Spread too thin? Fewer businesses might make M&M a better conglomerate

When Mahindra & Mahindra (M&M) took the call in 2008 to acquire a two-wheeler business being sold by Kinetic Motor for Rs 1.4 billion, the consensus was that the company, known for its tractors and rugged sports utility vehicles (SUVs), could leverage distribution and brand equity to crack a booming motorcycle market.

But a decade later, after struggling with product launches and unshakable domination from entrenched players Bajaj Auto, Hero MotoCorp, and Honda, Mahindra Two Wheelers has notched up cumulative losses of some Rs 28 billion, a market share of less than 0.10 per cent and not much light at the end of the tunnel. Predictably, the company announced it would hit the brakes on future investments while remaining in premium segments of two-wheelers. 

Then, Mahindra Retail, which ran the Mom & Me chain of stores, expanded too fast and had to shift strategy. It shut down 25 company-owned stores in 2015 in a bid to go asset light through a franchise model. It went on to change its name to BabyOye as part of an investment in a dotcom by the same name, which was finally sold to Firstcry.com. There's more. Reva, an electric vehicle maker whose cars were expected to become trendy and popular across metro cities, was snapped up by M&M some five years ago but remains a small operation with just 1,000-1,200 units in annual sales. 

While the idea for the group was to dip its toe in emerging businesses that could potentially take off, most of those wagers have not paid off. Instead, they have diluted focus from core businesses like SUVs. Today, the auto business, comprised almost entirely of SUVs, is M&M's Achilles' heel with a dwindling market share, slowed sales and a product pipeline that missed the compact SUV segment — which Ford, Renault and, more recently, Maruti and Jeep have capitalised on (Ecosport, Duster, S-Cross, Compass).  

In November last year, even Tata Motors, whose passenger car business has been sluggish, beat Mahindra & Mahindra to become the third largest auto player. In December, the company regained its slot as the number three car maker out of the top five car manufacturers, even as it reported overall de-growth of seven per cent, with utility vehicle sales declining by nine per cent. The writing is on the wall.

In 1994, the group was structured around functions in six sectors — automotive, automotive components, farm equipment, financial services, infrastructure, and software. Since then, M&M has invested in businesses such as hospitality, defence, information technology, and electric vehicles, while exiting others (oil drilling and instrumentation). However, the reality is that it's the tractors, information technology and automotive businesses that drive the company's engine despite its in-roads into electric cars, planes, boats, holiday resorts, real estate, retail, infrastructure and other ventures. 

Revenue generated by M&M's automobile and tractor business and Tech Mahindra account for 86 per cent of the group's sales with M&M Finance and Mahindra CIE responsible for much of the remainder. It's not unusual for conglomerates to have a jewel in the crown. 

M&M declined to respond to requests for an interview with senior executives. 

Conglomerates, once seen as a dying breed, may still have wind left in their sails if they are re-positioned as national champions of industry. The disclaimer being that they can't be jack-of-all-trades and must specialise. But how many businesses are optimum in a portfolio?

Shashank Tripathy, partner and leader, PwC India, says, "Three separate businesses would be a good number for a conglomerate to base itself around. However, that's a broad rule of thumb." It's more important to realise that if a conglomerate is not in the top three, it makes sense to get out and focus on leadership verticals. He's not alone in that view. Sharad Verma, senior partner and managing director at BCG, says that today, any business house must look at each company within its competitive set and judge how it stacks up regardless of whether it is in a mono-line or multiple-line business. "Two factors that are built into making any conglomerate successful are capital allocation and talent management. In an industrial conglomerate that may have dozens of businesses, misallocation may mean that you end up starving a business that needs capital at the right time," he said. 

On that score, Mahindra is at crossroads. Its auto business, built on rugged SUVs, is struggling to remain at third place with Tata close on its heels. Tech Mahindra is India's fifth largest software company and other ventures in steel and components are tiny. 

The more pressing challenge according to a BCG study is that the span of time for a company's leadership position has been pinched, going from a decade to around five years now, Verma says. The velocity of change and disruption is much faster, as in the auto sector where self-drive cars, car-sharing, Uber, and electric vehicles disrupt dramatically. 

Wilfried Aulbur, senior partner with Roland Berger, says there is an argument to have a broader basket of businesses, especially in emerging markets with institutional voids. Brand recognition by customers, financing capabilities, cross-country logistics and other factors are areas in which Indian companies such as Tata, Mahindra, Godrej and others have been able to create value by leveraging their conglomerates. Aulbur says, "Portfolio management can be a challenge as leaders who have committed themselves to a particular business or approach may find themselves in a 'media trap'." Conglomerates may find it difficult to retract from previous investments even if they do not bring necessary returns, he said. 

A PROBLEM OF PLENTY 

* Mahindra Retail, which ran the Mom & Me chain of stores, had to shut down 25 company-owned stores in 2015

* Reva, an electric vehicle maker, was snapped up by M&M some five years ago but remains a small operation  

* Auto business comprised almost entirely of SUVs is M&M's Achilles’ heel