Collaborative competition

Mahindra & Mahindra has turned around Punjab Tractors to make it the third-largest tractor manufacturer in the country. Its now competing head on with the market leader Mahindra itself

In 2001, Mahindra & Mahindra had decided that it should go for total dominance in the tractor market. It benchmarked its productivity and financials (return on investment and so on) against two of the most-efficient tractor companies in the country; one was Punjab Tractors owned by the Punjab government. It had a robust product, its financials were impeccable and the company was right on top when it came to after-sale service. It was the only tractor maker that took money from buyers in advance and delivered later. In 2007, word got round that the new owners of Punjab Tractors, private equity firm Actis and Mohit Burman, had put it on the block. Mahindra & Mahindra grabbed the company by paying Rs 1,370 crore.

Investment analysts said that Mahindra & Mahindra had overpaid. The companys fortunes had taken a dip in the last few years. Punjab Tractors market share had shrunk from 18.6 per cent in 1999-2000 to 8.1 per cent in 2006-07. Consequently, it had slipped from the third spot to the fifth. Profit after tax fell more than half from Rs 133 crore to Rs 65 crore during the seven-year period, and return on average net worth had slumped from 39.8 per cent to 9.9 per cent. Net product revenue too fell from Rs 1,017 crore to Rs 959 crore.

Three years later, Mahindra & Mahindra President (automotive & farm sector) Pawan Goenka says Punjab Tractors has done better than what was hoped. Even in our best estimate, we didnt expect it to turn around the way it has turned around, says he. We paid that much because we thought the synergy with Mahindra & Mahindra would be far bigger than anybody else; therefore it was worth a lot more to us.

Punjab Tractors has now been merged into Mahindra & Mahindra, though it runs as an independent business unit called the Swaraj division (Swaraj is the brand of its tractors); so, its profit & loss numbers are not in the public domain. But there are some indications of what has transpired in the last three-and-a-half years. The companys target was to double the turnover and triple the profit in three years. Goenka says the target has been met. Thus, the Swaraj divisions turnover could be in excess of Rs 1,900 crore and profit in excess of Rs 400 crore in 2009-10.

Tractor volumes jumped over 60 per cent from 30,045 in 2006-07 to 49,422 in 2009-10. This year, Goenka hopes to sell over 60,000 tractors. The other target was to become the second-largest tractor brand in the country after Mahindra. That has not been achieved till date. With 12.5 per cent share, Swaraj is third in the sweepstakes after Mahindra (29 per cent) and Massey Ferguson of TAFE (14 per cent). Mahindra & Mahindra Farm Equipment Sector Chief Executive (tractor & farm mechanisation) Bishwambhar Mishra says Swaraj will become number two only in 2013. To be fair, to increase share in a market that is growing at 15 per cent per annum isnt easy. (Tractor sales are expected to cross 460,000 in 2010.)

When the analysts had raised the red flag on the acquisition, they had probably underestimated the problem. Sometime in the late 1990s and early parts of this decade, Punjab Tractors had got into the market-share game. It thus began to push its tractors aggressively with the dealers. The chickens came home to roost in 2001-02 when there was a severe liquidity crunch after the dotcom bubble had burst. The company found that the unsold stock with the dealers added up to 30,000 tractors, way above its annual production of 24,000 tractors. As a result, the receivables had risen to Rs 735 crore. When Mahindra & Mahindra acquired the company, the stock with the dealers had come down to 12,000 tractors but the receivables were still Rs 585 crore.

This was accorded top priority. Dissatisfied dealers can ruin any company. To liquidate the inventory, production was curtailed. A scheme was introduced whereby the dealers could repay the money to the company in parts. By a stroke of good luck, the tractor market picked up around that time. The inventory got sold within six months and 80 per cent of the receivables were in the companys coffers within a year. It was a setback for six month but gave us a long-term advantage, says Mishra. We dont push our tractors to the dealers any longer; we produce only when the dealers need the tractors. Adds PINC Research Vice-president Vineet Hetamasaria: After the takeover, the dealers were told that they will not be given extended credit and the credit period will be 30 days. Hence, capital got released.

On doing the rounds of the two Punjab Tractors factories located around Chandigarh, it was found that the machinery was by and large okay. No huge investments were required, though some money had to be spent on balancing equipment and automation. Customer feedback suggested that the look and finish of the tractors were not contemporary; these hadnt changed in 35 years. The looks were thus made youthful and vibrant colours began to be used.

Punjab Tractors sourced engines from Swaraj Engines which it owned 51 per cent along with the Kirloskars. The engines were well known for their ruggedness. What was lacking was fuel efficiency. Up to 70 per cent of the operational cost of a tractor can be fuel. The efficiency of the engines has since been improved 4 to 5 per cent, which, according to Mishra, can save a farmer up to Rs 8 per hour of usage.

Independent research
Since the company was chasing numbers, it had not invested sufficiently in research. Consequently, there had emerged gaps in the portfolio, especially in the 40 to 45 hp segment. With rising incomes, farmers in India are upgrading to bigger tractors. There is increased usage of tractors for commercial purposes like renting it out to other farmers or the construction industry. It is viewed as more than just a transport vehicle or equipment for tilling the land, says Religare Capital Markets Analyst Kaushal Maroo. Thus, in 2009, the Swaraj division thus came out with a new tractor, the 843 XM, for this segment. It is now working on a new single-cylinder tractor for loose soil.

