Alliances and Joint Ventures in Indian 2 Wheeler Industry & Mergers and Acquisition in Global 4 Wheeler Industry SIBM

Bangalore

Hero Honda Joint Venture

HERO HONDA
Hero Group and Honda motor company formed joint venture in 1984. Hero Honda was formed with 26% stake by Munjal family and 26% stake by Honda group. Munjal family had their flagship company as Hero cycles Limited. Honda group had expertise in two wheeler segment and it was significant player in international market.

HERO HONDA
The joint venture was formed when Indian government allowed foreign companies to enter in India through joint venture route in 1984. Honda was technological partner in Hero Honda. Hero still pays royalties to Honda. The venture existed till 2010, when Honda opted to move out of joint venture. The company established itself as largest two wheeler manufacturer in India.

HERO HONDA
SYNERGIES The four stroke engine technology was brought by Honda which led to development of successful models. Honda have the competence in engines. It was rightly leveraged by Hero in Hero Honda. Hero utilized its distribution network and marketing channel effectively. Company had been market leader in non premium two wheeler segment.

HERO HONDA SPLIT

Rising differences between Hero and Honda led to split of Hero Honda. Reasons Reluctance to freely share technology by Honda Uneasiness by Indian partner over large royalties to Honda Refusal of Hero Honda to merge its spare parts business with HMSI(Honda Motors and scooter India)- a fully owned subsidiary of Honda.

HERO HONDA SPLIT

DEAL Mujal family led group established SPV to buy out Hondas entire stake (26%) It will pay over $1 billion to Honda which is at discount of 30-50 % compared to current market price of 26% stake. Remaining payment will be done through royalties spread over future.

HERO HONDA SPLIT

REACTION OF STOCK MARKET( DEC 2010)
Share Price
2500
2000 1500 1000 Share Price 500 0

Volume
7000000 6000000 5000000 4000000

3000000
2000000 1000000 0

Volume

HERO HONDA SPLIT

POST SPLIT PERFORMANCE-

Hero Moto Corps performance have improved post merger. It recorded highest ever monthly sales at 5,56,644 units in May, registering a growth of 11.28%.
Year
Return On Net Worth(%)

2012
55.43

2011
65.21

2010
64.41

2009
33.72

2008
32.41

Bajaj and Kawasakis Alliance

BAJAJ KAWASAKI
Kawasaki and Bajaj Auto have quite a long history of working together. The two auto firms joined hands long back in the year 1984 when Kawasaki agreed to provide technical assistance to Bajaj then known as Kawasaki Bajaj. The association still exist between two companies though Bajaj and Kawasaki market their own brands. Bajaj still pays royalties to Kawasaki for models like platina and boxer.

BAJAJ KAWASAKI
SYNERGIES The alliance have been beneficial to Bajaj. It helped company establish in two wheeler motor cycle segment. Kawasaki on the other hand, uses existing distribution channel of Bajaj to market its premium bikes. Also Low cost structure of Bajaj allows Kawasaki to source from Bajaj. Bajaj have been successful in transforming itself from scooter segment to motorcycle segment.

BAJAJ KAWASAKI
Timeline of vehicle launch
YEAR 1984 Lunch Bajaj to enter 100cc motorcycle segment from scooter
Bajaj-Kawasaki-RTZ Bajaj made foray into 4 stroke engines with Kawasaki (Kawasaki 4S) Kawasaki sourced Kawasaki caliber from Bajaj Waluj plant for export purpose Kawaski Bajaj Eliminator Boxer Model launched with KTECH engine of kawasaki

1987 1991

1998

2001 2002

BAJAJ KAWASAKI
Bajaj along with Kawasaki have entered into tri alliance with KTM-second largest motorcycle manufacturer in Europe. Bajaj launched KTM Duke 200 and Kawasaki Ninja 650R model, both in premium segment. Bajaj have 47.18% stake in KTM situated in Austria. Future strategy of Bajaj is to focus on non premium vehicles while leveraging its low cost structure.

Effect of alliance with KTM

Share price
2500 2000 1500 1000 500 0 Share price

volume
400000 350000 300000 250000 200000 150000 100000 50000 0

volume

Mahindras Acquisition of Kinetic

Mahindra and Mahindra

M&M is one of the leading tractor brands in the world. It is also the largest manufacturer of tractors in India with sustained market leadership of over 25 years. In recent times the company is engaged in spreading its reach beyond its traditional markets.

