SUPPORT DOMESTIC MARKET IN INDIA STRATEGIC INITIATIVE STUDY Page 1 of 18
Contents
Contents ................................................................................................................................................ 1 Abstract ................................................................................................................................................. 2 Company Profile .................................................................................................................................... 3 Influencing Factors and Challenges ....................................................................................................... 3 Strategic Initiative Approach .................................................................................................................. 4 Passenger Car Industry back ground .................................................................................................... 5 Who are Mahindra and Mahindra? ........................................................................................................ 7 Why Cummins to choose Mahindra& Mahindra (M&M) ......................................................................... 8 Strategy Management and Decision Making ....................................................................................... 10 Manufacturing Strategy .................................................................................................................... 10 Sourcing and Procurement Strategy ................................................................................................ 11 Financial Profitability Analysis .......................................................................................................... 11 Project Management ........................................................................................................................... 13 Time line and Road Map for execution of Project: ............................................................................... 14 Risk Analysis ....................................................................................................................................... 15 Conclusion .......................................................................................................................................... 16 Bibliography ........................................................................................................................................ 17
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Abstract According to Brache, Alan (2006), Strategic initiatives are the means through which a vision is translated into practice. Kaplan, Robert explains that Strategic initiatives are collections of finite- duration discretionary projects and programs, outside of the organization's day-to-day operational activities, that are designed to help the organization achieve its targeted performance. The purpose of this report is to provide strategic initiative approach for Cummins to launch passenger vehicle engines for Mahindra & Mahindra to support domestic market in India using decision making and project management tools. There are various approaches which are provided through making engines related to different branded companies that help to drive over their business. The report generated provides a variety of details related to the key points overview which was developed as per the managing instructions and activities. These options are very critical in order to obtain sustainable success.
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Company Profile Cummins a global power leader that design, manufacture, distribute and service engines and related technologies, including fuel systems, controls, air handling, filtration, emission solutions and electrical power generation systems. Cummins Engine Business manufactures are related to certain markets where it needs to complete line of diesel and natural gas powered engines. These engines are used as onhighway and off-highway use. All these markets are included with many heavy medium duty trucks, bus or any other recreational vehicle. These vehicles are based on the light duty automotive and used as number of industrial standards as agricultural, construction, mining marine, oil, gas and military equipments. These helps the Cummins Engine Business provides a maximum range over certain new parts and services that are remanufactured through extensive distribution networks. The Cummins engine range from size of more than 31 to 3500 horsepower and from 1.4 to 91 litres. Headquarter at Columbus, Indiana. Cummins India established as joint venture in India with Kirloskar Engines in 1962 and currently they are operating in 190 countries.(www.cummins.com) Influencing Factors and Challenges There are few major factors which are provided with potentially to significant affect over Cummins that does business at present and in the future. The challenges that include are: Globalization Increasing Customer Expectation Increasing Regulations Changing Demographics
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Strategic Initiative Approach Cummins remained a pioneer, strong, independent and global power leader committed to the development of engine technology and related services. Opportunity is to extend its engines business activity to passenger vehicle for domestic market at India. Thus it helps Cummins in utilising its plant capacity, customer service centre, dealership centre to the extent and provides overall profitability to the organisation. Positioning itself for long-term success, Cummins continued to expand its capabilities in technology, product and capacity enhancements. This was evidenced by USD $149 Million in capital investments in the current financial as compared to USD $136 Million in the previous financial. Believed these will better prepare the Company for decisive growth upon market recovery. With the Central Pollution Control Board regulating towards cleaner emission norms for engines used in generators, Cummins has evaluated numerous technologies and products and developed Fit for Market solutions to best meet emissions regulations cost effectively. Cummins prepare to take advantage of new opportunities arising from the implementation of the new norms. Cummins always encouraged investing on new opportunities and technologies that serves better growth for tomorrow. Add some more information to support strategic initiative with proper justification for selecting this passenger vehicle approach
