India---and MSAT—the new link in the

Global Automotive Chain

SUMMARY

• Global automotive market

• Key trends in the Asian markets

• Sourcing opportunity from low cost countries

• Relative strengths: the India perspective

• Mahindra Systems & Automotive Technologies (MSAT)

Auto Market Profile

•Mature, overcapacity, pricing pressure

•Overall slow/flat economy conditions in US, Europe
•Flat/Moderate Growth in the Auto Industry in US
•Lower runs, need to cut down costs
•Outsourcing labour-intensive lines to low cost countries accepted
as the way forward across industries: comparative advantage

•India, China, Thailand identified as the prime bases for this move
Consolidation in auto industry has impacted customer/ supplier
relationships

Major global auto players and their

share of global production in 2002

VolkswagenBMW Others *
1% 11%
2% General
Renault/
Motors (incl *Others includes at
Nissan
4% Isuzu) least 3 other major
Honda
30% global players i.e.
7% Suzuki, Hyundai
and Fuji Heavy
Toyota
7%
Daimler Ford (incl
Chrysler Mazda)
(incl 23%
Mistubishi)
16%
Auto Component Market Profile

Delphi Visteon Bosch

4% 3% 3%
Lear The market is
2% Magna highly
** 2%
Dana fragmented.
2% Even the leader,
Arvin Meritor Delphi with USD
1% 17 bn sales has
Denso
only a 4% share
1%

Others TRW
81% 1%

* share of business from parents (GM, Ford) at 65-80% and

decreasing
Total : US$ 624 billion
** estimated share of auto comp business

Global autocomp market expected to grow at 3% pa to USD 1.65 tn by 2015

(Source: Global Insight, MEMA, OESA, McKinsey analysis)
Cost concerns are driving many changes globally

• T1 suppliers : 2000+ to 200+ in 2 decades

• Current consolidation in the 2000+ global T2 community
• Vendor rationalization at OEM and T1-2 levels
• Migration of production to cost competitive locations with
flexible local work rules and practices
ASIA, DESPITE A BIG BASE, WILL DRIVE THE LIGHT PASSENGER
VEHICLE INDUSTRY GROWTH OVER THE NEXT FEW YEARS
Light passenger vehicle sales in millions Absolute
CAGR Growth
(Percent) (millions)

63.8 3.2 9.4

60.1 62.2
56.2 58.1
54.4
16.8 1.1 0.9
17.0
16.8
15.9 16.3
W.EU 15.9 2.5 8.5 0.8
2.3
2.0 2.1
1.8
South Am. 1.7
20.8 20.9 1.6 1.6
20.1 20.4
North 19.3 19.7
America
3.5 3.7 5.1 0.8
3.3 3.4
E. EU 2.9 3.1

20.0 6.2 5.3

15.6 16.4 17.4 18.6
Asia 14.7

2003 2004 2005 2006 2007 2008

* Footnote
Source: Global Insight December 2003
WITHIN ASIA, PRODUCTION GROWTH WILL BE LED BY INDIA,
THAILAND & CHINA
Light passenger vehicle production in millions

CAGR

24.7 4.3
22.3 23.5
20.8 21.5
19.9 2.3 6.7
2.1
1.9 2.0 3.6
1.7 3.5 2.6
Others 1.6 3.5
3.3 3.5 1.7 11.7
S.Korea 3.1 1.6
1.3 1.4
India 1.0 1.2
9.0 (1.9)
9.1
9.2 9.2
Japan 9.9 9.5
1.2 11.7
1.2
1.0 1.1
0.8
Thailand 0.7 6.0 6.9 13.7
4.2 4.7 5.2
China 3.6
2003 2004 2005 2006 2007 2008

* Footnote
Source: Global Insight December 2003
• Global automotive market

• Key trends in the Asian markets

• Sourcing opportunity from low cost countries

• Relative strengths: the India perspective

• Mahindra Systems & Automotive Technologies (MSAT)

Most Asian markets face declining prices which drive OEMs to....

