Mahindra War Room 2018 Aftermarket - MFCS Caselet

MAHINDRA AFTERMARKET - SERVICES BUSINESS CASELET

GOING BIG & BOLD INTO THE INDEPENDENT AFTERMARKET BUSINESS

India is the 4th largest automotive market in the world, and is part of the holy
triumvirate of China and USA as the world’s most important automotive markets.
About 3.2 million new cars were bought last year, growing about 9% over the
previous year. Most of the global automotive majors have set up shop in India,
with several of them opening large plants in various parts of the country. But a
large demand of 4 wheeled transport is also met by ‘Used’ cars - popularly
called “second hand" cars in the commonwealth countries and “aftermarket” or
“pre-owned” cars in the Americas. Over 60% of the entrants into the 4-wheeler
market prefer to buy a used car, to familiarize themselves with the vagaries of
driving, as well as to economize on the purchase. In the United States - the
cradle of automotive industry - about 3 used cars sell for every new car sold. In
Europe, 2 used cars sell for every new car. In India, last year, about 3.6 million
used cars were sold, representing 1.3 used cars for every used car. It is
expected that the used car market will grow significantly in the coming years,
moving the ratio of used to new cars closer to developed market averages, all
the more because of the large “feeder market” of two wheeler market. India is
now the largest two wheeler market in the world, overtaking China last year.
About 20 million two wheelers sold last year in India - that is 54,000 units every
day of last year. No wonder our roads seem more crowded everyday! Thus the
prospects of growth in the used car market in the coming years is indeed high!

Yet, the market was largely “unorganized” even till a decade ago. Sellers would
often palm off substandard products to buyers and disappear later, forcing a
large number of people to buy used cars within their social circle of family,
friends, acquaintances and references.

The Mahindra Group was among the first to spot the large opportunity in used
cars. In fact, Mahindra was slightly ahead of time while founding
‘AutomartIndia.com’ in 1998. The entity was restructured in 2007 as
‘FirstChoice’, with a mission to make the process of buying and selling used
cars as rewarding as a new car. Mahindra FirstChoice Wheels (MFCW) would
pursue the opportunity in multi-brand used-car retailing, while Mahindra First
Choice Services (MFCS) pursued the opportunity in servicing of both new and

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Mahindra War Room 2018 Aftermarket - MFCS Caselet

used cars. While MFCW opened a large used car superstore, MFCS pioneered
the concept of a 118-point quality check, offering warranty for used cars across
brands. MFCW soon expanded into over 1400 outlets across 700+ towns - both
company owned and franchise owned. MFCS has a footprint of over 34
warehouses servicing 353 Franchisees. Both businesses have a strong digital
footprint, spanning Indian Blue Book, AutoInspekt, Yard Management Solutions,
CarWorkz aggregator app of independent garages and so on. This caselet
pertains to the MFCS business - there is another independent caselet
pertaining to the MFCW business.

An Indian customer looking to service his or her car has a plethora of options
today - Original Equipment Manufacturer (OEM) Authorized Service Centers,
Independent Garages or Local Mechanics. The costs and benefits of servicing a
car vary depending on where one chooses to service the car. At one end of the
spectrum are “car mechanics” who offer a low cost but variable quality services.
Their use of genuine spare parts, and the standards of service offered vary wildly
unless the customer knows the mechanic or owner personally or has a history of
positive relationship. At the other end of the spectrum is the “Authorized Service
Centre”, often attached to the OEM’s dealership, where the cost of servicing is
significantly higher, but it comes with an assurance of greater standardization of
service and usage of genuine spares, as it is backed by a large brand.

Mahindra First Choice Services is positioned between the two, where one can
get the trusted high quality service experience of an OEM authorized service
centre, at a significantly lower price point, though the price will still be higher
than a local mechanic. MFCS adds significant value in customer service, such
as a one-stop, one-roof solution for servicing, accident repair and insurance,
pick-up and drop-off, towing services during breakdown or accident, on-line
appointments and transparent costing.

Over the last decade, both OEM Authorized Service Centers and MFCS have
not managed to attain full utilization of their capacities, though they have
expanded their networks significantly. A part of the reason is the cost of service
- a large number of automotive customers are still comfortable with the cost-
quality equation of their friendly neighborhood car mechanic whom they trust,
rather than an impersonal but professional authorized service centre. Promising

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Mahindra War Room 2018 Aftermarket - MFCS Caselet

upstarts such as CarNation and myTVS have practically shut down completely
or scaled down significantly. MFCS has stayed on with the strong backing of the
Mahindra Group and has proved its viability, though not entirely.

After dabbling with both company owned and franchisee owned models, MFCS
now operates 353 Franchisee Owned and Operated outlets across India, and a
further network of 34 warehouses which supply spare parts required by these
outlets. Franchisees are located between 50-200 kms from the warehouse, pay
cash and carry the spare parts they need from the warehouse. Delivering the
spare part asked on demand to the Franchisee is essential for MFCS to
succeed, as the Franchisee would find it difficult to keep the customer waiting
for his or her car to be serviced, while waiting for the spare part from MFCS. The
Franchisee may then source the spare part locally resulting in loss of business to
MFCS. At the same time, maintaining high inventory is a high cost option. Spare
Parts Management is thus very crucial for success in this business. About 70%
of spare parts used by value are specific while 30% are generic products (such
as oils, grease, filters etc.) With the large franchisee base, MFCS is now able to
realize economies of scale by accessing spare parts directly from
manufacturers, instead of intermediaries.