Kinetic Motors Company Limited (KMCL)

KMCL has a rich heritage spanning over 3 decades Luna was introduced by KMCL which was a big hot among Indian Market Manufactured India's first gearless scooter Kinetic which revolutionized the twowheeler industry

Mahindra Acquisition of Kinetic

The acquisition was done in 2008. The consideration for the acquisition is a sum of Rs. 110 crores plus 20 percent stake to KMCL in the New Co. M&M will hold the balance 80 per cent of the equity. Acquisition of KMCL was a defining moment in Mahindras History as it gave Mahindra a presence in almost every segment of automobile industry.

Factors which prompted M&M to Acquire Kinetic

India was 2nd largest producer of two wheelers Two wheeler industry grew from 3 million in 1998 to 8 million in 2008 Domestic sale grew from 3 million in 1998 to 7.2 million in 2008 at the CAGR of 9.2% Higher disposable household incomes and increased discretionary expenditure on personal transportation, outlook for the two-wheeler business in India was positive With sharply rising environmental concerns and favourable consumer attitudes in the West towards green vehicles, two-wheelers provide cleaner, quieter, more fuel efficient transport solutions. Kinetic had also introduced new technologies to India including four valve engines, electric start on scooters and motorcycles, v- twin engines, USD forks, etc. It was also the only company to offer top-end world class bikes, Comet and Aquila, to the Indian bike enthusiasts.

Synergies
Acquisition was of strategic fit Strong in house design and development competencies provided by Mahindra Engineering Services, with acquisition of Italy based design house coupled with KMCLs expertise to provide a significant position in rapidly growing two wheeler market The deal will enable Mahindra to design and market a range of scooters, value engineered motorcycles and high-end motorcycles for the Indian and global markets, helping it establish a robust, end-to-end twowheeler business in every segment of the industry.

 There are several macro environmental trends which make the scooter market especially attractive to Mahindra These include a younger, more affluent customer base with a significant number of empowered women and increased scooter demand in tier-2 cities and small towns. M&M is strongly positioned to cater to this demand, given the company's significant presence and brand equity in these markets. For Mahindra, two-wheelers are an additional touchpoint for consumers to interact and bond with the ever expanding universe of Mahindra products and services It allows M&M to engage and build relationships with customers at a relatively early stage of the 'personal transport solutions' value chain

Benefits for Kinetic

Kinetic will use the money from the sale mainly to repay Rs 60 crore worth of longterm debt on its books The sale of Kinetics operating assets will leave the company with real estate assets valued at Rs 30- 40 crore Kinetic Motor Company also has an option to sell its 20 per cent stake in the new joint venture after seven years.

Impact on Shareholders
Kinetic's Share Price - BSE
80 70 60 50 40 30 20 10 0

Kinetic's Share Price - BSE

M&M's Share Price - BSE

1200 1000 800 600 400 200 0 M&M's Share Price - BSE

The TVS-Suzuki Breakup:2001

The Beginning
Mr. Thirukkurungundi Venkata Sundaram (TVS) lyengar was an industrialist, the founder of TVS and Sons group of companies. He established the TVS in 1923. The group diversified into 2 wheelers, automotive components, automotive spares and financial services. TVS group was successful in Automotive components and Two wheeler business. TVS Group emerged as Indias Third leading two wheeler manufactures one among the top ten manufactures of bikes. TVS Group business philosophy worked with Quality, Service, Reliability, Sense of Ethics.

SUZUKI Group
Suzuki entered India through the TVS Suzuki joint venture, originally incorporated as Indian Motorcycles Pvt. Ltd in 1982. The company came out with a public issue in 1984 and was named as TVS Suzuki. In the same year, the company launched its first 100-cc motorcycle, Ind Suzuki.

Early Issues
The company failed to turn this initial success of IND Suzuki into sustainable profits due to the high import content of the vehicle and it posted losses up to 1986. The merger with Sundaram Claytons moped division provided temporary respite to the company. In 1987, the company launched TVS-Champ the moped for the urban segment. TVS-Suzuki product lagged behind in performance and fuel efficiency. TVS Suzuki posted losses consecutively for three years 19891991. In 1990-91, due to labour problems, the company had to declare a lock out for 3 months. The company could not meet the new emission norms.

