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The Volvo Group
Established in 1915 as a subsidiary company of SKF, Aktiebolaget Volvo (AB Volvo) has been involved in the automobile business since the introduction of their first car (Volvo ÖV 4) in April, 1927. The enterprise is involved in a variety of businesses including manufacturing of trucks, buses, construction equipment, marine and industrial engines as well as financial services and product related services.
The company has a global consumer base generating 431.980 billion Swedish Kronor and employing a little over 103,000 persons worldwide. After the car business, Volvo debuted its presence in the commercial trucks market in 1928 with the roll out of its ‘Series 1’ truck. With success in the truck business, Volvo soon started exporting its trucks to Europe in the beginning of the decade of the 1930s and started production and sale of buses in 1934, just a year before its initial public offering.
However, despite the growth, Volvo sold its automobile section to Ford Motors in 1999 in order to thrust greater emphasis upon the commercial vehicles business and subsequently undertook several partnerships in order to expand its business service area. To date, Volvo is extensively into the commercial vehicles business and is also reputed to have developed some of the most advanced safety systems much before than any of its competitors.
Eicher Motors Limited
Eicher Motors Limited is an Indian manufacturing company involved in the commercial vehicles and the motorcycles business. Interestingly, a less known fact about Eicher is that it is the parent company of Royal Enfield!
Eicher Motors was established as a tractor company in 1959 jointly with the Eicher Tractor of Germany. In India, Eicher has been completely held by Indian investors since 1965. However, the final segment of foreign investors were eliminated from the shareholder position in 1973 after Massey-Ferguson bought out the German share of the company. Following up on the same, the tractor and engine business of Eicher was sold to TAFE in 2005, the Indian licensee of Massey-Ferguson based in Chennai.
Eicher is among the top producers of commercial vehicles in India with its major competitors Tata Motors and Ashok Leyland. A less known story about Eicher is that in around 1998, Eciher started developing a truck design to compete in the market but it took them 6 long years to change the idea in a hardware piece and a total investment of Rs. 25 crores solely for this purpose.
Economics of the Joint Venture
The joint venture between Eicher and Volvo, known by the name Volvo Eicher Commercial Vehichles Limited (VECV), is still functional after 12 years of its establishment and is considered and proclaimed as the most successful joint venture in the commercial vehicle industry. VECV was formed as a joint venture by combining the capacity of 5 verticals segments of the two companies while also retaining their original entity and thus, individual autonomy.
The venture calls for Volvo having a 45.6% stake whereas Eicher Motors having a majority stake of 54.4%. For this stake, Volvo invested nearly 1,082 crores into the venture. Over the course of 4 years, from 2011-2015, VECV invested about 2,500 crores into business expansion, setting up new plants, increasing production as well as export capacity of the business.
The investments made by the two giants showed exemplary results within the first 4 years of the venture with their share of market increasing by 4%, from 27% in 2008 to 31% in 2012 for light and medium vehicles. Alongside, in the heavy truck and bus business, the venture saw a rise to 14% of market share which contributed towards extensive revenue generation. In addition, exports now contribute a greater percentage of total revenue to the business enterprise.
Incentives
Eicher had been looking for a partner into expand business into foreign territories since long in order to prevent high costs and reduce the uncertainty of risk that such an expansion may cause. In Volvo, the Eicher team saw a potential partner for business to expand business functioning into foreign lands without incurring exorbitantly high costs as well avoid any potential threat being a new player in the market and also on a smaller time scale.
On the other hand, Volvo saw this an opportunity to expand business into India by using Eicher’s channels as a method of producing cheap vehicles in India which would have otherwise costed Volvo almost 4 times the price an indigenous manufacturer (like Eicher) could have produced the same goods at. In addition, Volvo also saw this as a potential opportunity to combine its world – class support services with Eicher’s low cost production to export goods to fulfill the demand of Volvo products in other markets like Europe.
For the purpose of this venture, Volvo brings in its area of expertise like global consumer knowledge, leadership facilities in technology, exemplary sale services as well as a worldwide brand name. On the other hand, Eicher brings in cheap production facilities, access to vast domestic market as well as an increased export capacity.
With several advantages for both entities being available, the scope of this venture has enlarged over time with VECV taking over the Volvo Bus business in India for Rs. 100 crores. This will help the enterprise to merge the existing Eicher bus business with Volvo’s side of business, thereby taking over a major leap in the market share of the same.
Written by - Arnav Mehra
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