Seminar Paper, 2011
22 Pages, Grade: A bzw. 1.0
2. Background knowledge
2.1 Schöneweiss & Co. GmbH
2.2 Mahindra and Mahindra
3.2 Reasons for FDI
3.3 FDI and emerging economies
3.4 FDI and India
3.5 FDI in the EU from Asia
FDI from emerging economies has become more and more important in the recent years, it increased from $149 billion in 1990 to up to $1274 billion in 2005. As traditional FDI theories are more focussing on downhill- investments, namely investments from developed countries to developing ones, the uphill investment perspective becomes more interesting.
This term paper looks into Indian FDI invested into the EU, to exemplify this the paper uses the case study of the Indian company Mahindra and Mahindra acquiring the German company Schöneweiss in 2007.
It seeks to answer the question why an Indian company like Mahindra and Mahindra is investing into Europe, trying to find specific reasons for it by analysing empirical data. It is not only taken the perspective by Mahindra in this term paper but also the perspective by Schöneweiss, asking which were their reasons to agree to the acquisition.
After the analysis it became clear that Schöneweiss agreed to the acquisition due to price pressure in the industry and too high investments if they were about to go to low-cost countries themselves without a partner.
Mahindra’s reasons were mainly focussed on obtaining the expertise and deep customer relationships with major automotive companies and to combine these with their low-cost advantage. Due to a lack of a strong brand they decided to keep the brand name Schöneweiss as well as having them operating under the group logo of Mahindra, this makes the company’s name more known globally. Furthermore important reasons were risk diversion and moving up the value chain.
It seems to be a successful acquisition, as revenues increase, even though costs can be decreased and Mahindra is planning on using expertise to develop a new product, which can be produced in India as well as to re-organize their acquired Indian Forging companies.
In recent years it became apparent that more and more companies from emerging economies are aiming to enter markets from developed countries, acquiring companies in developed countries or merge with these. To name figures, FDI coming from developing countries is stated as $149 billion in 1990 increasing to $871 billion in 2000 up to $1274 billion in 2005 (Nayyar, 2008). When looking at the average purchase volume by developing countries through cross-border mergers and acquisitions it shows that it was at about $46 billion per year during the period 2001- 2005 (Nayyar, 2008). As traditional FDI theories are more focussing on “down-hill” investments, meaning investments from companies from developed countries into companies in developing countries, the phenomenon of “up-hill” investments becomes very interesting.
Questions are asked about the reasons of these up-hill investments and the success of it. The EU has registered an increasing amount of FDI coming from developing countries so this term paper will look at the EU as a destination of FDI and not the EU as an investor abroad.
To find specific reasons for the FDI coming from an emerging economy, this paper is looking at the case study of the Indian company Mahindra and Mahindra acquiring the German company Schöneweiss in year 2007. India seems to be a significant player when it comes to outward FDI, as it was at $124 million in 1990, increasing to $1859 million in 2000 up to $9569 in 2005 (Nayyar, 2008). This development will be discussed further down in this paper and it will give guidelines to judge the significance of these investments.
The following section will give a historical overview of the case, while the theory section looks at FDI. Here it not only considers traditional reasons for FDI but also adds reasons which are said to be specific for companies coming from emerging economies. The sections following these will look more specific into FDI from emerging economies, then more specifically on FDI and India to finish off with FDI in the EU from Asia, respectively India. The Analysis will match the theories with empirical facts, mostly coming from newspaper and magazine articles. This imposes the difficulty of objective information on this term paper. Unfortunately, this is the major limitation of this paper. Not all data on companies, especially on their mergers and acquisitions is publicly available and if it is available it might not be objective. This has to be kept in mind while looking at the case study.
The company Mahindra and Mahindra was founded in 1945 in India.
Gesenkschmiede Schneider, founded in 1891, was acquired by Jeco Jellinghaus, founded in 1885, on 1.7.1999. In December the same year the Jeco Holding AG was founded. On the 1.1.2005 Jeco Holding AG acquired Falkenroth Umformtechnik, founded in 1829. On 1.1.2006 Mahindra and Mahindra acquired the English company Stokes. On 28.09.2006 in the same year Mahindra and Mahindra and Jeco Holding AG merged. One year later on 1.7.2007 it acquired Schöneweiss GmbH and Co. One month later, on 15.08.2007, Mahindra Forgings Europe AG was founded.
This history of mergers and acquisitions on the way to become one of the biggest forger companies leaves the question why the Indian company Mahindra and Mahindra went into the forger business, acquiring several European companies and agreeing on a merger with Jeco Holding AG in 2006.
This paper looks specifically at the acquisition of the German company Schöneweiss, seeking to answer the question why Mahindra and Mahindra acquired this company, why they are investing into developed countries and not in less developed ones and it is trying to assess the success of it.
Schöneweiss & Co. GmbH is a family-owned company (moneycontrol, 2007), founded in 1866 and had a turnover of about EUR 100 million (FAZ, 2007). As one of the top five-axle beam manufactures in the world, it is specialized in suspension, power train and engine parts and has customers such as DaimlerChrysler Group, MAN, Scania and Volkswagen (moneycontrol, 2007). Three plants exist in Germany, in the cities Hagen and Gevelsberg with a total of 550 employees.
