holding entity is just a matter of regulatory compliance. In most cases the trend is to spin off non-cyclic entities as fully owned subsidiaries thereby accruing benefits to the holding entity.

Structural Identity

It is essential to classify the structural identity of the non-cyclic portfolio within the corporate structure. For instance, finance and insurance related businesses often cater to in-house customers. Tata Motorfinance, the financing arm of Tata Motors, has primarily financed Tata Motors vehicles. The organisation’s goal is to be the preferred financier for Tata Motors customers and channel partners. It is constantly engaging customer spending over the vehicle life-cycle, by extending value added products combining financing offerings with insurance, fleet management, operating leases, re-finance, and other products.

Similarly, Mahindra & Mahindra Financial Services is involved with automotive financing with a dominating leadership in rural markets. It closed FY 2007-08 at about Rs 177 crore, which is 33.2 percent up from Rs 132.9 crore a year earlier. In this case, the ventures cater and complement the sales function of in-house products, at least primarily, and in times of