Commercial vehicle major Ashok Leyland’s core business is under massive stress, with much of the pain due to the current sluggish economic environment.
However, some of the adjacent businesses that the Hinduja flagship diversified into a few years ago, as part of a de-risking strategy, have exhibited different levels of advancements.
Vice-Chairman of Ashok Leyland V. Sumantran , who has close to 30 years of experience in the automobile industry , has been driving diversification strategies. In an interview to The Hindu , he talks on the progress and growth plans in adjacencies for ensuring stability on the top line. Edited excerpts:
Has the slowdown forced you to rejig your adjacency strategy?
Definitely, we have a longer term growth plan that we want to achieve. Five years ago, we were motivated by two factors to drive adjacencies. Firstly, we felt top line growth is essential to remaina stable player in the industry over the long-term. Secondly, we must play in sectors where we must be strong. Hence, we chose adjacencies such as LCV, construction equipment, automotive electronics and engineering and testing. Now obviously, in downturn, every company keeps revaluating its portfolio, and wherever we found a portfolio element was a little further away from core we looked at a change in strategy.
That is why we divested our stake in Defiance Testing and Engineering (DTE) in North America. It was nice to have, but not essential to have for an IT and engineering strategy. We are not vacating from that. Otherwise, we continue to make the right investments in adjacencies. In LCV JV, we have been very fortunate with investment efficiency, and we, both the partners, have leveraged what we have. Someone like Carlos Ghosn (Chairman & CEO of Nissan) is very gung ho about this, saying it is very good way of recycling. Each one of our adjacencies has its own dynamics. Of course, we have to reflect the short-term headwinds, and, therefore, do some course correction in the strategy, and then move on to longer-term goals. We may continue to have a few course corrections. But there isn’t any major change. So, our adjacency strategy is intact, and it will serve us for long time.
There is a feeling that AL failed to convert the opportunity in LCV business after a positive take off with the launch of Dost. What are your views?
Post-April 2013, there has been a decline in the market share of Dost. When the LCV volumes started to contract in April 2013, some of the competition reacted to that with massive rebates, discounts and so on, including zero-per cent finance. We stayed away from that and decided we wouldn’t play that game. We took the call that jumping into the fray with that kind of discounting and rebates was a wrong thing for us.
If it meant some erosion of market share in the short-term, we said it would be fine.
So, I am playing for the long-term, and I don’t have money to throw around . We also gathered that the products that were supported by such rapid and aggressive financing schemes were losing their resale value in the long-term. Of course, I am not criticising what others are doing. They know best what they want to do. But we have to measure every journey by some milestones. Today, I feel a great sense of relief because significantly for me with Partner (truck) and MiTR (small bus), we have completed ‘Phase 1’ of the LCV journey. With three good products, we are more or less on time. I think we are doing what we wanted to do.
Most of your businesses are cyclical in nature in terms of their growth path. But you also embarked on a de-risking strategy, with some non-cyclical segments, to ensure stability to the top line. How is that helping?
There have been two major segments that have helped us in this regard. One is the power solutions business and the other is defence. We are very confident that defence business of Ashok Leyland will be a very solid, long-term counter-cyclical force. The power solutions business is as well. In defence, we have been mostly catering to products that serve the logistic needs of the armed forces. Stallion platform has been very successful there. But in the last few years, we have been trying broaden the strategy. This will be visible at the Defence Expo in New Delhi this week. First, we significantly expanded the product portfolio that we have in defence. Two years ago, we launched super stallion platform that took us to 6x6, 8x8, and this year, we will show the 10x10 format heavy vehicle. Second strategy was to go to the light-end. We will launch, for the first time, a 2.5 tonne 4 x 4 army logistics vehicle. Thirdly, we have started to become more integrated with large defence contracts. For instance, there is a very large tender for mounted gun system for army. Here, we don’t make guns, but will provide the vehicles that will carry those guns. We have suddenly started to become a part of the integrated weapon system where our products become the mobility platform. Slowly, if we add all these, I think we will significantly expand our defence portfolio.
Has offset policy been a big trigger for your defence business growth?
I think offset as an instrument for policy is extremely valuable and useful. Every country, whether it is Australia or South Africa, they have all very heavily leveraged the offset polity of respective nations to grow their industries. We are already seeing it. The big incentive to use the systems of SAAB or Nexter or anybody is it increases local content. Otherwise, foreign exchange drain to the country will be huge.
Is there a bigger focus on building capabilities and supply chain industry in view of the defence offset policy?
We are partners along with L&T for what would be the second most strategic indigenisation project. Government of India came out with categorisation of tenders. We, along with L&T, are one of the consortium partners and one of the tendering partners in FICV (Futuristic Infantry Combat Vehicle) programme. This means, for the first time, we are going to design, develop and build under make Indian plan. We are developing a completely a new FICV to meet the requirements. Clearly, R&D capabilities are being established. So, I think an offset policy is an essential instrument for a developing economy. Otherwise, we will end up buying everything, which we can’t afford from a foreign currency point of view.
What about the churn surrounding the Defiance business? Has there been any change in strategy?
The course correction in Defiance was to divest our stake in the testing entity. We had two different firms—IT and engineering services and vehicle testing in the physical level—and were even close to integrating. But we found that they were very different in terms of operating dynamics. So when time came to re-examine the portfolio, it made sense for us to look at it and realized a very good valuation on DTE. So, we exited very profitably. But Defiance Technologies continues. But it is fair for the investors to ask whether those investments are valid and fetching returns or not. So, DTE sale was the very good return on our investments. It validated that those investments in adjacencies have not been really wasted. With such deal, there was good opportunity to demonstrate two things – one put the money back on the table and validate to our shareholders/investors that money invested five years ago has good returns. So, we have our internal plans, and it means that we will continue to stay in what we have defined as our core adjacencies.
The CV market landscape is unlikely to return to pre-slowdown era, even after it revives. Is AL fully prepared for the emerging intensely-competitive scenario?
We are fully prepared for the new landscape. What I may not have is billion dollars of R&D facilities in Europe, U.S. or Japan. But I know my market conditions very well. In the AL-Nissan joint venture, you can easily see the role that each partner has played. For instance , we have just launched the Partner truck with 97 per cent local content. Of course it is no big deal. But I just didn’t take the Japanese engine and localise. We changed the combustion chamber, turbo charger, fuel injection system, torque curve, driving characteristics and everything.
We know our customers, and they don’t want a German or U.S. engine. All they want is an engine that will lug at low speeds, give outstanding fuel efficiency and forget about top speed capability and all. So we took that entire thing and redeveloped it. If you ask me are we prepared, in each of our product categories, whether it is Captain, Boss, Partner or Dost, our knowledge of the customer has allowed us to configure a product that is much closer to what he requires. So, I make up for not having a billion dollar R&D centre in Germany by being closer to the customer’s needs. Of course, there are smarter people everywhere in the world, but our structure allows us to score on speed and local control.
balachander.g@thehindu.co.in
