TVS – Suzuki : Alliance Turned Sour?

For all the attention the media bestowed on the eventual separation between TVS and Suzuki in their Chennai-based mopeds-motorcycles-scooters joint venture, the articulation of this arguably the most drastic development in its short life history, in the directors’ annual report to shareholders couldn’t have been more prosaic or clinical:

“Suzuki Motor Corporation, Japan (SMC) ceased to be a shareholder and provider of technology to the company pursuant to an agreement dated 27th September 2001, reached between SMC and Sundaram-Clayton Limited (SCL), the promoters of the company. During the year, the shares held in the company by SMC were acquired by Anusha Investments Limited (AIL), a wholly owned subsidiary of SCL. With the total holding of SCL and AIL in the equity capital exceeding 51 per cent, the company became a subsidiary of SCL, effective 15th November 2001.”

It was the culmination of what observers and analysts had termed a “troubled marriage: that was star-crossed right from the beginning with the partners’ divergent institutional aspirations with regard to the future of the business. Marriages of convenience, such as this one, do fall by the wayside, sooner or later. In October 2001, the board of directors of TVS-Suzuki Motors in Chennai met to discuss, besides the financials of the company, change of name to TVS Motors, following the exit of Suzuki from the seventeen year old joint venture that had led the company to rank third among producers of scooters and mopeds in India. Applying closure to joint ventures is not an unusual phenomenon and could be precipitated by a variety of causes. The most fundamental trigger however is the erosion of the basic need of the partners for each other. Among the needs that joint venture partners have of each other, learning is an important constituent; it could relate to technology, management practices, logistics and distribution management, local socio-cultural wisdom, and so on. Once this thirst is satisfied, the partners may begin to feel the redundancy of the other, especially if the agreements involve, as they normally do, joint decision making on key operational matters, as well as imposition of constraints on exploitation of overseas markets or use of domestically developed technological alternatives, and so on. A comment by Venu Srinivasan, the Chairman and Managing Director of the company in October 2001, months before the actual separation, succinctly underscores this vital constituent of such partnerships:

“A joint venture is a special purpose vehicle set up by two entities for the purpose of learning. It will work as long as both want to learn different things. Once this is achieved by either or both partners, it is time for disengagement.”

Most of the inter-partner problems in joint ventures arise from the asymmetry of the learning speeds of respective partners. The one who learns faster and hence reduces the dependence on the other is disengagement (nor inconsistent with any legally binding agreements between the partners), and their phasing. Is this what happened in TVS-Suzuki? Did each of the partners feel their respective business need for the other had been eroded so extensively that a break-up wouldn’t really matter? From the Indian partner’s viewpoint, it would not only seem to be so, but also had been articulated in public as well. For example, consider the following reported statement attributed to Venu Srinivasan, made just a few days before the actual separation was tabled at the board meeting for consideration and formal announcement:

“The Kawasaki deal has nothing to do with any Indian two-wheeler company. Bajaj may have a deal with Kawasaki separately, but that in no way is going to affect Suzuki’s deal with us. We have no fears about Suzuki pulling out of the existing joint venture.” (In September 2001, in response to questions on Suzuki’s reported deal with competitor Bajaj through the Kawasaki route).

And yet, within days, the company notified the stock exchange (preparatory to its board meeting on October 11, 2001) that the company would:

“consider a name change following the recent settlement on the overseas parent Suzuki Motor Corporation pulling out of the joint venture,” and also, “the possibility of disengagement of Suzuki Motor Corporation from the company both as a shareholder and a licensor.”

And the formal separation was approved by the board at that meeting. Thus ended a partnership that had been described as uneasy at the best of times over its decade and half plus tenure. Responding to press enquiries on the reasons for this (not unexpected) parting, all that Mr. Srinivasan would say was: “both of us desired to pursue our own business interests, markets and brands.”

