Is SsangYong relevant to Mahindra any longer?

While the adverse impact of the Covid-19 pandemic on businesses around the world is inevitable and likely to become clearer as the weeks go by, one of its first victims may well be South Korean automaker SsangYong Motor Co., owned by Indian automobile major Mahindra and Mahindra (M&M).

With M&M, part of the Mumbai-based auto-to-information technology business group led by Anand Mahindra, making it clear that it won’t be in a position to infuse the much-needed $406 million to keep its South Korean subsidiary afloat, speculation is rife on whether this is the end of the road for SsangYong, a carmaker that has been struggling for a while.

In February, the board of SsangYong had approved a three-year business plan that was expected to lead the company back to profitability by 2022. This plan would entail a total funding of $380 million- $ 425 million over these three years to repay the existing debt and augment capital expenditure (capex) needed for development of new products. The funds were expected to be sourced from a mix of fresh loans, new investments, and further equity infusion by Mahindra.

That was February 2020. While the novel Coronavirus outbreak had reared its head by then, the global extent of the outbreak, which originated in December 2019 from Wuhan in China, hadn’t been accurately estimated then.

Cut to April: The outbreak had afflicted over 1.4 million people around the world and resulted in over 82,000 deaths. The spread of the virus has been particularly rapid in India over the last couple of weeks. With over 5,000 confirmed cases and 149 deaths, the nation has been in a state of lockdown since March 25. While the lockdown was originally planned till April 14, there is every indication that it will be extended for a further period of time.

In this backdrop, when conserving cash has become of paramount importance to companies that have seen business come to a virtual halt, M&M said on April 3 that a request from the management and labour of SsangYong for a fund infusion of $406 million over the next three years had been considered by the board and rejected. In March, M&M’s own sales volume declined as much as 88%.

“The board noted that large parts of the global economy are under shutdown. India particularly is under an unprecedented 21-day complete lockdown. Only emergency services are operating, while everything else is closed,” M&M said in its statement. “After lengthy deliberation, given the current and projected cash flows, the M&M board took a decision that M&M will not be able to inject any fresh equity into SsangYong and has urged SsangYong to find alternate sources of funding.”

“Looking at the current scenario, and looking at Mahindra’s focus on the domestic market now, I think everybody has to look out on their own when it comes to funds for investment. Everybody’s pulling out money from everywhere,” says Gaurav Vangaal, associate director, automotive LVP (light vehicle production) forecasting, IHS Markit. “This is a tough scenario and I think it makes sense, not just for Mahindra, but for others as well because of the Covid-19 impact.”

However, to reiterate its commitment to its South Korean arm, M&M said that it would make a special one-time infusion of up to $32 million in SsangYong over the next three months to ensure continuity of business operations, while alternate sources of funding are being explored. In addition, M&M will support SsangYong in other non-fund initiatives such as capex-free access to M&M’s new car platforms, support technology programmes for capex reduction, support a material cost reduction programme and support SsangYong’s management to find new investors. In the interim, SsangYong’s labour and management have indicated that they will sell non-core assets, including a logistics centre in Busan, to raise short-term liquidity to stay afloat.

Mahindra’s investors also appear happy with the company’s decision to not infuse sizeable capital into SsangYong at the moment. From April 3 till date, M&M’s share price on the BSE has risen 16.4% to ₹327 a share. In the same period, the benchmark S&P BSE Sensex rose a little over 8%. Over the past one year, M&M’s stock price has declined over 51%.

In all of this, one remains ambiguous. M&M hasn’t commented on the future of its association with SsangYong either way. While stating that it will help SsangYong find new investors, the Indian company hasn’t specified whether it will continue to remain invested in it. It doesn’t mention the possibility of investing at least a portion of the $406 million requested at a later stage when the situation normalises either. On the contrary, it doesn’t even explicitly mention severing ties with the company, which it had bought in 2011 for around $450 million.

Some auto analysts suggest that a phased divestment of M&M’s stake in SsangYong is a distinct possibility. The South Korean carmaker has been struggling with losses ever since M&M acquired it, barring a brief period when it turned in a profit for calendar year 2016. After that, the company has reported 12 quarters of losses from 2017 onwards.

Plans for bringing SsangYong back on track in the past had included introduction of new car models and a reliance on exports to markets like the U.S. But much of this has failed to bear fruit and the U.S. entry never happened. SsangYong posted an operating loss of 282 billion won ($231 million) in 2019. Its total debt (including short-term and long-term debt) stood at 410 billion won ($335 million), a portion of which (around $74 million), availed from the Korea Development Bank (KDB), is falling due in July.

An analysis of the articles related to SsangYong that have appeared in the Korean media over the last few days paints a bleak picture for the company. Some have compared the automaker’s current situation to the predicament it faced in 2008, when its previous owner, China’s SAIC Motor Corp, dumped the financially distressed company four years after buying it.

Matters also stand complicated as Korea is headed for a general election later this month, and imminent job losses at a domestic manufacturing company won’t be in the best interest of the current government. South Korea has been relatively better off than other countries in the world when it comes to containing the spread of the Coronavirus, but it isn’t immediately clear whether the polls will continue as planned for April 15.

An article which appeared in The Korea Times on April 5 says: “Mahindra’s move is interpreted as a demand for the Moon Jae-in administration to choose between a bailout from state-run lenders or the collapse of SsangYong, which is a conundrum for the government and the ruling party wanting to avoid any job-related dent in their campaign ahead of the April 15 general election.”

From the point of view of M&M’s own future, SsangYong’s role may not be as strategic as it was in 2011 when it had bought a majority stake in the company. Since then, M&M has acquired Italian automotive design firm Pinanfarina; is in the process of acquiring Peugeot Motorcycles; and most importantly, has struck a wide-ranging strategic partnership with Ford Motor Co.

In October last year, M&M said it will pick up a 51% stake in Ford’s Indian arm and run its operations in the country. This would also include selling Ford-badged cars through M&M’s sales and service network. Before that Ford and M&M in 2017 had reached an understanding to share technological know-how with Ford sharing its expertise in electric mobility and petrol engines with the Indian company.

Consequently, M&M may rightfully think that focussing on and growing its partnership with Ford in India may be better use of its time and resources. In the past, M&M has utilised SsangYong’s utility vehicles platform for a few of its products in India like the XUV 300 (based on the SsangYong Tivoli) and the Alturas G4 (the Mahindra-badged version of the new SsangYong Rexton). It is also speculated that the new XUV500 would be based on the SsangYong Korando.

But after the introduction of stricter BS VI emission norms from April 1, electric mobility and petrol engines are widely touted to be the future of the automobile industry. This is evident from the strides that various automakers are making vis-à-vis plans to introduce electric cars and increasing sales of petrol engines over diesel-powered cars that have now become a lot more expensive. In such a scenario, M&M’s association with Ford (along with its own in-house product development efforts) may be more relevant to M&M’s future.