Ford ties up with Mahindra in India to cut risks and costs

© Reuters. Anand Mahindra, Chairman of Mahindra Group, speaks during a news conference in Mumbai

By Promit Mukherjee and Aditi Shah

MUMBAI/NEW DELHI (Reuters) - Ford Motor Co and Mahindra & Mahindra said on Tuesday they would form a joint venture in India, in a move aimed at reducing risks for the U.S. automaker's local business and cutting the cost of developing and producing vehicles for emerging markets.

The venture, valued at $275 million, will see Ford (N:F) enlist Mahindra (NS:MAHM) as a partner for developing and selling vehicles in India and emerging markets using the U.S. automaker's production facilities in the country.

By shifting to a joint venture, Ford is also changing its strategy for India, where it has long run an independent operation. The South Asian nation, where auto sales are slumping, once promised growth for global carmakers, many of which are now frustrated after working hard to gain a foothold.

Ford's decision comes at a time when Indian Prime Minister Narendra Modi's administration is trying to boost local manufacturing by cutting corporate tax rates and offering cheap loans to push car sales.

Under pressure from shareholders to make profits, Ford has been globally restructuring its businesses with an aim to save $11 billion over the next few years.

Ford President and CEO Jim Hackett said the partnership was "not only a fitness objective" but also gave the automaker a platform to expand in a market like India, where it wished it had done things differently.

"We have other emerging markets where we need to apply the same kind of understanding," Hackett told reporters in Mumbai over a video conference from Dearborn, Michigan.

Ford, which has invested more than $2 billion in India over two decades, will take an $800 million to $900 million non-cash charge to reflect the writedown of its Indian assets, it said in a separate exchange filing.

By shelving efforts to go it alone in emerging markets, including India, Ford will save capital for more urgent and potentially profitable endeavours - such as defending its U.S. truck franchise or fixing its operations in China.

Ford has also executed a significant alliance with Volkswagen (DE:VOWG_p) to share the costs of electric cars, commercial vehicles and developing autonomous vehicles.

"I think it's a disappointment when I see Ford sitting at the passenger seat, while Mahindra drives, if that will be the arrangement," said Gaurav Vangaal, senior analyst, automotive forecasting at consultancy IHS Markit.

"But looking at a global scenario of rapid transformation in powertrains and a shift to electric, this is a better way to mitigate investment risks," he added.

INDIA OPERATIONS

The two companies have for months been negotiating the deal which will see Ford take a 49% stake in the new entity, ending most of its independent India operations, Reuters reported in April.

Under the terms of the deal, which is likely to be finalised by mid-2020, Ford will transfer its local automotive assets, including both car manufacturing plants, and employees to the new entity, the companies said. Ford will retain its engine plant at Sanand in western India and global business center in Chennai in the south.

The new entity, which will be operationally managed by Mahindra, will develop and sell Ford brand vehicles in India and export Ford and Mahindra brand vehicles to emerging markets.

Mahindra will bring its sourcing, supply chain and Indian market knowledge to the table and will in return get access to Ford's global reach and technology.

"These synergies lead to sizable business opportunities to create new products, leverage brand and distribution assets, enter new markets and seize leadership," said Anand Mahindra, chairman of Mahindra Group.

In India, Ford currently manufactures and sells its cars via its wholly owned subsidiary. In 2017 it formed a strategic alliance with Mahindra under which, among other things, they would develop new cars together.

The companies expect to launch three new utility vehicles under the joint venture, starting with a midsize SUV. They are also jointly developing electric vehicles for emerging markets.

Michigan-based Ford has a share of just about 3% in a market dominated by Asian car makers including Suzuki Motor Corp (T:7269) and Hyundai Motor Co (KS:005380) that together control two-thirds.