STRATEGIC OBJECTIVES OF THE PARTNERS

Why indeed did TVS go to Suzuki in 1985 in pursuit of a joint venture: Responding to this question in 1997 when cracks had begun to show up in the relationship, Venu Srinivasan had said:

“We went to them 12 years ago (1984) not for technology alone but for strategic reasons. They had products off-the-shelf, while my development lead times were longer. Secondly, it gave us brand advantage. Thirdly, we learn work practices, manufacturing practices, vendor development practices.”

And again,

“The value-addition in two wheeler production is small – 70 per cent is the material cost. You need to make the product at the right cost oand develop and good vendor base. Technology is just a means to an end. It must meet the cost requirements of the customer. You have to provide a package.”

The strategic intent of TVS right from the beginning was thus explicitly spelt out from time to time: to gain brand advantage in the Indian market, to use virtually off-the-shelf products from the collaborator which would otherwise have taken much longer if developed indigenously, and to benefit from manufacturing and other processes that Japan was famous for. Once these were achieved, and internal capabilities had been strengthened, there was little that Suzuki could bring to the table, and still less that the domestic partner could learn from the other.

It is equally instructive to explore Suzuki’s approach to the idea of the joint venture initially, and its dissolution seventeen years later. It is common knowledge t hat Japanese companies in general had been eyeing the vast potential of the Indian market, and had been held back primarily because of the restrictions on foreign direct investment imposed by the Indian government in the post-independence protectionist and nationalistic zeal. Once there were signs of some thawing on these fronts, the Japanese, as indeed many others, were quite keen to get on board. Suzuki had one particular advantage, serendipitous or otherwise. They were in some ways very fortunate to have bagged the small car project (Maruti) originally envisioned by Sanjay Gandhi, the rising sun in the political arena, not the least because of his being the son of the then Prime Minister of the country, Indira Gandhi. Following his unfortunate demise in an air accident, the mother inherited the legacy and determined to turn her son’s dream into a reality. Suzuki won the collaboration not only because of it’s the small car demand at 200,000 units per annum by the year 2000, while other competitors were trailing far behind in the 50,000 units range. In a sense therefore Suzuki had tasted blood in its India foray, and was keen to strengthen its presence in India through a concerted strategy of sustained investment, not only in the small car company but also in a number for its two- wheeler operations, Suzuki was strategically and emotionally more than ready to jump in.

A second aspect of Japanese foreign investment strategy also needs to be borne in mind while reviewing its entry into the two-wheeler joint venture with TVS. It was a case of horses for courses. In the case of their investments in China for example, geographical proximity and Korean competition would dictate their business ventures. In case of countries like India, it was the sheer size of the untapped market that was the prime mover. Sundaram Iyengar, the founding father of TVS, aspired to provide transport independence to the teeming millions of middle class Indians, and Suzuki could see the spiraling demand for two-=wheelers in India and desired to participate and appropriate a fair slice of that cake. It was the same kind of aspiration (scaled up a keeping with the times)that led Ratan Tata later to work on providing a low-cost four-wheeler to the millions struggling in public transport and on two-wheelers leading to the Nano (the real small car of Tata Motors in 2009). Consistent with the Japanese philosophy of more than necessary commitment to projects they embark upon. Suzuki did put in financial, technical and managerial resources into the joint venture, with more than matching support from TVS in terms of local knowledge, management drive and burning ambition. TVS-Suzuki soon became a force to reckon with in the Indian two-wheeler market along with Bajaj and Hero Honda.

By the time the break-point was reached in 2001, had Suzuki come to the conclusion that its need for TVS was no longer as acute as it was in the 1980s and 90s? Clearly, in terms of acquiring a measure of local expertise on markets, logistics and business environment, Suzuki had probably learnt all it could both due to its presence in India, and through interaction with its Indian partner. Financially, the initial investments had probably paid back several times more through dividends, royalties and technical fees and so on. Whether TVS had the potential to offer Suzuki any further learning sources and opportunities which it could not be achieved (and the future prospects of achieving were indeed bleak) was to obtain total management control of the operations (unlike incase of the automobile venture where it has boiught out the equity of the other partner, the Indian government).