Car Prices
(Indexed 100 to Year 2000)

India China

105 105

100
100
95
Maruti 800 95
Honda
90 Accord
90
85
Suzuki
Alto 85 VW Santana
80

75 80
2000 2001 2002 2003 2004 2000 2001 2002 2003

* Footnote
Source: Auto car India, China Automotive Year Book
...increase outsourcing and amount of local content INDIA EXAMPLE

Average outsourcing budget as a Local content in most leading cars is now

percentage of revenue has been rising over 70%
Percent Local content
Global OEM Models Percent
average =
70% Indica
64
Santro

Ikon
59
58 Palio

Corsa

1998 1999 2000 Qualis

International OEM entry and domestic demand

boost drive local vendor pool development
Note: Maruti has nearly 90-100% local content in most high volume models
Source: ACMA; Infac; news reports; McKinsey Global Institute
• Global automotive market

• Key trends in the Asian markets

• Sourcing opportunity from low cost countries

• Relative strengths: the India perspective

• Mahindra Systems & Automotive Technologies (MSAT)

Components from LCCs are cheaper by at least 20 per
cent in some categories INDIA EXAMPLE
USD 1 US made
Landed cost of
Indian export
Breakup of costs for rear brakes Comparison of unit costs

Difference
20 -25% Percent Wiring
Logistics harness -25%
Overheads
15
Labor 525% Damper
-28%
-44%
-67%
Disc pad
-20%
Material
-27% Brake
lining -25%

US India

Lower labor and tooling costs are

primary sources of advantage
Source: Interviews; McKinsey analysis
Auto parts in India : Increasing presence

Key Industry Statistics

US$ billion
Key Players : 402

CARG : 15% Investments : US$ 2.5 billion

CARG : 17%
9.4
6.2 Output : US$ 4.5 billion
4.5
Exports : US$ 800 million

Export projections(2010) : US$ 2.5 billion

2001 2003 2006P
Employment : 250,000 people

Both Indian companies and Big Auto are partnering in India’s progress towards the
US$ 10 billion milestone
Quality is improving at plants in countries from Japan to India

JD Power Initial Quality Survey Ratings

No. of problems per 100 vehicles

Compact Car*, Midsize car**, Mini car***,

India India Japan

234 163
148
147 115
154

2001 2003 2001 2003 2001 2003

* Compact cars include Hyundai Santro, Suzuki Alto etc.

**Midsize cars include Fork Ikon, Opel Corsa, Fiat Siena, Hyundai Accent etc.
***Mini cars include Suzuki Wagon R, Honda Life, Subaru Cleo, Suzuki Alto etc.
Source: JD Power Initial Quality Survey India, Japan, GM Internal Quality Score card
This helps in boosting exports of fully built vehicles & parts
CAGR in
Percent

Car exports Fully built cars

‘000 units
Exports From India
India China Thailand
• Suzuki exports Alto and
Zen to Europe
36 9 28 • Hyundai Atos to Europe
106 1.0 235 and Mid East
0.8 175 181 • Ford Ikon to Africa
64 0.7 126 153
25
42 0.3 0.5 68
23 26 Exports From China
• Honda for Japan by
‘98 ‘99 ‘00 ‘01 ‘02 ‘03 ‘98 ‘99 ‘00 ‘01 ‘02 ‘03 ‘98 ‘99 ‘00 ‘01 ‘02 ‘03 2004

Auto Parts exports Exports From Thailand

US$ Million • GM Opel minivans for
India China Thailand Europe
16 36 43 • Subaru for Japan
1661
• Honda compact for
1215 Japan
1125 866
699 • Toyota pickups for
587 707 522 587
569 495 Japan, South East Asia
350 420 490
330 262
145
‘98 ‘99 ‘00 ‘01 ‘02 ‘03 ‘98 ‘99 ‘00 ‘01 ‘02 ‘03 ‘98 ‘99 ‘00 ‘01 ‘02 ‘03

* Footnote
Source: Dun & Bradstreet Auto Sector Update, Economic Times, China Auto Year Book 2003, Thai Auto Year Book 2004
• Global automotive market

• Key trends in the Asian markets

• Sourcing opportunity from low cost countries

• Relative strengths: the India perspective

• Mahindra Systems & Automotive Technologies (MSAT)

Framework to measure country competitiveness for different categories
Factors of competitiveness Metrics to measure competitiveness factors
1 • Factor costs
– Labour
What are the – Capital
“factor” • Factor productivity
– Labour
advantages that – Capital
How the country enjoys? • Factor availability
competitive are – Skilled labour
different – Raw material
countries?