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Passenger Car Industry back ground Currently, the auto components industry in India is around two-thirds the size of the OEM segment. This proportion is around one to two times in mature markets of Europe, America and Japan. This indicates (a) higher proportion of imports of auto components in India by OEMs and (b) lower replacement market sales. Given the healthy growth prospects of the Indian automobile industry over the medium term, Society of Indian Automobile Manufacturers(SIAM)expects the size of the auto components industry to grow at a rate faster than the OEM segment driven by OEMs thrust on localization and steadily growing replacement market demand. Indias automotive industry is one of the larger markets in world. Recently India over took Brazil and placed on 6 th largest position in passenger manufacturing industry in the world. Exporting passenger cars helped India to retain its 4th Asias largest exporter next to Japan, South Korea and Thailand. Now passenger car industry contributes 4 % in Indias Gross Domestic Product (GDP). According to the SIAM, annual vehicle sales are projected to increase to 4 million by 2015. Car sales trend from 2007- 2013 are as follows:
0 500,000 1,000,000 1,500,000 2,000,000 2,500,000 3,000,000 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 Q u a n t i t y
Financial Year Car sale trend from 2007-2013 Quantity Linear (Quantity) Automobile Domestic Car sale trend Year Quantity 2007-08 1,549,882 2008-09 1,552,703 2009-10 1,951,333 2010-11 2,501,542 2011-12 2,618,072 2012-13 2,686,429 Page 6 of 18
Maruthi Suzuki, 45% Hyundai, 14% Tata, 14% Mahindra & Mahindra, 7% General Motors, 4.3% Ford, 3.9% Toyota, 3.1% Honda, 3% Volkswagen, 3% Others, 4% According to statistics, here is a high potential business opportunity for Cummins tocontributed 7.2% of the passenger car sales business in corresponding financial year with a joint venture with Indian based automotive OEM called Mahindra and Mahindra Page 7 of 18
Who are Mahindra and Mahindra? Mahindra & Mahindra Limited (M&M) is an Indian multinational automobile manufacturing corporation headquartered Mumbai, India. It is one of the largest vehicle manufacturers by production in the Republic of India. It is a part of Mahindra Group, an Indian conglomerate. The company was founded in 1945 with 2 brothers Mr J.C Mahindra & KC Mahindra. In 1947 introduced India to the utility vehicle. More than 66 years later still India's premier utility vehicle (UV) and Tractor Company. It is one amongst the top 5 tractor manufacturing company. In addition to making ground breaking, launched many more SUVs like the Scorpio Bolero and XUV 500 models. Mahindra offers cars, electric vehicles, pickups, and commercial vehicles that are rugged, reliable, environmentally friendly, and fuel-efficient. Acquisition of the Ssangyong Motor Company in 2011 brought a major South Korean utility manufacturer with a presence in more than 90 countries into the Mahindra fold. Currently, they are operating their business in more than 90 countries. Automotive businesses cover all transportation needs thanks to strategic synergies between its expertise in design, manufacturing, and service. According to Financial report, M&M sold 245,700 passenger vehicles with gross turnover of 798 Million. It is ranked #21 in the list of top companies of India in Fortune India 500 in 2011. Apart from automotive business, M&M are into many various business activities in Financial, Aerospace, Defence, Energy, Industrial equipment, construction, logistics, real estate and many other sectors.
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Why Cummins to choose Mahindra& Mahindra (M&M)
There are many other passenger car manufacturing companies in India to support domestic market like Maruthi Suzuki, Hyundai, Tata, Toyota, Honda General Motors, Ford and so on. Majority of them are based and head quartered at overseas, where in technology and engines are built by them to support global business. To support domestic market these MNCs buy engines by importing from head quartered countries for its passenger car. Because of service and technology limitation, Cummins doesnt fit into a strategy to provide engines for MNCs operated passenger cars. Next available option is either with TATA or Mahindra and Mahindra. For passenger segment, Tata has its own engine manufacturing plant. Hence its not approachable. And Cummins has a two engine plant facility with TATA as joint venture to support trucks business. Mahindra and Mahindra is locally based company and currently buying/outsourcing the engines from a local engine manufacturing company for its passenger vehicles. Due to certain limitation in its current engine technology, M&M fronting in a sale loss and causing more customer complaints. As Cummins is pioneered in engine related technology, hence it is an approachable opportunity for them to extend its business strategy in launching engines for passenger car in joint venture with Mahindra and Mahindra. Cummins has its own service and dealership centre across India to support engine business, that support would extent for M&M in providing better customer satisfaction. M&M was started in 1945 and the company was built around the core idea that people will succeed if they are just given the opportunity. Employees across the Group constantly challenge conventional thinking to create solutions that make a significant difference in the lives of our customers.
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In 1947, M&M introduced India to the utility vehicle. They are India's premier utility vehicle (UV) company over 65 years. In addition to making groundbreaking UVs, M&M offers cars, electric vehicles, pickups and commercial vehicles that are rugged, reliable, environmentally friendly, and fuel- efficient. Their global presence is in Australia, Europe, Latin America, Malaysia, South Korea and South Africa. Mahindra is also there for you through the construction of excellent components, provision of spares, and commitment to superior service. Their automotive businesses cover all your transportation needs thanks to strategic synergies in their expertise in design, manufacturing and service. Their vehicles meet global regulatory requirements such as End of Life Vehicles Directive (ELV) in the European Union (EU). All their EU export vehicles are ELV certified and hence ensuring safe dismantling and recycling of fluids in environment friendly manner.
