Mahindra War Room 2019 Design to Disrupt

“DESIGN FOR AN ELECTRIC FUTURE”

LIVE CHALLENGE FROM MAHINDRA FIRST CHOICE SERVICES (MFCS)

“You either disrupt your own company, or someone else will!”

Chapter 1: Empathize

As the Indian automotive market started growing rapidly the needs for regular
servicing, supply of spare-parts for these services, accident repair, breakdown
maintenance and insurance grew significantly. Over time, a plethora of service
options emerged for the customer: Original Equipment Manufacturer (OEM)
Authorized Service Centers, Independent Garages or Local Mechanics. The
costs and benefits of servicing vary depending on where one services. At one
end of the spectrum are “car mechanics” who offer a low cost but variable quality
service. Their use of genuine spare parts, and service standards vary wildly
unless customer 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.

Chapter 2: Design & Ideate

With over 5 decades of experience in the Indian automotive industry by the early
2000s, Mahindra sought to solve the customer problems around servicing of
cars. Mahindra believed that Indians needed a fair value for money proposition to
service their cars - something that brings together the trustworthiness and
standardization of a large brand, with the value-for-money benefits of
independent garages and car mechanics. Mahindra First Choice Service’s
objective was to bring greater quality and service efficiency to the unorganized
and scattered Car Servicing industry in India.

Chapter 3: Prototype & Test

The first MFCS Service Centre offering the value proposition as indicated above
was set up in Parel area of Mumbai in 2007. MFCS would be a one-stop, one-
roof solution for servicing, accident repair and insurance, offering value added

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services such as pick-up and drop-off, towing services, on-line appointments and
transparent costing. MFCS customers started to enjoy a trusted and good quality
service experience at a significantly lower cost, though it was still more
expensive than a roadside mechanic.

Chapter 4: Scale Profitably

The value proposition of MFCS resonated with the customer, and soon attracted
a franchisee led growth model. Franchisees invested between INR. 65 Lacs to 1
crore including a security deposit and monthly fee. All other costs were borne by
the Franchisee. Sometimes, Franchisees owned the retail outlet they used as
MFCS Service Centre, but often they rented the space. MFCS provides back-end
support, including all aspects of knowhow, equipment sourcing, set up, process
training, SAP set up, spare parts supply and business development.

Ideally, MFCS would like to supply all the spare-parts needed by their franchisees
- this would allow MFCS to buy all spare-parts needed from OEMs in high
volume, at a lower cost, instead of sourcing from intermediaries. About 70% by
value of the total spare-parts used are “specific”, while 30% are “generic” such as
oils, grease, filters etc. It would be difficult for a Franchisee to keep a customer
waiting for his or her car to be serviced, while MFCS ships the spare-part. This
might compel the franchisee to source the spare part locally, resulting in loss of
business to MFCS and higher costs for the franchisee. At the same time,
maintaining a high inventory of spare-parts is a high cost option for MFCS. To
balance costs of spare-parts and customer service, MFCS has opened
Warehouses at 50-200km from Franchisees, where they pay cash and carry
spare-parts as they need.

During enrollment, Franchisees are usually confident of sourcing all the business
they need from their network. But over time they realize the market challenges
and seek support from MFCS to get footfalls. As investors, they believe they
have the right to have customers walking into their service centers every day, and
expect MFCS to play a major role in getting them, though that is not the
understanding initially. Improving customer footfalls is a major success factor in
this business. In response to these needs, MFCS periodically runs campaigns to
improve footfalls across all Franchisees. A few years ago, Mahindra ran a

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campaign called “Free ke baad, First Choice”, implying that customers should
move their servicing needs to First Choice once their free servicing period with
with the OEM Authorized Service Centre is over. The INR. 6-crore campaign got
a good response from prospective franchisees, spare-part suppliers and potential
customers, though the network being only 70 franchisees limited the impact to
some extent. MFCS also weathered the challenge of poaching by some of the
new entrants in this sector, who, often unrealistically, offer to solve all problems at
a fraction of the cost that Franchisees pay MFCS. Also, in some cases there are
opportunities for MFCS Franchisees to collaborate with OEM Authorized Service
centers, whose capacity is heavily under-utilized. Today, MFCS has scaled to 326
4-wheeler workshop franchisees, 90 2-wheeler workshop franchisees and 34
warehouses across India.

Studies conducted in 2016 showed that while 80% of cars were in need of
service or repair, only 52% of the owners serviced their cars seasonally. Many
owners were not interested in preventive maintenance beyond fluid checks &
tyres. To address this need, Mahindra set up ‘Car Workz’ as a digital aggregator
of service centres - the “go to” app for all needs pertaining to the personal vehicle
- from finding a good workshop, estimating the job cost, understanding trade
lingo or even increasing awareness about servicing itself.

Over the last decade, both OEM Authorized Service Centers and MFCS have not
managed to attain full capacity utilization, though they have expanded their
networks significantly. A part of the reason is cost - automotive customers feel
more comfortable with the cost-quality equation of their friendly neighborhood car
mechanic whom they trust, rather than an impersonal and over-professional
authorized service centre. Once promising upstarts such as CarNation and
myTVS have shut down completely or scaled down operations. MFCS has
stayed on and has proved its viability, though not entirely.

