Corporate: Turnaround - Ashok leyland roars to life

TURNAROUND
Ashok Leyland Roars To Life

It's a showcase turnaround. Chairman R. Seshasayee's unrelenting drive to keep up with the changing times begins to bear fruit.

By Dilip Maitra

Among the many responsibilities of the personnel department at auto major Ashok Leyland is a strange entry: pick five people to lunch with the company's Chairman R. Seshasayee when he's not travelling. Any five will do, as long as they're executives who work for the company. Says the quiet-spoken 52-year-old Seshasayee: ''Meeting with new people helps me understand the company's problems better.''

It isn't just employees of the Rs 2,611-crore company who find themselves at the receiving end of Seshasayee's relentless efforts: on some Sundays, Seshasayee commutes on the local transport service's buses (albeit, only those made by Leyland) to get a first-hand feel of the products that his company turns out; and, while travelling by roads, he routinely makes stops at trucker hang-outs to find out whether they face any problems with either Ashok Leyland's products or with the availability of spares. It's all a part of Seshasayee's self-proclaimed 'personal touch' approach to his company's management. And the approach seems to have worked wonders for the auto major.

The numbers tell the story of a turnaround: in 1999-2000, Ashok Leyland sold 37,859 heavy commercial vehicles (HCVs), 27 per cent more than it did in 1998-99. The company's total income in 1999-2000, at Rs 2,611.41 crore was 25 per cent higher than the corresponding figure for 1998-99; its net profit, at Rs 53.10 crore, 60 per cent. Nor were these numbers the result of accounting wizardry. Ashok Leyland's operational profits in 1999-2000 was Rs 55 crore, 77 crore more than the Rs 12-crore operating loss it had made in 1998-99. Says Jayant Jain, 31, Vice-President, Anand Rathi Securities, a brokerage that gave the Ashok Leyland scrip a 'buy' rating: ''We expect that the company will move ahead of its historical earnings band and the financial indicators achieved in the earlier business cycle.'' Seconds, S. Arun, 38, Research Analyst in SSKI: ''Unlike in the past, when Ashok Leyland's valuations trailed behind those of its leading competitor TELCO, we believe that the company's focused segment approach (with a presence only in commercial vehicles) is a strong positive.'' Indeed, as many as 11 research reports that have been published over the last nine months recommend a 'hold or buy' on the company's scrip.

The cost aspect

The recovery of Ashok Leyland can be attributed to the end of the recession. After all, its main rival, TELCO, registered a 37.5 per cent growth in sales volumes in 1999-2000. But what the bad years (and there were several between 1997 and 2000) did for the company, was to make it pinpoint its focus on critical issues like cost-reduction, operational improvement, and market penetration. Admits Seshasayee: ''The recession made us hasten the process of improvement that we had been working on for some time.''

The company's initiatives along these dimensions ranged from tiering its vendor network to reducing the number of vendors, and consequently, moving to a just-in-time (J-I-T) ordering system, to joint-improvement programmes (JIP), which are essentially exercises in value-engineering undertaken in association with key vendors. Tiering has formed the basis of the vendor-consolidation drive: for instance, till 1998, Ashok Leyland used to source the 62 components that go into its front-end structure of its trucks and buses, from 16 suppliers; today, one tier-I vendor sources the products from the other vendors and supplies the assembly to the company.

Through JIPs, the company works closely with vendors of high-value items, to find out ways of cutting costs. One such programme carried out by the company in association with axle-manufacturer Meritor, resulted in a cost-saving of 2 per cent-a significant quantum at the level of components. Boasts S. Nagarajan, 55, Executive Director (Projects & Quality), who is in charge of sourcing: ''These have saved us 2 per cent on our total material cost.'' The plan for current year? An additional 2 per cent reduction on material cost of Rs 1,500 crore that will lead to a saving of Rs 30 crore a year.

However, despite the reduction, the company's material cost, expressed as a percentage of sales is, at 70 per cent, 3 per cent higher than that incurred by TELCO. Agrees Arindam Bhattacharya, 38, Principal, A.T. Kearney, who was involved in Ashok Leyland's turnaround effort: ''While the company has made significant progress, it will still take time to achieve global standards in inventory management and productivity.'' Ashok Leyland, however, has built on its cost-reduction gains by reengineering its finances, and pruning its workforce from 16,000 to 14,000.