Reasons for decline of TVS Suzuki

Outdated 2 stroke engine technology. High capital cost as compared to Hero Honda and Bajaj Kawasaki. Lower market penetration and poor distribution and marketing efforts in North India. High level of market competition from superior products like 4 stroke bikes of Bajaj and Hero Honda.

The Differences
Differences between TVS and Suzuki first surfaced in 1992, when TVS approached Suzuki for more funds and technology for new models, to meet the intensifying competition in the motorcycle segment. Reportedly, Suzuki not only refused to provide funds and technology for the new models, but also created road blocks to the management instead of helping them TVS Suzuki was thus left with no option but to use its internal accruals for putting in place the turnaround strategy. Instead of getting new technology from Suzuki, TVS Suzuki had to re-engineer the basic Suzuki models, which led to the launch of the Samurai and the Shogun.

The Differences (Cont.)

The next major dispute between the two parties arose in the mid 1990s, when Suzuki, which had around 26% stake in the companys equity holding, expressed its desire to increase the equity holding. According to analysts, Suzuki wanted to play a pivotal role in TVS Suzuki, similar to the one it played in MUL, by gaining sufficient management control. Suzukis demands included:
Veto rights over all aspects of day-to-day management as well as in the strategic decision-making process. Restrictions on exports and high commissions on the exports made. Compulsory imports of all dyes and capital equipment by TVS from Suzuki. The minimum royalties to be paid for an indefinite period.

THE BREAK-UP
On September 2001, Sundaram Clayton and Japanese automobile major Suzuki Motor Corporation (SMC), partners in the joint venture TVS Suzuki announced their decision to break-up. TVS bought the 25.97% stake of Suzuki for Rs. 90 million increasing its stale to 58.43% Suzuki signed an agreement with TVS, according to which the existing licensing arrangement was to continue for 30 months. TVS agreed to pay royalty to Suzuki for this period.

After Effects
In the motorcycle segment, TVS was now on its own to compete with the technical and financial might of other IndoJapanese joint ventures. TVS over dependence on two-stroke technology was a definite handicap as the market had almost completely switched over to four-stroke engines. It was estimated that TVS would have to spend around Rs 2 Billion to convert to four-stroke technology.

Impact on Shareholders
TVS Share Price
1200

1000

800

600 TVS Share Price 400

200

LML & Piaggios Joint Venture

Introduction
Piaggio was established in 1884 in Pontedera, Italy. It was one of the world's leading producers of motorized two-wheeled vehicles. The LML was incorporated on the 1st May, 1972, at Kanpur. It was initially into production of leather and synthetic yarn and then moved to produce specialized machinery and finally to produce two wheelers.

The Deal
In 1984 LML had a technical collaboration agreement with Piaggio of Italy and a scooter project was set up. The contract was later converted into a technical and financial joint venture in 1990. Both the piaggio and LML promoters had an equal stake of 23.6% and rest was with public and financial institution.

Reason for the Deal

LML
To get technical know-how. They had the infrastructure and production resources. Responsible for Management, Finances, Sales

Piaggio
Access to newer geographies. They already had the scooter technology. Quality Control

Break-Up
On July 1998, under the Piaggios restructuring plan they were planning to merge 4 companies with Piaggio and a change in shareholding pattern. LML promoters opposed this move and Singhania's had cited a clause in the joint-venture agreement based on which the Indian partners enjoyed the right to acquire Agnelli's stake in LML following his death. Finally they had an out of court settlement in which LML paid 13.5 cr for the 23.6% stake @Rs 14.06/share. But in turn LML got Rs 46 cr from Piaggio in form of termination of contracts and advance share application money.

The outcome of settlement

LML shall, however, retain non-exclusive rights to use all Piaggio technology received for all vehicles other than Piaggio motorcycle. Piaggio will also be free to set up any business in India including manufacture of two-wheeler except motorised two-wheelers powered with later engine till December 31, 2007. LML and Piaggio will not use trademarks, logos and brand names of each other.