Interestingly, Mahindra & Mahindra has left its research department more or less independent; it shares just a handful of services with the Mahindra & Mahindra team like computer-aided engineering. To put it in perspective, Mahindra & Mahindra has merged the research teams of its automotive and Mahindra tractor divisions.

Also, the Swaraj vendors have not been replaced en bloc with Mahindra & Mahindra vendors. A lot of the Swaraj vendors are local producers in and around Chandigarh; those we have decided to leave untouched. Some of the critical components that come from outside have been aligned with Mahindra & Mahindra. There is no point force-fitting everything, says Goenka. Mishra says that Mahindra & Mahindra has helped the Swaraj division get better rates from the common suppliers. This has resulted in savings of up to Rs 4,000 per tractor. In the last three years, the vendors close to the factories have been given information technology as well as financial support in the form of soft loans. We source components worth Rs 800 to 1,000 crore from vendors in our neighbourhood. To safeguard our interest, we might even take an equity stake in some of our critical vendors, says Mishra.

Another area of synergy is finance. Mahindra Finance, the consumer finance arm of Mahindra & Mahindra, was brought in to finance Swaraj tractors. This has helped it expand the market.

Employee efficiency
The bigger interventions have been in the fields of human resources, distribution and marketing. The first thing that Mahindra & Mahindra Vice-chairman Anand Mahindra did after taking over was to announce that Swaraj was an important brand that will be protected and promoted, and it wont be subsumed by Mahindra. He assured the employees that they will not be swamped by people from Mahindra & Mahindra. Thus, the old Punjab Tractors team is more or less intact. Only two or three new faces were brought in, and that includes Mishra who was working for Mahindra & Mahindra in China. It was very important for us to keep the operations independent because one of the strengths of the Swaraj division was its very frugal way of working. It had tractors that were low in cost, and it was quick in taking decisions. We didnt want to disturb any of that, says Goenka.

To allay the apprehensions of the factory workers, daily morning meetings at the shop floor were started. Performance and prospects were shared with all employees every quarter. A biannual gathering of workers was started to reward those who had performed well. Japanese efficient practices like Kaizen and JIT (just in time) were brought in. It now wants to go for the prestigious Deming award for total quality management. Training of workers was stepped up. A five-minute film called Pagdi sambhal jatta (hold your turban high) was made to tell the workers that things can change with determination. Salaries, that were in most cases half of comparable staff at Mahindra & Mahindra, were over three years brought at par.

The biggest change perhaps has been the introduction of a performance management system. The salaries of all the 1,000-odd employees have thus been linked to performance indices like profits, customer satisfaction, improvement in processes and new product development. The variable component of the salary ranges from 8 per cent to 20 per cent. We came in sometime in July 2007 and rolled it out in September, says Mishra. Never before was this done on such a scale or such speed. The trade unions were kept on board, and they readily agreed to the new system. The results, say Swaraj division executives, show a drastic improvement. The productivity in 2007 was 2.87 tractors per person per month. It has now improved to 3.9 and the target is to hit 4 by March 2011. This will still be below Mahindras 4.5, but that is because the Swaraj division does most of its work in-house.

Mahindra vs Swaraj
The marketing teams of Mahindra and Swaraj have been kept separate, and both are encouraged to slug it out in the market place. Territories too have not been demarcated between the two brands, though Swaraj has stronger brand equity in the North. Both the brands are free to compete wherever they want. If we make boundaries, the value of each brand is lessened, says Goenka. Mahindra is number one in all states except two or three. Swaraj is not number one in any state but is number two in few states and number three in others. I have coined a term called collaborative competition for the two. Mahindra & Mahindra wants to set up a tractor factory in the South; it is likely that it will roll out Swaraj tractors as well. That will help Swaraj spread into the southern markets. Of course, Mahindra is the chosen brand for the overseas markets and not Swaraj. Adds Goenka: Swaraj is a very Indian brand and its focus will be India.

A drive was mounted to motivate the dealers. Used to being taken for conferences to destinations within India, the Swaraj dealers were taken abroad to Greece and Thailand by the new management. Careful audit of dealer satisfaction was done. This score has seen an improvement, says Mishra, though he does not give the numbers. The dealers have been trained under a programme called Jeet lo dil (win the heart) on how to deal with customers before as well as after sale. The performance of each dealer is measured and the best performers are rewarded. The dealer network has expanded from 535 in July 2007 to 615 now.

Customer satisfaction studies were also carried out. In 2008, the Swaraj division called existing customers from all over the country to show them the factory and products, and their opinion was sought. When the new tractors reached the dealerships, they were called to see if the changes they had proposed were carried out to their satisfaction or not. The idea was to make them our brand ambassadors, says Mishra. A service called SMS or Swaraj Mobile Service was started wherein mechanics would travel on motorcycles to fix any problem that may have occurred in the tractor. The Swaraj division also studies the CAP or customer-as-promoter score will you recommend the brand to others? The score for Swaraj improved from 8 per cent in 2008 to 61 per cent in 2009 and 71 per cent in 2010, says Mishra. This is the highest in the industry, higher than even Mahindra.

Therein perhaps lies the lesson on how to turn an enterprise around. We didnt have to tear apart what was there; we just plugged the holes. There was not enough energy, and thats what we provided, says Goenka.

Preeti Khicha contributed to this article