A Franchisee enrolls into MFCS by investing anywhere between INR. 65 Lacs to

INR. 1 crore, including a security deposit and monthly fee. All other costs are
borne by the Franchisee. The outlet where the Franchisee operates may be
owned or rented. MFCS adds value to the Franchisee through strong back-end
support, including technical know-how, equipment sourcing, set-up, process
training, SAP implementation, spare parts supply and business development.
During enrollment, Franchisees are generally confident of sourcing all the
business they need, but over time seek support from MFCS to generate
customer foot falls at their service centres.

Apart from managing Franchisees, MFCS also sources and supplies private-
label spare parts, and has developed CarWorkz as a potential platform
aggregator for the 70,000 independent garages in the country. MFCS is also
dabbling with Express Format servicing centre in petrol pumps and two wheeler
servicing, as potential areas of future growth.

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Mahindra War Room 2018 Aftermarket - MFCS Caselet

LIVE CHALLENGE: GOING BIG & BOLD INTO THE INDEPENDENT

AFTERMARKET BUSINESS

Estimated point to over 65 million vehicles plying the Indian roads today -
including cars, 2-wheelers, 3-wheelers and commercial vehicles. Collectively
their servicing needs is estimated at INR. 50,000 crores per annum. This
estimation is based on a broad definition that spans Service Centre revenues
including “cashless insurance claims” and Spare Part sales, across Cars, Two
Wheelers and Commercial Vehicles. Over the next 3 years, this is expected to
grow to INR. 65,000 crores. The OEM Authorized Service Centers are expected
to capture half of this pie, with the rest of the market remaining open for the
“Independent Aftermarket” segment. The Independent Aftermarket segment is
expected to grow to INR. 32,500 crores in the next 3 years, with the following
estimates:

SEGMENT SHARE ESTIMATED SIZE

2-WHEELERS 40% ~ INR. 13,000 CRORES

CARS 35% ~ INR. 11,500 CRORES

COMMERCIAL VEHICLES (INCL. 3W) 25% ~ INR. 8,000 CRORES

TOTAL REVENUES ~ INR. 32,500 CRORES

Thus far, MFCS was pursuing a vision to reach the #3 position in Car Servicing,
focused on Out of Warranty cars, but this is not amounting to the financial scale
aspired. Hence, MFCS has revised its vision to attain #1 position in the entire
Independent Aftermarket, estimated at INR. 32,500 crores as described
above, over the next 5 years. This is no doubt a lofty vision, and requires
action across one or more of 3 levers:

Lever 1: A historical challenge for MFCS has been increasing footfall of

customers into the Franchisee Service Centres across the board. Studies show
that while over 80% of cars are technically in need of some type of service or
repair, only 52% of car owners choose to service their cars seasonally. Many
owners are not interested in doing preventive maintenance beyond fluid checks
and tyres, expecting their automobiles to be maintenance-free. The growth of

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app-driven shared economy also compounds the situation - on the one hand it
diminishes automotive sales and therefore the need for service; on the other, it
increases the need for servicing as the aggregator cars are more intensively
used! Last year, MFCS ran a campaign called ‘Free Ke Baad First Choice’ to lure
customers into the Service Centres after their free service from the OEM is
exhausted, with some success. But MFCS is looking for a disruptor here. Can
MFCS expand its service offerings into 2-Wheelers, 3-Wheelers and
Commercial Vehicles? Is this feasible technically? Does it require additional
investments and if so how much? What is the current pattern of behavior of
servicing among 2-wheelers, 3-wheelers and commercial vehicle
customers? Can MFCS expand the pie dramatically by opening up to these
vehicle categories?

Lever 2: Selling private label spare parts into the “Bazaar Channel” - which
comprises wholesalers, distributors and retailers who buy from aftermarket
companies and sell into the “car mechanics” or independent garages - is
another significantly large opportunity. Last year, about INR. 15,000 crores worth
of independent after market spare parts is sold by companies such as Bosch,
Anand Group, Minda, Valeo, TVS group etc. Bosch is the leader here with
revenues of INR. 2500 crores with the distant No.2 estimated at INR. 400-700
crores. MFCS has developed its own brand of spare parts called “MFC Parts”
and has developed a network of 75 distributors with a unique business model
that is doing reasonably well. Since MFCS does not manufacture these parts,
they face the “cost vs quality” conundrum in developing sources aggressively
and expanding the range of products. While the sales to the network of
Franchisees can expedite the economies of scale in sourcing, what
strategy should MFCS adopt in sourcing, logistics, sales & marketing, to
scale the Bazaar Channel sales substantially? Can it compete with the likes
of Bosch and carve out a market share of say 15% in the next 5 years?

Lever 3: In developed markets such as the United States, Service Centres have
a strong “preferred partner” tie-up with Insurance companies, which divert the
large volume of accident repair businesses directly to the preferred partners.
Such tie ups help the Insurance companies to reduce their claim costs, by
consolidating their volume with their preferred partners. In India, such tie ups are

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Mahindra War Room 2018 Aftermarket - MFCS Caselet

in a nascent form of “cashless” accidental repair, where in the customer can

repair their vehicle at a Service Centre who would then bill and collect from the
Insurance company. But the direct tie up with the Insurance Companies and
benefiting from the large volume of diverted accidental repair business is yet to
be realized. Can Mahindra sell this value proposition and become the
preferred partner to Insurance companies? What is the landscape of these
insurance companies today? What would it take for them to offer a
preferred status to MFCS?

Given this backdrop, evolve a strategy for Mahindra First Choice Services
to attain the #1 Position in the Independent Aftermarket within the next 5
years, by pursuing one or more of the above 3 levers.

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