Making money from cars is something that Vivek Chaand Sehgal, the 62-year-old chairman of Motherson Sumi Systems, says he learnt when he was eight or nine years old. He would charge his friends eight annas to play with his battery-powered toy car which his father had gifted him.“The batteries were expensive,” he says. Not only were the battery costs covered, there would be enough for ice creams, too. “So making money from cars was always at the back of my mind,” says he.
A global auto component empire spanning 41 countries bears out the Indian-born Australian billionaire though he cut his teeth in proper entrepreneurship trading silver when he was 18. Sehgal’s affair with the auto component sector began in 1983 when Motherson—the company he set up along with his mother with a capital of around ₹1,000 eight years earlier—entered into a technical agreement with Tokai Electric (now Sumitomo Wiring Systems) to manufacture wiring harnesses for Maruti Udyog (now Maruti Suzuki). When Motherson Sumi Systems, a joint venture between Motherson and Sumitomo Wiring Systems, listed in 1993 it was a ₹19.3 crore company. Now the company’s revenue has grown to ₹68,347 crore. The revenue of Samvardhana Motherson Group, the holding group of the company,stands at ₹81,893.4 crore.
A good part of the exponential growth of the group has been realised through 21 acquisitions across the globe. As much as 87% of the company’s consolidated revenue is generated abroad. The group now has over 270 facilities, 24 design centres, and 32 collaborators. There are some 135,000 people on the group’s rolls and 36 state-of-the-art research and development laboratories, and seven tool rooms. It sells its wares to the world’s top car makers such as Volkswagen, Daimler, and Toyota. More importantly, Sehgal has a 100% success rate of making his acquisitions, joint ventures,and other associate companies work—a rare feat.There may be murmurs over the drastic fall in the value of shares of the company. But the company stays committed to its strategy of pursuing growth both organically and inorganically. Last heard, it was in talks to acquire Leoni, a Nuremberg, Germany-headquartered company which makes wire systems, electric power distribution,modular cable harnesses, and battery cables.
What Sehgal has done through this acquisition spree is diversification and building a risk-free business model: Only those companies that add to Motherson Sumi’s product portfolio or expand its geographical reach are bought. For instance, the U.K.-based Visiocorp, the world’s largest rear view mirror manufacturer, acquired in 2009, and the 2011 buy of the Germany-based Peguform Group, which gave it a strong presence in the polymer modules business which involves making bumpers, dashboards, and vehicle cock-pits. These two acquisitions were key to making it one of the world’s leading manufacturers of auto parts. The polymer modules business makes the lion’s share of its sales, followed by the wiring harness—its primary product once upon a time—and rear view mirror businesses.
The Bhagwad Gita has a prominent place in the well-curated collection of books in Sehgal’s room at the company’s head office in Noida. Sehgal is into spirituality in a big way as evidenced by his collection. We expect a verbose speech about his takeover strategy and his general view of life and business. Maybe some management tips. Nothing of the kind. It is just this: “You have to plough the land, sow the seeds, and do all the hard work, and only then the money will come.” Before you recover from the simplicity of the answer comes the punchline: “The only strategy that I have is that I have no strategy, because very few long-term strategies work.” The company’s view on strategy does not stretch beyond five years. As of now, any change in strategy will happen only in FY20, when the current five-year plan comes to an end, under which it aims to achieve $18 billion in revenue. “In 2020,the top management will sit and decide whether a new vision is required because the last one has been achieved,” says Sehgal. And that could mean entering into new areas like aerospace parts, defence equipment (as a part of the offset strategy), and medical devices parts because of their excellent engineering skills. It will be the firm’s fifth five-year plan.
There are a couple of reasons for this approach. One, rapid advances in technology, and two, policy changes. As more and more countries push for greener emission standards and a shift to electric cars, it is important that a company like Motherson Sumi stays flexible and nimble to cope with change. “We’re not betting, we’re responsive. So,whatever is happening in the automotive industry, we’ll respond to it.I never second guess my customers,” Sehgal says.
