The most obvious response to the news that Ashok Leyland, India’s second largest CV manufacturer has bought Czech OEM Avia is a simple one: it begins. After a long period of investment heading out of the Triad regions and into those emerging markets, suddenly the roles are reversed, and an emerging market-based OE has snapped up an EU-based operation, writes Oliver Dixon.
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We’ll hesitate to describe Avia as a player – it is, in truth, more of an interested observer, with a built-up capacity of 20,000 units per year, and a range recently extended to 12 tonnes, from its core business in the 6-9 tonne sector.
How seriously does one take Avia in today’s globalised, verticalised truck market? Its recent history has been patchy at best. In 1995, Daewoo Motor Corporation acquired a 50.2% stake in the company and invested in both production capabilities and product technology, resulting in the launch of the D line series. Daewoo proceeded to go pop in 2000, and investment company Odien Capital Partners LP ended up with 98.4% of the stock following the resulting fire sale.
Last month Avia slashed its basic capital by around 83% to GBP21.53m from a previous GBP122.8m in order to pare down a part of its cumulative losses. Indeed, Odien seemed to be doing a half decent job – its restructuring efforts helped cut the firm’s losses to GBP16.87m last year from GBP20.67m in 2004. At the same time, it unveiled the D120, a 12 tonne model as well as D110 and D100, 11 tonne and 10 tonne models respectively. The new models also feature the all-new 4.5 L Cummins ISB Euro IV engine with Selective Catalytic Reduction (SCR) technology. The new Cummins engines offer power outputs of 140 hp, 160 hp and 185 hp.
It’s reasonable to assume therefore that Ashok Leyland has paid for Avia more or less out of loose change. But what is it getting for that which it has found behind the sofa cushions?
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By GlobalDataAshok’s take on the deal is a predictable one. Spelling out his plans for Avia, Managing Director R. Seshasayee said that although the present volume of sales from Avia was limited, there is good potential to scale up, through new markets such as the Middle East, South East Asia, Russia and Ukraine and by consolidating and strengthening existing dealership arrangements in Europe.
He expressed confidence that there was potential to save material costs through component/aggregate sourcing out of low cost countries. The planned scale-up of Avia operations will absorb the current strength of around 275 employees. New products from the Ashok Leyland range, in line with market expansion plans yet to be announced will be introduced into the Avia portfolio, will arrive in due course.
“Avia is part of our inorganic growth plan and is a significant step in securing a beachhead in the European Union and the Eastern European markets. The acquisition will also give us a modern, international vehicle for our light and medium commercial vehicle range of trucks for India and other export markets,” said Mr. R. Seshasayee, Managing Director of Ashok Leyland.
The strategic location of Avia also opens up possibilities of using its facilities as an assembly and marketing base for some of Ashok Leyland’s future products.
Immediate thoughts have to turn to infrastructure. Avia has a presence in three major EU markets as well as its home market of the Czech republic – the UK, Spain and Italy – as well as representation in Ireland, Hungary, Slovakia, Lithuania, Croatia, Serbia, Greece and Latvia. It also has business in Bulgaria and Romania – both showing double-digit growth in the run-up to EU-accession in 2007.
Infrastructure has value – considerable value – but only if a product exists to take advantage of it. Will the UK’s 21 existing Avia dealers be putting Ashok Leyland’s on their forecourt in time for the Christmas rush? Probably not, but Ashok Leyland has deep pockets – courtesy of the controlling Hinduja Bros – and so there could be some extra investment heading into the network as a result of this deal.
Which could get interesting. The retail truck sector is a phenomenon born over the past decade, with the likes of Isuzu and Mitsubishi-Fuso eschewing traditional transport buyers and aiming instead for those for whom transport is a non-core but important business function. Here lies good revenue, and bumping up Avia’s efforts in a non-brand aware market sector would make a lot of sense.
Such a move could give Ashok Leyland a boost in terms of its own scale. It already produces 65,000 units per year – putting it ahead of MAN, Iveco and Scania in global terms – but still small relative to the likes of DC, Volvo and family and the Chinese leviathans Dong Feng and FAW. But by scale we don’t mean finished product; instead, it’s worth noting some remarks made at Ashok’s recent analyst meeting earlier this year. It is well on the way to producing a Euro IV engine, which would be fine were it not for the fact that India goes to Euro III in 2010. Nothing like being prepared of course, but this smacks of sleeping upright three days before an early start. We assume that the Indian OEM has its eye on some export business – China especially suggests itself – and a small EU-based test population would be no bad thing.
And, naturally, if an Ashok Euro IV engine is being put together within the EU, then there may be incremental business to be had from this too. Ashok already has an on-going arrangement with Hino for its J-series Euro II and III powerplants, and it will be interesting to see how Cummin’s input into the Avia range will be absorbed into the new struture.
And this could be a key driver behind the deal. There is more to Ashok Leyland than knocking out 65,000 trucks every year. Sitting in a newly built 400-seat design office is Ashley Design & Engineering Services (ADES), established to cater to overseas OEM and Tier 1’s demand for developing, testing and validating vehicle design. And just down the corridor is the Auto Components Group (ACG), which has been tasked with generating US$100m in the next three years through targeting markets like the US, Europe, Malaysia and Austria US, Europe and Malaysia.
Where does Avia sit in all of this? The Czech Republic isn’t a bad address to have if you want to do business in today’s global automotive business. To the west are R&D-dependent OEMs, most of whom have a freeze on new hires, but all of who have ongoing R&D needs. To the east is new Europe, and, more importantly, Russia, itself a huge potential growth market.
Buying Avia has given Ashok Leyland a long-term option on the EU market; it has a cornerstone, and it may or may not seek to exercise its right to develop further. It gives ready access to Russia, the Middle East and Turkey, all key markets and likely to become increasing competitive in the future. It also offers an opportunity to reshape the business, get out of truck building per se and to focus instead on Tier 1 and 2 business. This may sound a bizarre suggestion, but consider RABA. What was once a major domestic truck producer in Hungary is now a far-from-unsuccessful Tier 1 components producer with a niche SVO business.
But buying Avia has also allowed Ashok Leyland to give one or two EU OEMs a high-end headache. Iveco has 15% of the Indian OEM, but it also has a new best friend in Tata. Iveco wants rid of Ashok, but now must be wondering quite what will come of the Avia deal; after all, the Italian OEM has been doing good business in Eastern Europe for some time now, and many of us can testify to the vitriolic nature of the ‘ex’.
Moreover, whereas Iveco had an opportunity to do a bit of power-broking in the Indian market with its stake in Ashok, it now needs to be very careful in terms of which OEM it finally divests its stake to. Iveco survives on light and medium duty business, and it could probably do without another competitor in the is sector, meaning that its choices of vendee are now somewhat limited.
All told, this is an intriguing development. We don’t think Avia is ever likely to be on anything other than the periphery of the EU truck business, but with a heavy hitter such as Ashok Leyland behind it, the future could get interesting. Moreover, this is a first – an emerging market OEM buying an OEM from the Triad. There are three sub-65,000 HCV OEMs out there that may now just be wondering who may or may not be doing some initial due diligence with a view to having a quiet chat with their banks.
Oliver Dixon