What Went Wrong?

The fly in Suzuki’s ointment was its partner TVS itself, which also nurtured similar ambitions. TVS went looking for help to achieve its ambition of being a dominant player in the two-wheeler segment in the country, not to be gobbled up by the multinational joint venture partner. The TVS script had been carefully and thoughtfully written out right from the beginning. Consider the following pointers:

1. While Suzuki’s equity holding in the joint venture company was peged at 25.97 per cent right through, TVS holding had moved up to 32.46 per cent, clearly establishing the latter as the senior partner in the venture. 2. TVS did not agree to a request from Suzuki in mid-1990s to increase its equity holding, and to have a more effective say in the company’s day-to-day management. 3. Prior to 1996, both TVS and Suzuki had an equal number of directors on the Board. In 1996, TVS had increased the number of Board seats in control to 5, one more than Suzuki. 4. In 1999, taking advantage of policy relaxations, Suzuki gave notice to TVS seeking to increase its equity holdings to a controlling 51 per cent failing which a concurrence to set up its own 100 per cent subsidiary. The proposal was vehemently opposed by TVS, and Suzuki dropped the matter. 5. When the foreign direct investment guidelines were relaxed in favour of easier entry of international companies without having to wait for concurrence from the Indian partners, if any, Venu Srinivasan was among the most vocal critics of the move. Although positioned as advocacy of the interests of the domestic industry, the direct personal interest in the matter, given the relationship with Suzuki, cannot be lost on the discerning observer. 6. When, in the early 1990s, Suzuki rejected TVS’s request for more funding to facilitate internal design capability, the joint venture company nevertheless went ahead with its plans for strengthening such capabilities, using internal funds. There could be no better indicator of the JV’s move towards self- reliance (just in case Suzuki’s contribution should diminish or disappear at a future date).

Both partners were thus on a mutually conflicting strategic course which did not permit or accord with management control, dominance, or even sharing to any extent by the other. Suzuki’s long term plans in the more relaxed foreign direct investment climate of the country was to have total control over its business operations. It had indeed been able to wrest such ownership and management control in the case of Maruti-Suzuki automobile operations. The circumstances were entirely different though: in Maruti-Suzuki, the partner was the state with no particular ambitions to play a lead management role in the later years of the venture, with both Sanjay Gandhi and Indira Gandhi, the initiating and inheriting champions, out of the scene. In TVS-Suzuki, the partner had such aspirations duly supported by an established brand presence and, what is more, with necessary design and technological capabilities assiduously, and with foresight, developed over the years. Quite appropriately, after the separation was formally effected, Venu Srinivasan would philosophically comment that he was neigher happy not despondent about the development. This was perhaps the strongest understatement in the entire deal process. Just a few months later, the real gleeful recognition of the achievement would seep through the veneer of detachment in the 2002 Annual Report where, in the Management Discussion and Analysis, a mandatory disclosure requirement, the company would comment.

“The ending of the partnership with Suzuki had meant a greater freedom and flexibility to grow according to TVS-M’s own perception of its priorities and goals, charting its own course for the future. Now TVS-M can design, and develop new motorcycles and upgrades of existing products to meet the changing customer needs not just in the Indian market, but also abroad, TVS- M has not longer any restrictions in designing and developing , manufacturing and selling products for the overseas markets. TVS-M can thus more fully exploit its capabilities in design, development, manufacturing and marketing of two-wheelers and attempt penetrating Asian and other markets.”

