The Mahindra-Volkswagen deal: How they plan to do it

Mahindra may get access to Volkswagen’s underutilized Pune factory as part of the non-cash transaction, the people cited above said on the condition of anonymity. The factory has an annual capacity of 190,000 vehicles, while Volkswagen India managed to sell only 136,000 vehicles in 2023, including exports.

According to the two people, the two automakers hope to finalize a deal focusing on future investments in platforms and technologies before the end of the year.

Volkswagen's Pune factory capacity can be expanded to 350,000-400,000 units, one of the two people cited above said. "Besides, with half of the available land in the Volkswagen factory in Chakan still vacant, this facility could expand to accommodate 700,000-750,000 units annually with the necessary investments.

Moreover, Skoda Volkswagen's manufacturing facility is located just a stone's throw away from Mahindra's largest facility in Pune, and the company has been finding it difficult to find a suitable parcel of land to expand in Chakan", the person said on the condition of anonymity.

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While extra capacity from Volkswagen would help Mahindra overcome production bottlenecks at its Chakan plant running at full capacity, finding an Indian partner will help Europe's largest automaker share investments to scale in India, where it has just 2% of the passenger vehicles market despite continued presence over 20 years. A deal will also help Mahindra better challenge domestic rival Tata Motors, which will benefit from Jaguar Land Rover's EV platform expertise for its future vehicles.

“For Volkswagen, the premise of the discussions is to achieve scale via joint platform production to achieve better cost structures", the person cited above added. While the transaction valuing Volkswagen India slightly below a billion dollars will primarily involve Mahindra's future investments, it may involve a small element of cash as well, the person cited above said.

Mahindra to fund the deal via platform investments, not cash

The partnership will likely involve sharing platforms and components, particularly for EVs, with both companies looking to pool resources for future growth. SAVW will be able to build SUVs on Mahindra's NFA platform, which will also be able to accommodate hybrid technologies, the people cited above added.

“It was made clear from day one: This is more about building up future business rather than paying for what has already been built", the person cited above said.

The deal will not involve cross-badging of products or utilization of each other's local sales networks.

"We are closely monitoring recent developments to see which products and platforms will be shared between the two players," Gaurav Vangaal, analyst, S&P Mobility said.

"At present, all automakers are striving to reduce the risks associated with powertrain investments, and collaborations like these often lead to innovative solutions. After more than two decades in India, it is good that Skoda is now open to partnerships with Indian companies, while Mahindra's recent product successes are driving their interest in collaborating with global partners for export market aspirations," Vangal added.

The two companies began collaborating earlier this year, under which Mahindra will source components from Volkswagen’s Modular Electric Drive (MEB) platform for EVs built on its own INGLO platform. The supply agreement came nearly two years after the company first expressed intent to explore a strategic alliance in 2022.

Volkswagen’s underutilized Indian capacity

Volkswagen operates two India factories; the Pune plant makes mass-premium brands Volkswagen and Skoda, while the one in Aurangabad handles and assembles premium models such as the Tiguan and Kodiaq, as well as imported Audis, Porsches and Lamborghinis. The Pune plant has a capacity of 190,000 vehicles, while the Aurangabad plant can produce 60,000 vehicles annually.

The Ford connection between Mahindra and Volkswagen

This isn’t the first time Mahindra and Volkswagen have explored a partnership. When Ford exited its joint venture with Mahindra in 2020, it opened a gap in Mahindra's expansion strategy. To fill this void, Mahindra approached Volkswagen for a potential collaboration, the second person said. The discussions initially focused on platform-sharing, where Mahindra, Skoda and Volkswagen vehicles would be built on a common architecture.

However, concerns arose around the feasibility of selling multiple brands on the same platform, particularly with pricing differences and the potential for cannibalization between models. Mahindra eventually grew skeptical of the arrangement, citing challenges in differentiating products enough to maintain brand integrity. Still, those talks laid the groundwork for ongoing discussions between the companies years later, focusing on new opportunities in both ICE and electric vehicles.

Lowering costs to tame India's ‘predatory’ market

For the Volkswagen group, cost optimization is the most critical element of the partnership, leveraging Mahindra’s established supplier network to bring down the cost of producing its vehicles, which are currently priced at a premium in India’s competitive market. "Skoda wants to leverage Mahindra's relationships and bring down costs. The idea this time may be to reduce the price gap between Mahindra cars and Skoda-VW cars," the second person said.

“We are very impressed with what Indian OEMs like Tata Motors and Mahindra & Mahindra have managed to achieve in terms of costs with their suppliers", a Volkswagen India executive said on the condition of anonymity.

In June, Klauz Zellmer, chairman of the board of Czech carmaker Skoda Auto said it is looking to partner an Indian automaker to grow its business in a market that's brutally price-competitive, and one that it's been unable to crack in more than two decades of its existence there. It believes that finding a local partner is a "very attractive" scenario, as it aims to make deeper inroads into the Indian market with the help of a domestic entity that has close linkages in the supplier ecosystem, a rich understanding of local customer preferences and scale that can drive down the European carmaker's costs in the country's competitive market.

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However, concerns may could still arise over potential cannibalization of sales and an adverse impact on brand image if Mahindra and Volkswagen share platforms.

“The products will be very differentiated and not comparable, I don’t see a need for one brand to be cheaper than the other because they will target very distinct audiences. There will be some bit of cannibalization between the two German brands - but not with Mahindra", the first person said. “Mahindra also stands to gain a lot from a highly trained workforce which pays a lot of attention to detail and quality", the person added.

In a statement to Mint, Volkswagen said, "Škoda Auto is leading the India operations on behalf of the Volkswagen Group and its brands. To fully explore the country’s growth potential, we are always considering new business opportunities and are evaluating various options to ensure the best possible solution to implement our strategy in the highly dynamic Indian market. Earlier this year, Volkswagen Group and Mahindra signed a supply agreement on components of Volkswagen’s MEB for Mahindra’s purpose-built electric platform, taking a step further on a joint vision for e-mobility collaboration. Volkswagen Group and Mahindra continue to explore multiple opportunities to expand the collaboration potential."

On 23 September, a Mahindra statement to the stock exchanges said, “Mahindra and the VW Group continue to explore multiple opportunities to expand the collaboration potential. In case there are any concrete outcomes with regard to any of the aforementioned discussions, appropriate disclosures will be made in a timely manner…"