2
• Domestic industry maturity
What are the – Size
– Growth
structural factors
advantaging the
• Presence in global markets
– Supplier base
country enjoys ? – Current advantage (Metric: Share of world trade in the sector)

3 • Creating competitive environment (Metric: Maximum stake

permitted for foreign entities)
What are the
• Demand stimulation
Government – Taxation
policies which – Tariff protection
influence the • Enabling factors
industry? – Infrastructure
– Labour reforms
Example : auto components sectoral assessment on High
factor advantages Low
SAMPLE ASSESSMENT

Factor costs Factor availability

Labour Capital Talent availability
Skilled labour No. of engg. Overall
Country wage rates WACC* graduates Survey score rating
US$/hr Per cent ‘000 per year 10=Favourable
1=Unfavourable

India 0.81 7.45 1,078 8.73

China 0.67 5.30 1,337 4.17

Mexico 3.14 9.50 598 6.56

Poland 3.28 8.58 27 6.30

Thailand NA 6.92 251 5.49

* Weighted average cost of capital

Source: Country specific publications; Bloomberg; McKinsey analysis; World Competitiveness Yearbook 1999
 High
Example : auto components sectoral assessment on
Low
structural factors SAMPLE ASSESSMENT

Overall
Country Domestic industry size Export volumes Share of world trade Rating
US$ billion, 2001 US$ billion, 2001 Per cent, 2001

India* 4.5 0.4 0.2

China 19.8 2.4 1.3

Mexico 23.2 12.9 7.0

Poland 2.6 1.7 0.9

Thailand** 8.7 0.9 0.5

* Significant structural advantages from forecast high growth in demand and emerging supplier base
** Significant structural advantages due to strong emerging supplier base
Source: Country specific publications; World competitiveness year book; McKinsey analysis
Example : auto components sectoral assessment on High
Low
government policies
SAMPLE ASSESSMENT

Country Demand stimulation/competition Government policies

Overall
Indirect tax Import duty Infrastructure Labour reforms Rating
Per cent Per cent Survey score Survey score
10=Favourable 10=Favourable
1=Unfavourable 1=Unfavourable

India 20 39 2.29 2.50

China 17 12 5.27 4.32

Mexico 15 N.A. 3.85 3.51

Poland 22 8 2.65 2.52

Thailand 7 60 5.97 6.41

Source: Country specific publications; World competitiveness year book; McKinsey analysis
**China- market profile

Auto
• Fastest growing market: 47% yoy for last 3 years; 1.9mn units in 2003
• High cost of car manufacture- because of high import content (30-40%)
• Low auto financing levels 10-15% (compared to 75% in India)
• Low level of exports- 1% of production
Autoparts:
• Huge, low cost labour pool: offers advantages in the low skill, mass
production, lower end of the value chain.
• Fragmented component production, large no. of small scale players
• Higher level of imports: 30-40%
• Low exports; primarily in tires, glass, small engines
• Most global majors present; scaling up capacity rapidly
• $3 bn aftermarket : mostly (56%) in mechanical (engine and drive) parts.
• Risk areas: intellectual property, quality, timeliness of supply, overcapacity
**Thailand- market profile

Auto, Autoparts
• No home-grown car maker to protect; has welcomed overseas assemblers
• Second largest pickup truck producer in the world: nearly 1mn units - 50% of
ASEAN vehicle production.
• Government support:
– investment incentives
– low import taxes
– able to capitalize on lower labor costs.
• Location: able to access the domestic market while gaining entry into the
ASEAN,Oceania regions for exports.
• High level of automotive material imports- opportunity for alliances, JVs, other
suppliers

*FTA has already been signed between India and Thailand

**India- market profile

Auto:
• Relatively small size (approx 1 mn units)
• Divided between Local (Tata, AL, M&M) and Global players (Hyundai,
Suzuki, GM, Ford etc)
• Expected to be one of the drivers of Asian (and Global) growth over rthe
next decade
• High level of auto financing

Autoparts:
• Industry approx USD 5 bn in 2004; fast growing; could touch USD 33-40
bn by 2015
• Fast growing exports - approx USD 1 bn in 2004; could touch USD 20-
25bn by 2015
• Competitive disadvantage in Power costs and Taxes
• Low cost labour pool
• Higher degree of Engineering skills when compared to other LCCs
• Global levels of environmental standards
Key Opportunities for India

• Engineering Services: India offers a vast pool of skilled, low cost

workforce

• Finishing: In the non-proprietorial space, India has a clear edge:

high quality gear production, Forging and Machining of engine
components, design to assembly of aggregates

• Materials: Strong supply base for quality steel; also a growth in the
Composites market.