Chapter 5: Design to Disrupt

About 72 million vehicles ply the Indian Roads today - including cars, 2-wheelers,
3-wheelers and commercial vehicles. Collectively their servicing needs is
estimated at INR. 55,000 crores per annum, based on Service Centre revenues
including “cashless insurance claims” and Spare Part sales, across Cars, Two

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Wheelers and Commercial Vehicles. Over the next 3 years, this is expected to
grow to INR. 70,000 crores, equally distributed between OEM Authorized Service
Centers and the “Independent Aftermarket” segment.

But something more fundamental, more disruptive is going on in Cars and

vehicles, the source of demand for Aftermarket Services space:

• Emergence of Fleets as a major segment: Traditionally, automotive services

have been oriented to Retail customers with low bargaining power compared
to Fleet owners. As aggregators gain ground, fleets are expected to
dominate the future, with retail shrinking significantly. The emergence of fleet
owners t means Service businesses are bound to lose bargaining power,
which could affect their profitability adversely.

• Interplay of new technologies such as Connected Cars: Would an app sitting

in the car already set up appointments with a preferred service centre?

• The World of Autonomous Cars: How would the world of services be when
autonomous cars are the norm? Will they drive themselves to the garage?
Would service companies use AI to persuade cars to come to their garage
rather than advertise to humans?

• The Electric Future: Perhaps the most disruptive force of them all, electric
vehicles will give birth to a whole new ecosystem, as they are fundamentally
different from Internal Combustion Engine cars. Compared to the classical
Internal Combustion (IC) Engines, Electric Vehicles are simpler with fewer
moving parts, and therefore have considerably lower service requirements.
This could have profound implications on the Services business, which are
driven by spare-parts margins. Typically, electric vehicle powertrains
comprise a high voltage battery, an electric motor with power electronics
controller and gearbox. While battery electric vehicles are purely driven by
the electric energy stored in the high voltage battery, hybrid electrical
vehicles have a hybrid powertrain comprising both internal combustion
engine and an electric motor.

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In the world of business, being able to peep into the future to create a
winning strategy in the present determines success. If our roads are filled
with electric cars instead of combustion engine cars, the entire complexion
of services will change dramatically for MFCS.

Slowly but surely, the world is also waking up to the reality of gas guzzlers that
deplete finite fossil fuel reserves and pollute the environment. The ‘Internal
Combustion’ engine, which forms the heart of the automobile for over a century
now, has evolved significantly. Yet, the sheer volume of automobiles polluting the
air and utilizing the limited supply of fossil fuels, is compelling the world to seek
alternative technologies for a sustainable future. Tesla has shown the possibility
of a real product, though commercial viability is some distance away.

There are 245 million registered motor vehicles in India, of which 70 million are
used. Most of them run on fossil fuel, with a small share of vehicles running on
Electric, Ethanol, Bio-diesel and Bio CNG alternatives. This forces India to import
crude oil worth over INR. 7 Lac crores each year, which can be saved if the fuels
are locally sourced. Niti Aayog estimates that India can save 64% of passenger
mobility related energy demand, and 37% of carbon emissions by 2030, saving
INR. 3.9 Lakh Crores per annum. Such saving will significantly improve India’s
economic strength, and hence is of Government interest. The Government has
stated its objective to have a 100% of all new vehicles sold from 2030 to be
electric. Though this appears as too tall a goal, SIAM estimates that 40% of all
new cars sold in India will be electric, by 2030. Government schemes such as
FAME and National E-Mobility program are focused on this goal. The main
obstacle to growth of electric vehicles in India today is the lack of policy clarity on
whether the sale of electricity is to be treated as a service or a product. If it is a
service then setting up of charging stations would not require a license; if it is
product it would. This lack of clarity is preventing big investments coming into
Electric Vehicle charging, and the EV policy is expected to provide norms for
bidding, installation and selling price of power for the charging stations.

With Sustainability being a core value, Mahindra invested into alternative

technologies as early as 1999, developing an electric 3-wheeler called ‘Bijlee’. In
the mid 2000s, the Maini Group created the Reva electric car, attracting global
attention and over USD. 50 million in equity investment. These products,

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however, remained limited successes, owing to high prices and lack of

infrastructure such as charging stations. In 2010, Mahindra acquired promoter’s
stakes in Reva Electric for INR. 330 crores and has hence launched the e2O
which is already selling across India.

How will an India driven by electric vehicles look from the services
perspective? What are the opportunities that will get created for servicing,
when many cars go electric? And what current opportunities will get
eliminated? How would companies in the servicing space evolve, and what
would therefore become the necessary play for MFCS? How can Mahindra
benefit by being an early mover in electric cars, already owning Reva
technologies built over the last 2 decades?

Design a strategy for Mahindra First Choice Services to play in the

upcoming electric future.

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