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JSW-Volkswagen JV hangs in balance on localization, cost model
Summary
- For JSW to run a joint venture profitably with Volkswagen in India, it will have to correct the cost model that the Volkswagen and Škoda brands have in India as close to 60%-70% of the net sales price of a vehicle comes from the BOM (bill of materials) cost.
New Delhi: Homegrown conglomerate JSW Group and Europe’s Volkswagen Group are currently at odds over key issues involving pricing of parts and localization as they negotiate a potential strategic deal for the German auto giant’s India operations, said people privy to the discussions.
While JSW Group plans to enhance cost-efficiencies through localizing the supply chain, and renegotiating prices with existing suppliers, Volkswagen is yet to take a call on these issues, they added. JSW’s move comes as it solidifies its alliance with Chinese auto giant SAIC Motor, parent of MG Motor India, which heavily relies on imported parts from China. As part of an agreement, JSW aims to boost local sourcing following the acquisition of a 35% stake in MG Motor India.
SAIC is planning to divest a 51% stake in MG Motor India to Indian entities. While JSW acquired 35%, 8% equity is earmarked for private equity fund EverSource, the remaining equity will be distributed among MG Motor’s dealers and employees through employee stock ownership plans. An announcement is expected in the coming weeks, coinciding with the JSW investment, during a dealer conference aro-und 20 March.
According to the people, Volkswagen is looking for a partner to invest in its India operations as the German firm wants to build a production hub in the country for the next 10–15 years, besides looking to develop a low-cost electric vehicle (EV) for the global markets. However, to ensure profitability, JSW’s contention is that both Volkswagen and sister brand Škoda needs to address the cost model in India, considering 60–70% of a vehicle’s selling price is attributed to the bill of materials (BOM) cost, including raw materials and components, they said.
Volkswagen Group aims to establish itself as the top-performing European carmaker in India, spearheaded by the Czech brand Škoda Auto, the company said in its annual report for 2022.
“Škoda Auto has been in an exploratory mindset looking for partners who can invest and help grow its volumes in India, as it is apprehensive about investing more, considering its past investments has not yielded desired volume growth," he said, adding that the two companies are in negotiations to iron out differences.
In fact, similar differences between Mahindra and Mahindra (M&M) and Volkswagen, led the Indian company to pull out of a potential joint venture with the Indian arm of Volkswagen AG, besides its slow decision-making among other factors.
High cost of parts and platform were key issues that prompted M&M to call off the deal, said a second person, adding that M&M’s move was also influenced by the auto major’s decreasing reliance on foreign original equipment manufacturers for technology.
In July 2018, the Volkswagen Group had announced €1 billion investment for the India 2.0 project. The initiative led to the development of the Kushaq, Slavia, and Taigun, which were built on top of its entry-level MQB A0 platform, specifically for the Indian market.
While the Sajjan Jindal-led $23-billion JSW Group has already inked the share purchase agreement with SAIC, for a 35% stake in MG Motor India, discussions with Volkswagen Group may result in a three-way deal, or two separate JVs, with the JSW Group acting as a common shareholder, the people said.
“Škoda is taking on crucial tasks, like developing new generations of the Superb and Passat, overall responsibility for the MQB A0 Global entry-level platform, and regional leadership in emerging regions of India and Vietnam on behalf of the Group," the company said in its 2022 annual report.