As the cliché goes, “the choice was clear!” If Suzuki wished to work towards achieving their ambitions of being a lead player in the two-wheeler segments in India in their own right, they had to part company with TVS, and venture out afresh on their own. This, in the event, is what they chose to do. After nineteen years of cohabitation, TVS and Suzuki agreed to go their respective ways, each confident of achieving its own goals in grand isolation. Source: Adapted from Government Issues in Corporate Partnerships and Separations: N Balasubramanian

Suzuki and TVS: Strategic compulsions

D. Sampathkumar

WHEN an alliance has lasted a decade and a half, as the TVS-Suzuki collaboration in two-wheelers has done, few would cay it is a shotgun marriage that could end up in a Mexican-style divorce the next day. Mr Tarun Das, Director General with Confederation of Indian Industry, had in the past given the impression that business alliances, if not seen as having the same endurance that the Catholic Church vests vows of matrimony with, ought to be reasonably longstanding. Even he would have far less reason to brand Suzuki's walk-out as yet another example of 'cowboy capitalism' -- the business equivalent of 'shoot first and ask questions later approach -- an appellation he had bestowed on many other alliances that broke up.

It is now pretty clear that the latest development merely presages an entry by Suzuki into the Indian two-wheeler market on its own, at a later date. Even if the relationship between the two had been marked by tension while it lasted, the parting of ways need not be an indicator of bad faith on the overseas party to the domestic alliance. In a world economy that is integrating itself along global lines, it is perfectly reasonable for a player to want to reach out to the outlying areas of the global market place that it does not serve in its own capacity, at the present moment.

Also, it could be argued that an alliance of some duration, such as in the instant case must necessarily have been mutually beneficial for any one party to be saddled with the odium of displaying bad faith. If the alliance has helped Suzuki to understand the Indian two-wheeler market and thereby secure a better foothold here when it seeks to enter on its own, so too it could be said that TVS had gained an insight to the Japanese way of doing things.

It is not difficult to see the strategic compulsions behind Suzuki's move to quit the alliance and strike out on its own. For a company that started its business journey manufacturing textile looms, it has come a long way with a significant presence in automotive business. Incidentally, Suzuki shares a common history with its more celebrated rival Toyota, as the latter too started out life manufacturing textile looms. Today, Toyota has left other Japanese car manufacturers way behind. But that is another story.

The basic problem confronting Suzuki is its narrow product and geographical focus. Nearly two-thirds of its income accrues from automobiles and 70 per cent of its total income is accounted for by the home market, Japan. This would not have mattered so much if the Japanese economy was robust, or if Suzuki enjoyed leadership position in the automobile market. But unfortunately, neither of these conditions exist for Suzuki to leave things as they are.

The Japanese economy has gone into a long-term recession from which it is not showing any signs of recovery. In fact, given the economy's structural deficiencies and a demographic profile which shows an aging population, any dramatic improvement in the economy and by extension, car sales as well, in the medium term, can be ruled out. Similarly Suzuki cannot also hope for a leadership position in the automobile market in the near term. It is way behind at fourth spot, with Toyota, Honda and Nissan ahead of it. Even this fourth position does not seem all that impregnable with Mitsubishi, Daihatsu, Fuji, etc., snapping at its heels.

The situation may or may not be ripe for an immediate shakeout. But the prospect for all but the top two or three players in the industry can be none too good. Lending momentum to the process is the global forces at work. The global automobile industry might be left with just four or five players -- a situation that does not leave much room for most players but the top ranked ones, reckoned on a global basis. It is entirely possible that Suzuki may be vacating the major lines of passenger car market for General Motors and perhaps concentrate on mini cars and station wagons. For Suzuki, then, the situation clearly calls for hedging its bet on the motorcycles business, where it has a superior leadership position on a global scale. A thrust into India on an independent basis is a strategic imperative.

The global manufacturing sector is inexorably moving towards a situation of commoditisation of manufactured goods. A diffusion of manufacturing know-how and global access to capital has made it (commoditisation) so. Each manufacturer tries to counter this by building in a value proposition in his manufacture through product innovation and brand promotion. But success, such as it is, is only transitory. Once customers realise that all features are universally available (logic of commoditisation implies that this is so), the price becomes the key attribute for success in the market place.

A winning edge in price can come about only through cost efficiencies. Superior cost efficiencies are possible only for those with manufacturing capability on a global scale. A virtuous cycle of scale economies contributing to larger volume of sales gets repeated many times over. Any strategy of securing a global operating space in motorcycles is inconceivable without a presence in India, a huge market by any yardstick. It is precisely for this reason that Suzuki could not have allowed too much operating space to its Indian co-promoter so that the joint venture could assume a commanding presence in the Indian market.

