ANALYSIS-Ditching JVs, carmakers drive alone in India
By Henry Foy
MUMBAI, April 16 (Reuters) - Japanese automaker Honda Motor Co's (7267.T) Indian marriage is on the rocks.
Accusations by its local partner of "inappropriate" corporate governance and a tussle over future investment have exposed the perils of operating in a business model that has run out of gas for foreign automakers in India's booming car market.
As sales and their confidence rises, overseas manufacturers are tearing up local partnerships and pumping billions of dollars into wholly-owned Indian units, encouraged by the government's hands-off policy that gives it an edge over Asian rival China.
With more foreign car makers choosing to have complete control of their Indian businesses, investment is increasing, capacity is rising, and Asia's third-largest economy is fast challenging Thailand and China as an automobile export hub.
FACTBOX: Expanding capacity in India [ID:nL4E8D91EQ]
COMMENT: Car boost for India manufacturing [ID:nL4E8CV5KW]
"The automotive industry requires significant investment, particularly at the initial stages, coupled with a lengthy product development cycle," Michael Boneham, president of Ford Motor Co's (F.N) wholly-owned India unit told Reuters.
"Such capital intensiveness can be burdensome on partnerships, and the need for large investment and R&D can be difficult to maintain if it's not your core business."
Like Honda, Ford entered India in a joint venture, with Mahindra & Mahindra (MAHM.NS) in 1995. That lasted 10 years and sold a total of 120,000 cars. By comparison, Ford's subsequent solo venture, which has committed $2 billion to India, shifted almost 100,000 cars in the last financial year alone.
As companies look to tie-ups and joint ventures in Europe and other developed markets to cut costs and share technology, eight of the world's top-10 car manufacturers operate in India without a domestic partner.
"Carmakers now want to do further value addition and bring in proprietary technology, and want to run it on their own ... So they determine the fortunes," said Chandresh Ruparel, managing director of the Indian unit of Rothschild, who has advised Indian automakers on partnerships with foreign companies.
Honda's troubles stem from a battle over 32 billion rupees
($622 million) worth of fresh investment. The Japanese company wants to boost diesel engine production to meet a surge in demand. Local partner Usha International isn't happy.
"The relationship with (Honda India) has been weakened recently through inappropriate behaviour by Honda in the governance processes adopted by its board on significant decisions," said Krishna Shriram, Usha executive chairman.
"We have heard through press interviews that Honda would like to merge their companies in India together for greater flexibility, partly because of difficulties with their Indian partners," Shriram told Reuters. "We're quite hurt by these statements due to our belief we have been committed and true."
A spokesman for Honda in Tokyo declined to comment on whether the company is considering consolidating its two-wheeler and automobile operations in India. "We are constantly in close contact with our partner," said Tomohiro Okada.
Honda has been here before.
Insiders at the company had privately lamented the difficulties of getting things done at Hero Honda, the Indian motorcycle joint venture between the Japanese firm and India's Hero Group. Since Honda exited that joint venture last year in an $851 million deal, the company's fully-owned subsidiary has raced to second place in India's motorcycle sales rankings.
And Honda's troubles are not unique.
Fiat (FIA.MI), which has a joint venture with Tata Motors (TAMO.NS), is severing its distribution agreement with the Indian company in an attempt to boost sluggish sales. Tata's chief financial officer said in February that the relationship was not producing the expected results.
Renault's three-year joint venture with Mahindra was dogged by disagreements and poor communication between the partners: its sole product, the Logan sedan, was mauled by critics and was 25 centimetres too long for a lower tax bracket rivals enjoyed.
"We're late, but not too late," Renault India Managing Director Marc Nassif said this month as the French car maker takes a second crack at the market - this time on its own.
END OF THE AFFAIR
Joint ventures in India used to be all the rage.
Devoid of car making expertise, India scouted for foreign companies to kickstart an industry best known for the Ambassador, a chunky sedan based on Britain's 1948 Morris Oxford that is still made in Kolkata by Hindustan Motors (HMTR.NS).
In 1982 it sold the idea, and 26 percent of nationalised Maruti Udyog, to Suzuki Motor Corp (7269.T), and the concept was born. At the time, India was an automotive backwater where annual sales, mainly of foreign knock-offs, were below 40,000 - or one car for every 14,000 of its then 550 million people.
Subsequently, global majors such as General Motors (GM.N) and Toyota (7267.T) wanted local expertise to help scout for suppliers, set up sales networks, negotiate land purchases and - most important - navigate India's infamous bureaucracy.
That's no longer the case.
While India makes it tough for foreign operators in many industries, it has rolled out the red carpet for foreign car makers. States offer huge discounts on land for employment-boosting factories and the domestic supply chain for components and materials is well established.
"Today, it's easy to come in alone," said Vishnu Mathur, director-general of the Society of Indian Automobile Manufacturers, a domestic trade group.
"Traditionally, an Indian partner was always required to take you through a labyrinth of government process, procedure and policy," Mathur said. "But when the policy is so transparent ... then the need for a local partner diminishes."
Late arrivals such as Nissan (7261.T) and Volkswagen (VOWG_p.DE) entered with wholly-owned units. Those still weighing up the joint venture or subsidiary model, such as Japan's Mazda (7261.T), are unlikely to pick the former, analysts say.
Foreign subsidiaries accounted for 73 percent of India's car sales in the year to March 2011. Joint ventures in which foreign firms hold stakes accounted for just 7 percent. Total passenger vehicle sales in India were around 2.6 million in the year to end-March 2012.
India's open-door policy towards foreign car makers, which has allowed for 100 percent foreign ownership since 2002, mirrors the approach taken by Thailand, and stands in direct contrast to China, where foreign manufacturers must join up with a local player and get the deal stamped by authorities.
It's an approach that has paid off.
Unfettered by partners, Ford, Nissan and Hyundai have set up export bases in India, and total installed capacity has doubled to 3 million vehicles over the past five years.
India exported 520,000 cars in the year to March 2012, against Thailand's 2011 exports of 735,000 and China's 850,000.
Honda, shackled in an unhappy partnership, is finding it tough to ramp up capacity.
"We do not wish to stand in their way, but will insist on transparency and acknowledgement of missteps in a mature manner," said Usha's Shriram.
($1 = 51.4750 Indian rupees)
(Additional reporting by Annie Banerji in NEW DELHI, Chang-Ran Kim in TOKYO and Sinsiri Tiwutanond in BANGKOK; Editing by Tony Munroe and Ian Geoghegan)
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