In May 2011, Pravin Shah, the CEO at Mahindra & Mahindra, was evaluating four possible options of company’s growth strategy in the South Africa. Those options included: entering into agreement with the local vendor for the contract assembly of M&M vehicles, investing in its own manufacturing plant in South Africa, using South Africa as a hub for the further export of the other countries and lastly waiting and watching until enough vehicles are sold for the sustainable long term growth. Once those options were evaluated, Shah needed to present the final chosen one to the board of directors for the final approval on the best strategy for company’s growth in the South African Market.
1) Which option should Shah chose?
Based on the information presented in this case (and not based on the class discussion and video presented), I would advise Shah to exercise the wait and watch strategy at a given period of time. Shah was faced with this decision in 2011, which was only a few years after the global recession took place. Even though they had an outstanding result in 2010 showing the growth of sales at 24% and making the projections for the further sustainability, that was only one year of the positive outcome compared to the years before that. During the time of the recession and specifically in years 2007 through 2009, an automotive market suffered dramatically.
It was mainly due to the flow of credit and the passing of the law by the local South African government to limit further availability of credit. Solely based on the case information, it would make sense to make a projection plan for the next 3-5 year to watch the growth of the automotive market and then take additional necessary steps to further grow the company’s overall expansion in the local market. Even though this option has some negative sides such as higher import duty and losing some of the market share to its competitors, in case of the declining auto market situation it could financially benefit the company.
2) What is your assessment of M&M’s experience with its South African subsidiary to date? To date, Mahindra & Mahindra shows a very strong entry-level presence in the local market. In short 6 years period, they were able to capture the trust and loyalty of the local populations. Their strategy to manufacture and export vehicles that were suitable for local roads and, at the same time affordable for the locals, made it possible to secure the market share of 1.2% of the SUV and medium range SUV vehicles. Their localization of dealers in nine South African provinces made it possible for customers of all regions to have the direct access to the vehicle inventory. On the other hand the company faced a challenge of losing sales because of the time it took to process vehicles orders from India.
3) How attractive is the South African auto market for the growth and profitability? In the past decade or so, South Africa showed a stable economic growth among the population. Even though the growth rates are somewhat low compared to the other developing countries, it didn’t have any decline. With economic growth, more locals are able to afford to own a vehicle. As research study presented in the case shows, the buying power of the black African consumers, making the largest segment of the middle-income market, was rising. To the benefit of companies such as Mahindra & Mahindra, unlike white South African population, black African consumers were more open and inclined to purchase newly introduced brands to the markets.
The research showed that they did not trust the local brands rather than preferred any specific European or Japanese/Korean brand. This presents a colossal opportunity for M&M’ to enter the local South African market and continue its growth and profitability by securing the trust of local population. As long as company considers the growing need and affordability of the vehicle introduced in the future, they have a strong potential in further securing the larger auto market segment in the local market.
4) What potential roles can M&M’s South African subsidiary play in the company’s global network? With the globalization growing it is very important for international companies to be able to secure the brand within local markets. In this particular case, a South African subsidiary could potentially mean a large growth for the M&M. They would be able to shorten their delivery time and secure additional market segment by signing with the government. It would also be easier to export vehicles to other locations. The parent-subsidiary operating structure allows for greater diversification and increased efficiencies, partly because senior management at the parent company does not have to be involved in the operational details of its subsidiary. It would also isolate certain financial risks because the two companies are separate legal entities.
5) What should be Shah’s recommendation to M&M’s board of directors? Shah should advise the board of directors that at the current time it would be beneficial for the company to monitor the growth/decline of the automotive market on the global scale as well as in the South African market. With the reasonable proposal to monitor for the next 3-5 years it would allow company to receive securer results for the industry. Further on, based on the collected results, the company should consider moving on to the one of the other three options: contract assembly, own manufacturing plant or use South Africa as a hub.
Courtney from Study Moose
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