Any gains made by the joint venture would make the later day entry of Suzuki that much more difficult. If the local promoter wanted more product innovation and technical inputs, Suzuki could not have acquiesced without compromising its own long-term prospects in the Indian market on a standalone basis. The joint venture, by the very nature of differing expectations and aspirations among the partners, cannot but be an uneasy alliance -- one bound to break up sooner or later. The break-up of the Suzuki- TVS group's joint venture must be seen in this context.

Where does that leave the TVS group? If it had seen the inherent contradictions in the respective positions and prepared itself for this day, all may be well. For then, their strategic response could be set to be already under way and success may be just round the corner. If, on the other hand, they had not prepared for this day, their response is going to be delayed that bit longer and this would begin to reflect on their financials sooner than later.

Source: http://www.thehindubusinessline.in/iw/2001/09/30/stories/0830h151.htm

Suzuki to alight from TVS pillion

Our Bureau

CHENNAI, Sept. 26

SUZUKI Motor Corporation of Japan is set to exit its two-decades old joint venture, TVS- Suzuki Ltd.

TVS-Suzuki today announced that it would hold a board meeting tomorrow to ``consider the possibility of disengagement of Suzuki Motor Corporation from the company both as a shareholder and a licensor''.

The board meeting is to be held in New Delhi, because ``they (the Japanese collaborators) are all there and it (the deal) was mediated there'', a senior company official told Business Line.

No further details are available - TVS-Suzuki's Managing Director, Mr Venu Srinivasan, declined to comment, saying that it would not be proper for him to do so before the board meeting.

Suzuki Motor Corporation has a 25.97 per cent in the Rs 23.10 crore equity of TVS- Suzuki.

To observers of the Indian two-wheeler industry in general and TVS-Suzuki in particular, Suzuki's move to exit the joint venture comes as no surprise. The two partners had always had an uneasy relationship.

In the early 1990s, the Indian side lobbied hard against Suzuki increasing its stake in the company.

Besides, Suzuki Motor Corporation's contribution to the joint venture was shrinking. With the exception of the two-stroke 'Suzuki Max 100' R, an evolution of the original Ind Suzuki, none of the company's fast-selling two wheelers had a major Suzuki cont ribution.

TVS-Suzuki's 'bread and butter' product, the mopeds, is all Indian (although there is a lingering suspicion that it is an adaptation of a moped model called Go-go VA of Batavus of Holland). The hugely successful TVS-Scooty again is a non-Suzuki product.

It was only in two-stroke motorbikes such as the Max 100 R and the Samurai, and the four-stroke Suzuki Fiero, that TVS-Suzuki had to rely on the collaborator's technology, and of course, kits.

However, with the waning-off of the two-stroke motorcycles in India, and with the recent launch of the all-Indian 'TVS Victor', it was clear that the Indian side could do without the Japanese collaborator.

When TVS-Suzuki launched the Victor, company officials said ``off the record'' that the collaborator was not too happy with it, because it would, among other things, mean that TVS-Suzuki would buy fewer kits from it.

Some signs of trouble between the collaborators emerged a few months ago, when both parties separately bid for the public sector Scooters India Ltd. It was then whispered that Suzuki wanted a manufacturing facility of its own in India and Scooters India offered quite that.

The absence of the Japanese collaborators at TVS-Suzuki's annual general meeting held on September 21, was another indication that all was not well between the partners.

From Suzuki's point of view too exiting the joint venture appears appealing. Two other compatriots of Suzuki, viz., Honda and Yamaha, are today on their own in India, having jettisoned their erstwhile partners.

