The case traces the various developments from the time the Joint venture took place till the breakup In 2000. In 1 995, Escorts and Yamaha Motors formed a 50:50 Joint venture (MEAL). From 1995 to early 2000, MEAL took several steps to become the number one player in Indian’s two-wheeler market. However. In mid-2000, Escorts divested 24% equity to Yamaha Motors and as a result, Yamaha Motors became a majority stakeholder in the venture (74:26). In May 2001, Escorts sold its remaining 26% equity, thus, exiting from the Joint venture. The case is intended for MBA/PAGED bevel students as part of the Business Environment curriculum.
From the case students are expected to understand why Escorts pulled out of the Joint venture and how this move is going to affect Yamaha Motors. Students can also discuss Escorts new business initiatives and examine how the company Is placed to succeed In new economy businesses. This case will also enable students to understand the structural changes In the two wheeler market In India. – Issues: Diversification Into unrelated business by one of the partners, Problems In the Joint venture due to the external environment ? Contents: I Page No.
I Introduction | 1 Two Wheeler Industry in India | 1 Escorts, Yamaha Tie the Knot | 3 | The Honeymoon | 3 | The Honeymoon is Over | 4 The Divorce | 5 | The Road Ahead | 5 | Keywords: 2000, 1995, Escorts, Yamaha Motors, 50:50, MEAL, 24%, equity, 74:26, May 200126%, Business Environment The role of the Escorts group was always minuscule since Yamaha has been gradually hiking its stake in the Joint venture. The Ands of the Escorts were only promoters in the JP. ” – Yamaha Motors’ official commenting on whether Escorts’ exit form the Joint venture would affect the performance of Yamaha Motors in India.
Introduction On April 24, 2000, at the board meeting of Escorts Limited (Escorts), (Refer Table Ill for a profile) members seemed to know precisely what to expect. Just five days earlier, group, had been to Japan to hold talks with the Yamaha Motor Company (Yamaha Motors) officials- Escorts’ equal partner in the Indian motorcycle venture, Escorts Yamaha Motor Ltd (MEAL). I Before leaving, he had left instructions that a board meeting should be convened on April 24. An important announcement was to be made.
At the meeting, And informed the directors that, subject to the board’s approval, Yamaha Motors could be given a majority stake in the Joint venture company. The Japanese two-wheeler major had offered to buy an additional 24% stake in MEAL from Escorts at RSI 200 per share. The deal would add RSI 2. 3 billion to Escorts’ coffers. The announcement seemed to have been well accepted by the board, as there was not even a murmur of protest. For the Escorts board, such announcements were not new. In a little over a year, Escorts had offloaded substantial chunks of its equity in three Joint ventures to its overseas partners.
It all darted in 1999 when Escorts sold one-third of its shares in the construction equipment company Escorts JOB to JOB of the United Kingdom for RSI 490 billion. This brought its stake down from 60% to 40%. Next came the turn of Hughes Escorts Communication, a 51 :49 Joint venture between Hughes Communications of the United States and Escorts. In December 1999, Escorts offloaded 23% of its stake to Hughes for RSI 750 million. This brought its shareholding in the company to 26%. This was the second such exercise undertaken by And since 1995 when he took over he reins of the company from his father, Hard Pradesh And as chairman of the group.
At that time, he had identified six areas of growth for Escorts-agric-business, construction equipment, two-wheelers, auto-components, telecoms and finance. And each business was spun off into a separate company, leaving Escorts, the flagship, to focus on agric-business. And then identified four thrust areas for Escorts-agric- business, telecoms, software and healthcare. The idea behind giving Yamaha Motors the majority stake in the Joint venture was to focus more on the four thrust areas. Two Wheeler Industry in India The 3. Million two-wheeler market in India included scooters, motorcycles and mopeds. In the late sass, the domestic two-wheeler industry had undergone many structural changes. Motorcycles consistently gained market share from the scooter and the moped (Refer Table l). The trend was expected to continue in 2001-02. Chic vehicles from Baja] Auto and ELM dominated the scooter market. Northern India was the major market accounting for nearly 46% of the total scooter sales. The Indian motorcycle market could be broadly categorized into Indian motorcycles and Indo- Japanese motorcycles.