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Strategy Management and Decision Making Project success depends on following deciding factors: Whether the project is critical to profitable growth Whether the project is required to meet a customer commitment The level of urgency of the project, specifically in the current environment The likelihood that the project generates benefits in the near term Manufacturing Strategy Assembly, Testing, Painting: At Cummins facility Cylinder Block: Casting Outsourced and Machining at Cummins facility Cylinder head Machining: Casting Outsourced and Machining at Cummins facility Connecting rod Machining: Casting and Machining at Cummins Facility Camshaft Machining: Outsource Casting and Machining Crankshaft Machining: Outsource Casting and Machining Conveyor system for assembly line production Multi Spindle Nut runner for all precision torqueing 38 engines to be built in 1 hour to support customer demand 3 Months training to be provide for all assembly operators at M&M assembly plant Process Flow and Standard operating procedures to be ready before the production training Value Stream to be mapped to understand the Cycle time At initial stage of the production launch, production and development trail can be done at current Cummins R&D and manufacturing facility
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Sourcing and Procurement Strategy - Use of existing supplier source of supplier from existing business for complex parts - Purchasing strategy to be developed to reduce the material cost from 60 - 50% - For standard items like bolts, gaskets and sealing can purchase fromexisting Cummins supplier to maintain standardisation of Engine assembly across global - Production Part Approval Process (PPAP) to be sign off for all purchasing items from all Cummins and non-Cummins supplier with standard proper supplier agreement in the first 4 months of the production trails
Financial Profitability Analysis
With respect to above statics chart,NPV has been calculated using the following assumption: Assumption of positive 5% sale growth for every yearin the next 10 years based on the historical data
Cost of the engine ($1250) is an average of 12% of the total cost of the car ($12000) To start up with material cost is considered as 60% of the total cost of engine i.e. $750 With an capital investment of USD $100 Million and 5% of its cost as maintenance cost for the following years Planned human resources of 250 to operate for 3 shifts in a day to get an output of 836 engines per day
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From financial calculation, Launching of engine for passenger vehicle with M&M is a justifiable strategic initiative to go with. And also it has projected with positive NPV with good IRR. Considering long term strategy in relation to overall Cummins profitability and sustainability, it is a good and recommendable choice to proceed.
Product line Financial Analysis for launching Passenger Car Engine Particulars % of sales 2014 2015 2016 2017 2018 2019 Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Initial Investments - Equipment Capital in USD 100,000,000 $ 5,000,000 $ 5,250,000 $ 5,512,500 $ 5,788,125 $ 6,077,531 $ Profit & Loss Volumes 245700 282555 324938 373679 429731 494190 Average Unit Price 1,250 $ 1,141 $ 1,141 $ 1,141 $ 1,141 $ 1,141 $ Sales 307,125,000 $ 322,481,250 $ 370,853,438 $ 426,481,453 $ 490,453,671 $ 564,021,722 $ Average Unit Cost 750 $ 685 $ 685 $ 685 $ 685 $ 685 $ Material Cost 184,275,000 $ 193,488,750 $ 222,512,063 $ 255,888,872 $ 294,272,203 $ 338,413,033 $ Manuf acturing Overheads :- Number of Associates 250 263 276 289 304 319 Cost of Associates $ 2400 per year 625,000 $ 656,250 $ 689,063 $ 723,516 $ 759,691 $ 797,676 $ Depreciation 10% 10,000,000 $ 10,500,000 $ 11,025,000 $ 11,576,250 $ 12,155,063 $ 12,762,816 $ Overheads - Fixed ( 40% of 20%) 40% 36,855,000 $ 32,248,125 $ 29,668,275 $ 34,118,516 $ 39,236,294 $ 45,121,738 $ - Variable (60% of 20%) 60% 55,282,500 $ 48,372,188 $ 44,502,413 $ 51,177,774 $ 58,854,441 $ 67,682,607 $ Warranty 3% 9,213,750 $ 