Furthermore, the recent strategic alliance between Suzuki and Kawasaki created a conflict of interest, as Kawasaki has a successful joint venture with Bajaj in India. http://www.thehindubusinessline.in/businessline/2001/09/27/stories/14270701.htm

The mathematics of a TVS minus Suzuki

M. Ramesh

CHENNAI, Sept. 27

MR Venu Srinivasan, Managing Director, TVS-Suzuki Ltd, has a Tamil nickname - 'moped mannar' (moped king). As things look today, the name may stick more than ever before. With Suzuki Motor Corporation getting out of the joint venture, the general opinion is that the company would be pushed into the confines of the entry-level two-wheeler market.

TVS-Suzuki (or whatever the company will be called in future) has a 30-month space to learn to be all on its own. The period coincides with the completion of the process of separation of Hero Motors and Honda. During that time, TVS will conceivably acquire mastery over the products at present manufactured under a licence from Suzuki--Max 100 R, Samurai and Fiero. The question is, beyond 30 months, what?

Recently, Mr Srinivasan told his shareholders that the company proposes to spend around Rs 250 crore over the next three years, only on developing new products.

The biggies in the motorcycles business - Honda, Yamaha, Suzuki and Kawasaki - won't have to spend anything. Honda has over 400 models in its stable. The others have lesser, but certainly in the upwards of 150 models each. To be able to compete with thes e giants is not going to be easy for TVS.

TVS's track record of in-house product development is not good. Over the last seven-odd years, there has been a string of failures - the 110 cc Shogun, the 135 cc Shaolin, the 100 cc Supra and Supra SS - all adaptations of Ind Suzuki. These products were developed in India and got approved by Suzuki. However, Ind Suzuki itself, in its other name as Max 100 R, is still a fast-seller. As regards the new TVS Victor, it is too early to judge.

Even in the non-motorcycles segment, the 50 cc Super Champ, the 60 cc Astra, the 70 cc TVS Sport and more recently, the 150 cc scooter Spectra, all turned out to be lemons.

Today, essentially the company has four successful products - the moped TVS Champ, the scooterette TVS Scooty and the motorcycles Max 100 R, Samurai and Fiero. Victor may or may not prove to be successful.

The moped market has been hit by the recent lowering of the excise duty on scooters and motorcycles, which has narrowed down the price difference between them and mopeds. However, it is still the entry-level vehicle - any one who wants to 'graduate' from cycles to a motorised vehicle will go to a moped shop. Here comes the strength of `moped mannar's' company.

TVS Scooty is selling well. The company proposes to introduce 4-stroke versions also in the next couple of years, thought it is not clear, at what cost. Even today, TVS Scooty costs almost as much as the recently-introduced 4-stroke Bajaj Boxer.

Conceivably, the Japanese majors will also be eyeing this segment. These players may not care much about margins in the short run, or make their profits in the higher-end models. The competition in this segment is intense, and can be expected to intensif y further.

Again, coming to motorcycles, TVS will not only have to compete with the technical and financial might of the Japanese majors, and presumably with imports also, but will also have to fight a mind-set. A totally indigenously developed vehicle is not treat ed with a great trust in this country.

On the other hand, there is also a view that TVS should not be written off. One option is to source design and development from abroad. There are companies like Tokyo Engineering of Japan, AVL of Austria (which had a hand in Victor) and Cagiva of Italy.

Some analysts believe that, now that TVS is freed of Suzuki, it could access technology from anywhere - different sources for different vehicles.

But until details on these issues emerge and the picture gets clearer, the odds are loaded against 'TVS minus Suzuki', as the hypen in TVS-Suzuki may today mean. http://www.thehindubusinessline.in/businessline/2001/09/28/stories/022807zu.htm

Questions for Analysis:

1. Analyse the type of alliance between TVS and Suzuki using the typology of alliances studied. Comment on the business level and corporate level aspects of the alliance, TVS used for its strategies. 2. Based on the facts given in the case, do a fitness analysis of the alliance from the point of view of TVS & Suzuki and identity the probable gaps which could have been addressed by the partners. 3. Make an analysis of the design and governance issues in the alliance and illustrate the same using suitable diagnostic frameworks.