CEO Speak

M&M MD Pawan Goenka on dealing with economic slowdowns

Pawan Goenka, MD of Mahindra & Mahindra, talks to Outlook Business on the necessity of investing in the company even during a slowdown

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Published 2 years ago on Jan 02, 2019 Read

The auto sector has been hit the hardest in this slowdown. At a time like this, are you thinking big or small?

There’s a saying, “A slowdown is a terrible thing to waste” and I truly believe in that. This is the fourth slowdown in my management career and each one has been a learning experience. One of the most important things to remember is to never mortgage the future even when you are on a cost-cutting drive. In the auto industry, the investment cycle is three to four years, and slowdown cycles have been five to six years. If you stop investments during every slowdown, you will never have any products for the future. Next, you need to make systematic changes in the way you do business. So, when the good times come, which they always do, you are ready to sprint. You should always come out of a slowdown much fitter and leaner. Third, if you have a good balance sheet, you’ll find opportunities for inorganic growth that you wouldn’t have found in the good times. You must look to leverage such opportunities. While you do all these things, you also need to keep employee morale high. And if you are the ‘big brother’ in the industry, like most auto OEMs are, you have to ensure that you do not pass on your woes to your dealers and suppliers.

But do you think that is feasible, because even the large companies look to protect margins? The easiest way to do that is by pressurising suppliers.

Suppliers and dealers have to co-exist in the ecosystem. The ones who pressure their suppliers during a slowdown are not thinking long-term. The benefits are only for a short time. You spot your fair-weather and true friend only during a slowdown. Suppliers and dealers will remember how OEMs treated them in the bad days. If you treat them well, they will pay you back when you need help. This is not something you build over one slowdown or in a few months. This should be inculcated as culture of an organisation. Furthermore, if you burden your suppliers, the weaker ones will go out of business. That’s not good for anyone and brings me back to my earlier point of not mortgaging your future.

Is it hard to drive consensus on what has gone wrong, even within the company?

During a slowdown, there are two factors at play — external and internal. It’s easy to get consensus on outside factors. Everyone will agree that it’s the oil prices, interest rates, consumer sentiment, commodity prices and so on. Internal reasons cause conflict. When things are going well, everybody takes credit for it. When things take a bad turn, nobody wants to take the blame. The leader’s most important task then is to avoid formation of silos and ensure that the whole leadership team is working together. For instance, October has been one of the best months for the auto industry in the past 15 months. For Mahindra, particularly, it was better than the industry average. This was partly because the leadership team got together at the beginning of the month and said we had to win in October no matter what happens. We believed once we did that, there would be a virtuous cycle that would set in. So, the whole organisation worked together as one team without any question. Of course, you can’t do that every month. But an internal alignment is absolutely crucial for any leader.

Another challenge the auto industry is dealing with is tech disruption. How do you deal with this uncertainty?

In all fairness, what has happened from the early nineties till today has been good. There is more competition, so you have to fight to win a customer, with the best in technology and the right prices, and you have to know your business… unlike during the ‘licence raj’ when whatever an OEM made would be bought. Today, the winners are the customers and we (auto companies) are customers too. Coming back to the slowdown, it is a time to improve systems and processes. This is a good opportunity to push through reforms. We have to list down things we could correct during this phase and ensure that we emerge better when the tide turns.

But, this is a particularly trying time for the auto industry. This slowdown has come at a wrong time, though there is never really a good time for it! But this timing is worse because we are in the midst of the BS-VI transition and, after March 31, we have to stop selling BS-IV vehicles. Any industry insider will tell you it’s difficult to manage a cut-off for sales, because we can control how much we manufacture, but not by when we can sell that product, particularly big-ticket items such as cars. Second, we have to manage the change in technology and the rise of electric vehicles. Add to that the whole dynamic of mobility, which is changing with ride-hailing companies. Therefore, the industry needs to have the financial strength to make these transitions and, with many strained balance sheets right now, it is much more difficult. There is no doubt that five or seven years from now, the auto industry will look very different than what it is today. Hence, while we work on tackling the slowdown, which is an immediate short-term problem, the bigger need, frankly, is knowing how to manage the multiple emerging scenarios. Nobody knows today which one will play out.

Also, the difference between 2008 and now is that nobody questioned if there was a slowdown then. In FY09, the first financial year after the 2008 slowdown, Q1 saw growth in sales, Q2 was flat, Q3 saw de-growth of 15% and Q4 was flat. The next year, the industry had the highest ever growth, of 25%. So, the industry faced only one quarter of de-growth. This time, we have had five quarters of decline, and over the past two consecutive quarters, every segment has de-grown for the first time. Last quarter, there was de-growth of 25% in the industry, a first since 2001. A lot of people are wondering if the slowdown is structural or technical, I hope it is not the former. But, if it has lasted this long, we have to wonder.

How are you dealing with the slowdown at Mahindra?

We are not cutting down on any market expansion or product, brand or people development. We are only cutting down on discretionary expenditure. For example, we are holding off-site meetings in-house, ditching hotels. We are also reducing travel for internal meetings by using digital means of communication. These may sound trivial, but we are likely to save as much as #500 million this year due to such initiatives. The good thing is that many of these cost-cutting measures actually make us more productive and will be continued even after the slowdown.

We are also using the slowdown to make some structural changes — introspecting to see where we have unnecessary layers of management. Some of these changes require a cultural change, but at the end of it all, they will make us more productive and agile, and serve us well when the good times return.

Does today’s scenario throw up a lot of distressed-asset acquisition opportunities?

Certainly, opportunities do show up. However, one should not buy a distressed asset just because it is available. It has to address a strategic necessity.

How do you prioritise R&D in a slowdown? 

I’d like to explain this with examples of two of our most successful products. The Scorpio was launched during the 2002 slowdown and the XUV500 when the 2008 financial crisis was developing. We also undertook our largest capex, that of the Chakan plant, during that slowdown. I cannot imagine where we would be if we had decided to slow down these projects back then. You have to have the confidence that good times will come back and that you will be ready with your products to be in the front row. As I said earlier, a slowdown is a terrible thing to waste.

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