Thus, its employee costs, expressed as a percentage of sales, dipped from 9.16 per cent in 1997-98 to 8.80 per cent in 1999-2000 and its average cost of borrowing decreased from 11.5 per cent in 1997-98 to 9.6 per cent in 1999-2000. Significantly, the company managed to reduce its head-count by 2000 without raising any sticky labour-related issues by involving its employees in small group activities, peer group meetings, and continuous dialogue. Emboldened by this, the company hopes to prune its workforce by an additional 1,000, and has just announced a voluntary retirement scheme (VRS) to this effect.

The marketing aspect

It was the typical analyst-refrain: Leyland in the South; TELCO elsewhere. If the company had to sustain its turnaround, Seshasayee realised, it would need to spread its reach and reposition itself as a manufacturer of a complete range of HCVS (and not just the medium-duty vehicles-gross vehicle weight, or GVW, of 16 tonnes). To this end, the company set up 15 dealerships and 46 authorised service centres in North and West India between 1998 and 2000. Today, it has 137 dealers and 52 service outlets across the country. And, in an effort to expand its range beyond the commoditised 16-tonne GVW segment, the company's marketing emphasis has shifted to new products: the 22-26 tonne GVW multi-axle vehicle and the 26-35 tonne GVW tractor trailer. Between 1998 and 2000, the share of 16-tonners in the company's sales has dropped from 63 per cent to 61 per cent and tippers from 24 per cent to 15 per cent, while that of multi-axle vehicles has increased from 5 per cent to 13 per cent, and tractor trailers from 7 per cent to 10 per cent.

Indeed, customisation is the name of the game at the new Leyland. In 1999-2000, the company manufactured 4,000 trucks that could operate in extreme weather conditions for the Indian Army; in 1999, it developed CNG buses for the Delhi Transport Corporation and best; and in the same year, it launched a small oil tanker variant of the Cargo to enable companies to shift petroleum products over short distances. Points out Jain of Anand Rathi Securities: ''On the product-strategy front, the company has been working in close association with its customers to understand the nature of their business in a major effort to improve its own earnings.''

Leyland is also entering the emerging market for high payload vehicles and has developed a 44-tonne GVW tractor trailer for this purpose. Explains Seshasayee: ''With the massive National Highway plans, I expect the demand for high-payload vehicles to pick up substantially.'' Agrees Arun: ''The long-distance transportation business in future will move towards heavier vehicles, and Ashok Leyland, with its expertise in the heavier category, has an edge. It has already developed multi-axle vehicles and 44-tonners.'' The result? Ashok Leyland's share of the medium-duty vehicles market segment has increased from nearly 30 per cent in 1996-97 to 36.4 per cent in 1999-2000.

The next step

Its ability to cut costs and focus on operational improvements has endowed Leyland with an innovative streak. For instance, to meet the Euro-I emission norms (which have already come into force), and the Euro-II ones (which will come into effect in end-2000), Ashok Leyland has upgraded its existing engines instead of going in for new ones. Thus, all that it cost the company to comply with the Euro-I standards was an incremental Rs 25,000 per vehicle. In contrast, the corresponding figure for TELCO was Rs 60,000.

According to the projections of industry experts, all the company is likely to incur in making its vehicles compatible with Euro-II norms is an additional cost of Rs 25,000 for trucks and Rs 40,000 for buses. Says R. Jaganath, 57, a full-time director on the company's board: ''Meeting the emission norms through engine upgradation kept the lid on the costs.'' This approach also means that the company gets to retain between 85 and 90 per cent of the parts which went into its old engines.

If its efforts to hive off the Iveco engine assembly operations at its Hosur plant into a separate joint venture with Italian truck major Iveco fructify, Ashok Leyland will have come that much closer towards becoming a full-fledged systems integrator. Says Jain: ''Once the engine plant is hived off into a joint venture with Iveco, Ashok Leyland will get newer engines suitable for higher-payload vehicles. And, as there will be no additional costs, the company's return on capital is also expected to improve.''

Also on the anvil are two ventures with as yet unnamed partners-one to manufacture axles and transmissions and the other to make gear-boxes. If the company manages to get these ventures off ground, it would have successfully managed its transition into a pure assembler-the ultimate dream of all automobile makers.

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