Mahindra and Mahindra is based in Mumbai, India and is heading the Mahindra group, which is in many different industries on every continent. The company was founded in Ludhiana, India in 1945 by K.C. Mahindra, J.C. Mahindra and Malik Ghulam Mohammed as Mahindra and Mohammed. Mohammed having left the company, it was renamed “Mahindra& Mahindra” in 1948. It was founded as a steel trading company, going into manufacturing general purpose utility vehicles, light commercial vehicles and agricultural tractors. Now it is leader in the utility vehicle segment in India and has major stakes in several automotive companies across Asia.
It belongs to the 10 biggest industrial concerns in India and has a turnover of $12.5 billion, employing 120,000 employees in 100 countries (Mahindra, 2011).
FDI, foreign direct investment, is international investment that can come in two categories. Either a company, coming from one country, acquires at least 10% of a company which is in another company; even payments after that acquisition are still foreign direct investments (EU, 2007). As the direct investor receives power in the management, the company investing and the company invested in enter a long-term relationship (EU, 2007).
Another form of FDI is the so-called “Greenfield” investment which implies either setting up a new company or purchasing of a company through merger or acquisition (EU, 2007)
Different scholars state different reasons for FDI. While Madura and Fox concentrate on two different reasons to invest abroad, the EU adds another one and the economist states some reasons which are claimed to be especially valid for FDI coming from developing economies.
There are two differently motivated reasons to invest directly abroad according to Madura and Fox (2007). First of all there are revenue- related motives, and secondly there are cost-related motives.
The revenue- related reasons include attracting new sources of demand, entering markets in which there is the possibility for higher profits, using the company’s monopoly of some specific product abroad, reacting to trade restrictions and international diversification (Madura, Fox 2007), these are regarded as horizontal FDI by the EU (2007). In that paper examples are stated as easing market access, reducing delivery times and that there appears a trade-off between increased fixed costs due to a new factory and decreased variable costs due to savings of for example tariffs.
Cost-related reasons are the benefits from economies of scale, the usage of foreign factors of production, raw materials or technology and as a reaction to exchange rate movements (Madura, Fox, 2007). These are explained as vertical FDI as well (EU, 2007).
While Fox and Madura (2007) end their reasons there, the EU adds that M&As emerge in order to diversify risk and to deepen economies of scale (EU, 2007).
While the theories stated by Fox and Madura as well as by the EU concentrate more on the traditional view on FDI, namely the perspective that companies from developed countries invest into developing countries, the economist (2011) states some reasons for companies coming from developing countries investing into developed countries.
Three different reasons are identified. As the most important reasons are named that these companies want to hedge against (political) risk in their domestic market; they want to move up the value chain and combine foreign expertise and skills with their own.
Nayyar (2008) claims that the reasons for Indian companies investing abroad were different from the ones other developing countries have. In his article “The Internationalization of firms from India: Investment, Mergers and Acquisitions” (2008) he suggests seven distinct reasons for Indian firms to go abroad. These partly overlap with the reasons that have already been stated by different scholars but might be worth mentioning as this paper is continuing to focus especially on an Indian company investing in Europe. As the first it is stated that companies want to get market access for exports, and it is claimed that especially in the automotive industry there is supposed to be evidence (Nayyar, 2008). Furthermore they want to integrate either horizontally or vertically, Horizontal integration refers to companies buying other companies that are in the same industry as them and are also on the same production level. Here it is likely that this company wants to monopolize a market and buys competitors. Vertical integration refers to companies buying companies in their supply chain, the major reason here can be that the investor wants to have an influence on their supply. As another reason to go abroad it is stated that Indian companies want to deliver their services on foreign markets (Nayyar, 2008), which becomes clear when looking at the Indian IT industry going abroad to provide their IT services also on other markets than their domestic market. The merger and acquisition strategy of Indian companies makes also clear that another reason for them to invest abroad is to capture international brand names, as well as access to technology and/or source raw materials (Nayyar, 2008). Here Nayyar does not mention a prime reason mentioned by “The Economist” (2008), which refers to companies going abroad to benefit from the foreign expertise. As the last reason Nayyar (2007) refers to global leadership aspirations by Indian companies, and states as an example the Indian company Bharat Forge which is a direct competitor of Mahindra, the company which will be looked at in this paper.
When looking at the reasons The Economist states and compare it with the ones stated by the EU and Madura and Fox, it shows that companies coming from developing countries seem to look especially for risk diversion and foreign expertise in order to move up the value chain and to gain market access for exports. Nayyar (2008) also states horizontal and vertical integration as integral part of the reasoning to go abroad for Indian companies. This might be able to get integrated into the risk diversion explanation by the other sources. As the main reasons to integrate horizontal or vertical is to either make the supply more secure and have influence on their supplier or to acquire a competitor to monopolize the market.
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