The Hero group, Baja] and Escorts dominated the Indo- Japanese motorcycle segment in collaboration with Japanese vehicle manufacturers Honda, Sukiyaki and Yamaha respectively. In 2000, the market for motorcycles was segmented into three categories based on price: the premium segment (45,000 and above); the mid segment (RSI and the entry segment. (Upton RSI 40,000) In the premium segment, the competition was between TV’S Suzuki, Hero Honda and Escorts Yamaha Motors. In the mid segment, Hero Honda was the clear leader with 35% share. In the entry segment, Baja] Auto was the choice of many (Refer Table II for segmenting sales & marketers).
Yamaha Motors was a major competitor in the of rejuvenation. The Indian market favored four-stroke vehicles. This posed a problem for Yamaha Motors, whose strength was two stroke vehicles. TV’S-Suzuki was not very aggressive as far as new launches were concerned. Between 1992, when the Samurai was launched, and 2000 when the Firer was launched, the company had nothing really new to offer… Escorts, Yamaha Tie the Knot In 1985, Yamaha Motors entered into a technical support agreement with Escorts, and started local production of Yamaha motorcycles.
In 1995, Yamaha and Escorts signed another contract, establishing MEAL to manufacture and market motorcycles in India. Each company invested 50% of the capital for the original venture (Refer Table ‘V). MEAL produced a wide range of motorcycles for the urban and rural markets at its Abridged (Harlan) and Surplus (Attar Pradesh) plants. The Joint venture manufactured Ratios motorcycles at Abridged and the ARK and four-stroke WEB series at Surplus… The Honeymoon In 1996, Escorts transferred its motorcycle manufacturing facility at Abridged to the joint venture.
Nail And, chairman, MEAL, said the Surplus and Abridged facilities would be modernized and upgraded with a RSI 3. 75 billion budget. MEAL would turn out upgraded versions of the current high performance bike, ARK 100, and RAG 135 to meet stringent emission norms. In 1997, a further upgraded RAZZ 135, a sleeker version would be launched and the 4 stroke WEB 125 would be launched in February 1998 to meet the growing demand for fuel-efficient bikes. WEB 125 would deliver the best of both worlds-performance along with fuel efficiency. MEAL also planned to launch 2-3 product variants every year…
The Honeymoon is over In April 2000, Escorts announced that it was likely to sell around 20% stake in MEAL to Yamaha Motors. Escorts would thus become a minority shareholder in MEAL. However, an official said that Escorts’ holding in the Joint venture would not be less than 26% and it would not exit from the Joint venture. Said And, “l have no intentions of selling off the entire stake to Yamaha. Escorts will retain the 26 per cent stake we now hold in the venture. ” In late April 2000, the board of Escorts approved the proposal to divest 24% equity. With the change in the equity pattern, Yamaha
Motors would control the management of the Joint venture. Commented And, “We have always believed that business relationships are driven by the value added by each partner… The Divorce In May 2001, Yamaha Motors struck a deal with Escorts for acquiring the latter’s 26% shareholding in YEMEN for RSI 700 million. The deal marked Escort’s exit from the Joint venture. Yamaha Motors would now hold 100% stake in the company. Commenting on Escorts’ exit from the Joint venture, an official said, “We would like to get out of businesses where we are not in the driver’s seat and in the case of Yamaha n agric-business, telecoms and healthcare…
The Road Ahead Escorts’ exit from the Joint venture seemed to be a well-planned move. The group had already moved out of businesses where it believed it did not have a sustainable advantage. On August 22, 2000 at the group’s Annual General Meeting, And announced that Escorts would now focus on the new economy. He said, “To continuously create value, we have strategically moved our investments from low- growth areas to high growth avenues, or in other words, shifted our focus to businesses, which have a potential for higher growth and profitability… “