LML Share Price

LML
180 160 140 120 100 80 60 40 20 0 01/Jan/98

LML

01/Jan/99

01/Jan/00

01/Jan/01

01/Jan/02

Current status
LML is producing its NV series of scooters and selling its 4 stroke and 2 stroke scooters in the states of Punjab, Haryana, Delhi, UP, Rajasthan. It is also planning to re-launch its motorcycles range to get a establish a national network. Piaggio has entered the Indian markets again by launching Vespa 125. It is planning to launch new vehicles in the coming time.

RENAULT-NISSANS STRATEGIC ALLIANCE MODEL

Renault-Nissan
Renault-Nissan Alliance is a strategic Franco-Japanese partnership between automobile manufacturers Renault, based in Paris, France and Nissan, based in Yokohama, Japan since 1999; The two companies are joined together through a cross-shareholding agreement

The benefits of alliance with respect to other strategies

In the market for car manufacturers, the only appropriate strategy is that allows the rapid acquisition of new skills. Strategy of horizontal diversification.
Merger Acquisition Alliance economies of scale, geographically diversification, the reputation, the bargaining power

Complementarities between the strengths and weaknesses of both companies Distinctive resources and competencies Learning: major challenge - little degree of synergy would cause a high cost of restructuring Advantages of the alliance before merger and acquisition

Internal Analysis
Strengths Renault Cost Control Debt Innovation, creativity, imagination Weakness Nissan Recurring Losses Lack of creativity and renewal of its Products Poor management capacity Supplier relationships (vertical Keiretsu) in mismatch with a globalization strategy Management & slow conformist Weakness Renault Timeliness of Filing Delay in production time

Overall management and strategic platforms production and supply

Privileged relationship with suppliers Capacity Management Strengths Nissan Quality Products of poor quality

37% of the total distribution in the U.S. and 28% Japan

18.5% of cars with engines up to range on all of their production

Lack of notoriety in Japan & USA (0% of the distribution)

Opportunities insufficient to justify the development and production of top-end engines (4.5%)

 Two principles:
Developing all potential synergies by combining the strengths of both companies through a constructive approach to deliver Win-Win results Preserving each companys autonomy and respecting their own corporate and brand identities

Three objectives:
To be recognized by customers as being among the best three automotive groups in the quality and value of its products and services in each region and market segment. To be among the best three automotive groups in key technologies, each partner being a leader in specific domains of excellence. To consistently generate a total operating profit among the top three automotive groups in the world, by maintaining a high operating profit margin and pursuing growth.

Nissans problems before the alliance

Nissans problems before the alliance
Company was falling apart $ 20 billion in debt

The reasons of the problems

Recession in early 90s in Japan There was complacency and a lack of urgency in the culture There was no cross-functional and cross-regional communication The design of the cars was out of touch with the market A high degree of bureaucracy There was an emphasis on engineering culture rather than managerial culture and promotions Sticking in the Keiretsu model

Renaults problems before the alliance

Main source of revenue - small to medium size cars in Europe 85 % of sales in Western Europe No international market

Objectives of the Alliance

Synergies and Success Factors

Quality between the relationships among the managers and engineers of Renault and Nissan Business experience Technical skills Core values:
Balanced relations between the two companies and the development of strong identities for each of the brands

Other factors:
Alliance charter Capital contributions and equity participations Management structure and exchange of personnel

 Combined vehicle sales have increased from 4.9 million units in 1999 to more than 8.03 million units in 2011 (including Sales AvtoVAZ) World's fourth-largest automotive group (2010) Significant presence in major world markets (United States, Europe, Japan, China, India, Russia) The rise in sales resulted in the Alliance capturing 10.7% of the global auto market in 2011;

MAHINDRA-SSANGYONG ACQUISITION

Deal Structure
In April 2010, the company released a statement citing interest of three to four local and foreign companies in acquiring SsangYong Motor Company; The companies were later revealed to be Mahindra & Mahindra Limited , The Ruia Group of India and SM Aluminum, Seoul Investments and Renault Samsung of South Korea. In August 2010, Mahindra & Mahindra Limited was chosen as the preferred bidder for SsangYong. The acquisition was completed in February 2011 and cost Mahindra $463 million for 70% stake.