• Contract manufacturing: With potential ranging from material to

services and market, it is also an ideal base for contract
manufacture
Key strengths of the Indian Auto component Industry

- design skills at competitive costs - and quick

Human turnaround
Resources - conversant with global automotive standards
- competency with wide range of machinery

Technology - access to variety of technologies (Japanese,

Korean, US, European); strong domestic
technology base

- Access to cost competitive inputs

Procurement
- efficient supply chain

- Large, growing domestic OE base

Market - Production base for foreign OEs

Indian Autocomp market expected to grow at 10% over the next decade-
Mckinsey Analysis/ ACMA
• Global automotive market

• Key trends in the Asian markets

• Sourcing opportunity from low cost countries

• Relative strengths: the India perspective

• Mahindra Systems & Automotive Technologies (MSAT)

 MSAT

Mahindra Systems & Automotive Technologies

Guiding Principles

•Scope Auto centric; Full service supplier

•Drivers Technology, Scale, Skill
•Market: Global market focus
•Facilities Leverage existing presence
•Acquisitions: >50% in each entity
•Org. structure: Vertically aligned
Building Blocks -basis

MSAT
SECTOR

Production
MES* SSBU*
units

USP •Domain Knowledge •Purchasing power •In house skills

Strategy •Art to Part •Contract Sourcing •Complement
with M&A
•Supplement
with Greenfield
*MES: Mahindra Engineering services
*SSBU: Strategic Sourcing Business Unit
 MES
Mahindra Engineering Services
Strategy

•Aim for Full Service Supplier

•Leverage on MSAT, SSBU for sourcing of parts

•Acquire overseas for Market coverage and Proximity

•Acquire locally for Design, Prototyping skills

Opportunities

5. Design Support- Chassis and BiW

6. Prototyping

7. Testing- components.
8. Offsite placement in India
9. Parts Sourcing & Tool Design
10. CAD/CAM jobs – Engineering changes & data migration
Scope

Concept Design and

Development
• Ideation • Preliminary Validation
• Renderings Design
Exterior/Interior • Packaging • Prototypes Implementation Mfg.. Support
•Scale model- POP •Detailed Testing
•Tape Drawings Design • Fitment • Tool •Process
•FRP See Through •Prototypes trials Development refinement
•Digitizing •Value Engg • Field trials • Vendor
• Surfacing •Fine tuning • Approval & Development
certification • Process
• Market Implementation
feedback • Pilot batch
 SSBU
Strategic Sourcing Business Unit
Business Structure

SSBU

Strategic Vendor Global

Sourcing Management Sourcing
Strategy

Primary focus: servicing of M&M requirements

Contract sourcing for Global OEMs

Vendor base build:

• Strategically few
• Quality assured players
• Supplying Parts and Systems
Opportunities

•Leverage on MSAT growth

•Contract sourcing for Global OEMs

•Focus on players who do not have a sourcing base in India

MSAT - Production units
Business Structure

Business Verticals

Sheet Metal Gears Axle parts Engine parts

•PSSL
•Musco - Kanhe
•Hydroforming •M&M facilities
•Local Acq
•Overseas acq
• MUSCO
• Siroplast
MSAT: Building Blocks

MES Design, Tools, Prototyping, Integration, Packaging, Testing

MANUFACTURE:
CONTRACT MANUFACTURE Vehicles, Engines
COMPONENT MFR Gears, Axles, Engines- aggregates and parts
FINISHING Machining, Assembly
PROCESSES Casting, Forging, Sheet Metal & Stamping, Hydroforming
MATERIAL Steel, Composites

SSBU Sourcing base AND Component Development for OEs

MSAT: Value Proposition

MSAT, as a single, integrated entity with a cohesive strategy offers

the following unique value proposition:

•Full Service Supply: From Engineering Services to Steel; with the

Sourcing support of SSBU, MSAT becomes a robust Tier 1.

•Partnering: The model adopted moves the relationship up from

Vendoring to Partnering- From Art to Part, Design to Delivery