Vinnie Mehta, director general, Automotive Component Manufacturers Association of India, says a major concern of the auto components industry is the lack of a definite policy framework: “If electric is the future, then I am extremely nervous because more than 50% of what I produce is going to be out of the window tomorrow. What is the road map that helps me in transitioning?” In this regard, Motherson Sumi, which supplies products to six of the top 10 electric car models,is ahead of the game. “It grows inorganically. It acquires technologies.In their DNA, it’s very different. Like they tend to acquire what they don’t have. They seem to have mastered the art of integrating companies, integrating different cultures into their system. So, I guess that is the advantage that they have,” says Mehta.
The company is categorical that any request for the takeover of a parts maker or technology provider must come from its customers. As light disruption in a car manufacturer’s production chain can hurt its efficiency and productivity, and set back delivery schedules.
“We do so only after making sure that we have all the resources to make the acquisition a success and add more value to the products and services (even after a request from the customer). We only pick those companies that want to be saved,’’ says Sehgal.
Though Sehgal’s acumen for acquiring the right company is slowly becoming the stuff of legend, he is quick to point out that his strike rate is very low—just 5%—because of the time and energy spent on planning and execution. “Nearly 90% of our time is spent in planning before any acquisition and only 10% in execution,’’ says Sehgal. “If I don’t get the right deal, I won’t do it.” And for making sure that the deal is right, the company leaves no stone unturned. “We never make an acquisition before setting up an office in that country and getting the local people to do proper due diligence,’’ says G.N. Gauba, chief financial officer, Motherson Sumi Systems.
When the deed is done, then the focus is on “customer delight”. Sehgal credits the long Japanese connection for this. “The Japanese taught us something brilliant, that was customer delight. Whenever we acquire a company, we ask them to raise their expectations before visiting our factories. We invite them to India to come and see the genesis of Motherson,” he says. “And they are shocked.”
Inside Motherson’s wire harness factory in Noida (one of the 35 in the country), close to 2,500 workers work in step with high-end industrial robots. What catches one’s eye and ear is workers taking memory tests of every wire harness fitting over and over again amid the constant clanking of machines. That’s how Sehgal ensures precision at the grassroots level. The company’s stated objective in its turnaround strategy—Sehgal is allergic to the word—is simple. He says improving the performance of the shop floor by making it more efficient will translate into better financial performance. The easiest way to do that is by eliminating waste. “If you can bring down the rejects from 10% to 6%, it will result in huge capacity augmentation and greater profits,’’ says Gauba.
Gauba says lowering rejects is key for an original equipment manufacturer (OEM) because when a car manufacturer discovers defective sup-plies, he appoints contractors to separate them.These contractors are paid from the amount earmarked for vendors or suppliers—a double whammy. Therefore, cost-cutting measures arewelcome, but orders that could entail cutting corners are not, says Sehgal. He would rather walkaway from them. “Do the right things, provid eexcellent services to customers, make beautiful products but never compromise on quality,’’ says Pankaj Mital, chief operating officer, Motherson Sumi Systems. The other reason for the company’s success on acquisitions is its financial discipline. “Our policy is never to exceed 2.5 times the net debt to Ebitda [earnings before interest, tax depreciation and amortisation] ratio, which essentially means that I should be able to pay off my debt in 2.5 years. Our comfort level is more 1.5-2 times,’’ explains Gauba.
The only time the company touched 2.5 times its net debt to Ebitda ratio was when it bought out Peguform for ₹890 crore. Says Seghal: “If my customer asks me to make an acquisition of $3 billion, I am not going to say no. That number is not cast in stone. And then do whatever is required to come back to the comfort level, which may take a few months.” But he will do nothing that threatens the bottom line. “But I won’t sacrifice everything for the top line. In fact, in every presentation of mine, I make it clear to my people that top line is vanity, bottom line is sanity and cash in bank reality.”