Why Acquisition?
Ssangyong was in debt owing $626 million to financial firms and subcontractors. It has been under court-led restructuring since February 2009 as the global recession hit car sales. Mahindra and Mahindra wanted to expand their market in USA and china after this deal. The Korean maker of Rexton and Kyron SUVs and the chairman luxury sedan also exports to China, Russia, Europe and the Middle East. The coming together of Mahindra and Ssangyong will result in a competitive global UV player.

Synergies and Success factors

Together with its financial capability, Mahindra offers competence in sourcing and marketing strategy Ssangyong has strong capabilities in technology, innovation and R&D Ssangyong also has strong international sales network The global presence of Mahindra and Ssangyong combined, jointly they will be able to achieve more success in the global market.

M&M Share Price

Ssangyong Share Price

Daimler Chrysler Merger: 1998

Daimler Chrysler Merger

In 1926, the merger of two German automobile manufacturers Benz & Co. and Daimler Motor Company formed the German company Daimler-Benz. Its Mercedes cars were arguably the best example of German quality and engineering. In 1998, Daimler-Benz and U.S. based Chrysler Corporation, two leading global car manufacturers, agreed to combine their businesses in what was perceived to be a merger of equals.
The merged entity ranked third (after GM and Ford) in the world in terms of revenues, market capitalization and earnings, and fifth (after GM, Ford, Toyota and Volkswagen) in the number of units (passenger-cars and commercial vehicles combined) sold. In 1998, co-chairmen and co-CEOs, Schrempp and Eaton led the merged company to revenues of $155.3 billion and sold 4 million cars and trucks.

Rationale for the Deal

Short Term Rationale
Cost Cutting Worldwide integration Rationalization R&D savings Value pricing strategy Plant Closings

Long Term Rationale Global presence Strong brands Broad product range Technology leadership

Daimlers need for an American Partner

Despite a booming U.S. economy, its luxury vehicles had captured less than 1% of the American market. Its vehicle production method was particularly labour intensive - requiring nearly twice as many workers per unit produced over Toyota's Lexus division. It recognized that it could benefit from an economy of scale in this capital-intensive industry. With $2.8 billion in annual profits, remarkable efficiency, low design costs, and an extensive American dealership network, Chrysler appeared to be the perfect match.

Terms of the Deal

Daimler-Benz shareholders receive one share of the new company for every share they currently own. Chrysler shareholders receive 0.547 of the new company's shares for every Chrysler share they own. At current market prices, the deal values Chrysler at nearly $58 a share, up from its last closing closing price of 48-11/16. The companies expect to realize cost savings of $1.4 billion in the first year after the merger and $3 billion in savings over the next several years. The company will have headquarters in Germany and Michigan but it will be incorporated in Germany and have a traditional German structure with separate supervisory and management boards. The combined company would have $92 billion in market value and an estimated $130 billion in annual revenue as the fifth-largest automaker in the world.

Impact of Merger on Shareholders

Diamler Share Price - German Stock Exchange
120.00
100.00 80.00 60.00

40.00
20.00 0.00

Share Price

Chrysler Share Price - NYSE

120.00 100.00 Axis Title 80.00 60.00 40.00 20.00 0.00 Share Price

Axis Title

Comparison of Daimler Benz and Chrysler

Daimler Benz Corporate Structure Corporate Cultures Hierarchical Structure Management processes of planning, organizing and controlling. More conservative, efficient and safe. Chrysler Team-orientated Setting goals, directing and monitoring implementation. Known as the risk-taking underdog

Customer proposition

The driving image and Attractive, eye-catching design at experience associated with a very competitive price the highest quality available in the market Emphasis on engineering, design, quality and after sales service High volume, low cost manufacturing and distribution

Value chain

Culture Clash
Chrysler and Daimler-Benz's brand images were founded upon diametrically opposite premises. Chrysler's image was one of American excess, and its brand value lay in its assertiveness and risk-taking cowboy aura, all produced within a cost-controlled atmosphere. Mercedes-Benz, in contrast, exuded disciplined German engineering coupled with uncompromising quality. These two sets of brands, were they ever to share platforms or features, would have lost their intrinsic value. Thus the culture clash seemed to exist as much between products as it did among employees.