9,674,438 $ 11,125,603 $ 12,794,444 $ 14,713,610 $ 16,920,652 $ Manuf acturing overheads 111,976,250 $ 101,451,000 $ 97,010,353 $ 110,390,500 $ 125,719,098 $ 143,285,488 $ Gross Margin ( A ) 10,873,750 $ 27,541,500 $ 51,331,022 $ 60,202,081 $ 70,462,370 $ 82,323,201 $ Gross Margin % to sales 4% 9% 14% 14% 14% 15% SAR 5% 15,356,250 $ 16,124,063 $ 18,542,672 $ 21,324,073 $ 24,522,684 $ 28,201,086 $ Packing 2% 6,142,500 $ 14 $ 14 $ 14 $ 14 $ 14 $ SAR (B) 21,498,750 $ 16,124,076 $ 18,542,686 $ 21,324,086 $ 24,522,697 $ 28,201,100 $ PBIT ( C = A - B ) (10,625,000) $ 11,417,424 $ 32,788,336 $ 38,877,995 $ 45,939,673 $ 54,122,101 $ PBIT % to sales -850000% 1000384% 2872883% 3406453% 4025190% 4742127% Interest cost ( D ) - For 3 yrs 2% 6,142,500 $ 6,449,625 $ 7,417,069 $ Prof it Bef ore Tax / savings ( E = C - D ) (16,767,500) $ 4,967,799 $ 25,371,268 $ 38,877,995 $ 45,939,673 $ 54,122,101 $ Present Value and Rate of Return PROJECT TITLE: Engines for Passenger Vehicle Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 Dec-19 Dec-20 Dec-21 Dec-22 Dec-23 Dec-24 (US$000) Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Savings -16,768 4,968 25,371 38,878 45,940 54,122 63,596 74,560 87,239 101,894 118,827 Expense 0 0 0 0 0 0 0 0 0 0 14,526 Tax Depreciation 28,571 21,837 17,098 13,788 12,742 13,379 14,048 6,073 6,377 6,696 PBT -16,768 -23,604 3,535 21,780 32,152 41,380 50,218 60,512 81,166 95,518 97,605 Effective Tax Rate 37% 37% 37% 37% 37% 37% 37% 37% 37% 37% 37% Tax -6,204 -8,733 1,299 8,004 11,816 15,207 18,455 22,238 29,828 35,103 35,870 PAT -10,564 -14,870 2,236 13,776 20,336 26,173 31,763 38,274 51,337 60,415 61,735 Capital 100,000 5,000 5,250 5,513 5,788 6,078 6,381 6,700 7,036 7,387 7,757 Working Capital -44,023 6,974 2,317 -1,486 -3,309 -3,612 -3,939 -16,020 -18,409 -21,155 -24,313 CFWD-Tax Effect 0 0 0 0 0 0 0 0 0 0 0 (US Tax Entities Only) Total Cash Flow -154,587 15,675 21,139 23,875 25,026 29,225 34,821 29,601 31,966 38,249 50,888 Cumulative Cash Flow -154,587 -138,912 -117,773 -93,897 -68,871 -39,646 -4,824 24,777 56,743 94,992 145,880 NPV 7,599 Int Rate of Return 11.98% Expense Case: Base +0% Discount Rate Payback Years 6.2 Savings Case: Base +0% 11% Capital Case: Base +0% IRR % Estimate Volume Case: Base +0% 25% Page 13 of 18
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Project Management This project is driving through a methodology called Value Package Introduction (VPI) with defined Key milestone with different phases from M0 to M6 for smooth running of project launch. Page 14 of 18
Add few more details on project management
Time line and Road Map for execution of Project:
Activities Time line Resp Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Plan Actual Plan Actual Plan Actual Plan Actual Plan Actual Plan Actual Plan Actual Production Trail Facility/Infrastucture Readiness Person-A Person -B Person- C Person D Person-E Person-F Person-G Quality Approval Production Launch Time Management Financial Analysis/Approval Design Development/Approval Purchasing/Supplier Development Page 15 of 18
Risk Analysis The quantifiable likelihood of loss or less than expected returns resulting from uncertainty. Types of uncertainty: External: Customer Demand Supply of raw materials Internal: Time duration and resource requirements Success/Failure prospects
Other uncertainties: Failure in design development and quality Delayinfrastructure Resource availability Manufacturing facility capital cost Market uncertainties Variation in price and demand Resource availability & costs Competitors promotion offer
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Add few more details on Risk Analysis related to this project: Source of Uncertainty: Risk analysis: Risk of aversion:
Conclusion
Input required related to strategic initiative described based on business information and opportunities for Cummins and M&M on the long term Page 17 of 18
Bibliography Brache, Alan (2006). Implementation, New York: McGraw-Hill. p. 195 Kaplan, Robert. The Execution Premium: Linking Strategy to Operations for Competitive Advantage. 103: Harvard Business School Press.