The company is clear that whenever it does an international acquisition in Europe it will be done in euro or dollar bonds, depending on where the company is located, but never in Indian rupees. Interest payment in India can go up to 15% to 16%—8% to 9% in interest plus the forward premium for borrowing in dollars or euros. “But borrowing in the international market is far cheaper because euro loans are available at 1.8% for five years, which is likely to come down further to 1% or 0.8%’’ says Gauba. A special team is always in talks with banks to replace high-cost debt with low-cost ones.
A top priority of Sehgal’s takeover strategy is getting all stakeholders on board—customers, labour unions, and the senior management of the company being acquired.
“If you have all the stakeholders on board and have gained their trust, it is easy to put the turnaround plan in place even if there are occasional hiccups,’’ says Seghal. Such an approach is important to defuse situations arising from hard decisions. Sehgal cites the example of moving the plant of Wexford Electronics in Ireland to Sharjah in the U.A.E. Wexford Electronics was the first company Motherson Sumi acquired in 2002. “Even though they [the workforce] knew that we are closing the plant in Ireland and shifting the plant and equipment to Sharjah, they still volunteered to train 60 of my employees for two months in manufacturing wiring harnesses,’’ adds Seghal. However, airlifting 80 containers of equipment to Sharjah and setting up the plant there, and then carrying the manufactured products to its customers in Europe was a logistical nightmare. But Motherson Sumi’s customers were in no way affected. The company also prefers the existing local management team to continue instead of looking to cut costs by putting in a fresh team. The regular practice is to have a town hall meeting with employees of the acquired company soon after the deal is sealed, answer all their questions, allay fears and remove doubts. R.C. Bhargava, chairman of India’s largest automaker Maruti Suzuki, whose ties with Motherson Sumi go a long way back, is full of praise for Sehgal’s management capabilities. “Sehgal’s single point agenda is the growth of his business. And he has developed an excel-lent management style. He knows how to delegate and trust people,and motivate them to perform,” says Bhargava.
Reydel, a Netherlands-based company that makes interior components and modules for PSA, Renault, RSM, Mahindra & Mahindra, Volkswagen, and General Motors, was Motherson Sumi’s acquisition No. 21; it was completed a few months back. This time, too, the buy ticked all the boxes. Reydel has 20 manufacturing facilities across 16 countries. The product portfolio complements that of other subsidiaries.
Also, it will help Motherson Sumi realise one of its goals under the FY20 five-year plan, according to an IIFL research note: “3CX15”.That is, no country, customer, or component should be more than 15% of total turnover—this is Motherson Sumi’s way of dealing with global volatility. Mital points out that since the group “does not trade across geographies, we have a natural hedge against currency and interest rate fluctuations, local government policies, and trade wars”.Also, if an acquired company has a global R&D centre doing front-end engineering work for one customer in any part of the globe, the basic engineering work can be outsourced to India or any cheaper place.
Though it’s loaded with tech chops thanks to its global acquisition spree, Motherson Sumi is pursing the organic path to innovation, too.In the light of views aired by industry veterans like Pawan Goenka, managing director of auto manufacturer Mahindra & Mahindra, that startups will play a huge role in generating data that will disrupt the industry, the company has set up an innovation centre with Sehgal’s son, Laksh Vaaman Sehgal, at the helm. “When we are making a new product, we are coming at it from the design stage itself. So innovation in some part comes from the carmaker and some from our own creativity,’’ says Sehgal Jr.
However, if the price of the stock of the auto part maker is any indication, Motherson Sumi’s market star has been on the wane since the be-ginning of last year with the stock value falling around 35%—a stark contrast to the spectacular run it saw with a rise in value close to 300% over the preceding four years. Rise in costs of raw materials such copper, the appreciation of the dollar, and startup costs for setting up new plants had caused the company to miss profit estimates in the quarter ended September 2018. Profit after tax in the quarter ended December rose 12% from the previous quarter though it fell 1.19%from the year ago period.
When we ask him about the change in the tide, Sehgal quotes Ghalib: “Mushkilein mujh par padi itni ke aasaan ho gayi. [I am saddled with so many difficulties that they all seem easy to bear now].” Sehgal knows it is only a matter of time before the tide turns again.
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