Distribution & Sales Systems Issues

Distribution and retail sales systems had largely remained separate owing generally to brand bias. Mercedes-Benz dealers, in particular, were averse to including Chrysler vehicles in their retail product offerings. The logic had been to protect the sanctity of the Mercedes brand as a hallmark of uncompromising quality. This hindered the Chrysler Group's market penetration in Europe, where market share remained stagnant at 2%. Potentially profitable vehicles such as the Dodge Neon and the Jeep Grand Cherokee had been sidelined in favour of the less-costeffective and troubled Mercedes A-Class compact and M-Class SUV, respectively.

Conclusion
Synergy savings are only achieved when two companies can produce and distribute more efficiently than when they were apart. Owing to culture clash and a poorly integrated management structure, DaimlerChrysler was unable to accomplish what its forbears took for granted : profitable automotive production. Finally on May 14, 2007 DaimlerChrysler AG sold 80.1% of its stake in the Chrysler Group to Cerberus Capital Management for US$7.4 billion.

Present Situation
Chrysler filed for Chapter 11 Bankruptcy Protection in the U.S.A. in 2008 On January 20, 2009, the Italian Fiat and Chrysler LLC announced that they have a non-binding term sheet to form a global alliance. Under the terms of the agreement, Fiat took a 35% stake in Chrysler and gained access to its North American dealer network. In exchange Fiat provided Chrysler with the platform to build smaller, more fuel-efficient vehicles in the US and reciprocal access to Fiat's global distribution network. The federal government provided Chrysler $6.6 billion in exit financing.

Geelys Acquisition of Volvo : 2009

Introduction
Volvo Car Corporation was part of Ford Motor Company's Premier Automotive Group (PAG), along with Jaguar, Aston Martin and Land Rover. While part of the PAG, the company grew in its range of vehicles significantly. Ford Motor Company offered Volvo Cars for sale in December 2008, after suffering losses that year. On October 28, 2009, Ford confirmed that, after considering several offers, the preferred buyer of Volvo Cars was Zhejiang Geely Holding Group, the parent of Chinese motor manufacturer Geely Automobile. Geely only started to manufacture cars in 1998. But it has quickly grown into one of the country's leading private companies, with its sales increasing by nearly 60 percent last year.

Geelys Acquisition
On December 23, 2009, Ford confirmed the terms of the sale to Geely had been settled. A definitive agreement was signed on March 28, 2010, for $1.8 billion The European Commission and China's Ministry of Commerce approved the deal on July 6 and July 29, 2010, respectively. The deal closed on August 2, 2010 with Geely paying $1.3 billion cash and a $200 million note. Biggest overseas acquisition by a Chinese automaker As China hasn't got many high-end cars, coupled with Volvo's reliable and environmentally friendly reputation, industry analysts believe that Volvo's prospects in the Chinese market look good and that Geely's move will further encourage other Chinese auto makers to do the same.

Product Life-Cycle

Competitive Strategy

Geely
Culture Chinese culture

Volvo
Swedish culture, western culture Truly international

Market

95% in China, and the rest for export 2009 Profit of 188 million USD 40000-112000 Low cost and low quality segment Chinese customers for quality products with competitive price

Finance Price range Segment

Loss of 653 million USD 183000 - 583000 Premium segment

Customer base

World-wide customers for driving experience and safety

Brand Innovation Growth

Only known in China, low cost and low quality Very limited innovation due to the short history High growth, thanks to the explosive domestic market of China. A growth of 59% during 2009.

Luxury or nearly luxury brand over the whole world, famous for its safety record Very innovative, particularly in safety technology No growth during the last ten years, and negative growth during the finance crisis. A negative growth of 10.6% during 2009.

Impact on Shareholders
Ford's Share Price
20 18 16 14 12 10 8 6 4 2 0 05/01/2004

Ford's Share Price

05/01/2005

05/01/2006

05/01/2007

05/01/2008

05/01/2009

05/01/2010

05/01/2011

05/01/2012

Geely's Share Price

5 4.5 4 3.5 3 2.5 2 1.5 1 0.5 Geely's Share Price

08/12/2006

08/12/2007

08/12/2008

08/12/2009

08/12/2010

08/12/2011

Issues moving forward for Volvo and Geely

Brand and Customer Loyalty Cost Structure Language Issues Cultural Differences:
Social Structure Keeping in Time Schedule Respect and consideration for others Respect of rules and written procedures