Neeraj Kanwar, the 41-year-old younger son of Apollo Tyres Chairman, Onkar S. Kanwar, does not believe in being ‘a Johnny on the treadmill’. He would rather be a marathon runner in the industry.
Justifying the recent deal to take over US-based Cooper Tire & Rubber Company, Neeraj, who is Apollo Tyres Vice-Chairman and Managing Director, says the company cannot remain a ‘one brand, one country’ entity any more, and needs near-shore (closer to the market) presence in large, developed markets to mark its global presence.
Neeraj started his journey in Apollo in 1994-95, when it was a one-product (truck tyres) and one-country (India) company, having islands of excellence (working in silos) everywhere but lacking in communication transparency and dependent on foreign companies for technology.
Today, it is a different story. “This is a new wave for us. Apollo has gone for organic and inorganic expansions, and has access to overseas markets through brands like Vredestein,” said Neeraj.
The wave of change did not hit Apollo alone, but the entire tyre industry. “If you see the tyre industry in the nineties, there was consolidation that took place worldwide. There was a small consolidation phase in India as well,” he said.
“Then came an era when we saw the Chinese and Koreans gaining quick ground. This required us to acquire and/or build a manufacturing and distribution presence in China and South-East Asia, to dominate the large emerging markets by developing a low-cost global manufacturing footprint,” he added.
Apollo’s global competitors are aggressively scaling up manufacturing capacity and the ability to supply to North America, China and other large markets. And it is competing with names such as Bridgestone (Japan), Michelin (France), Yokohama (Japan) and Pirelli (Italy).
Buying a behemoth
On opting to acquire a company twice its size, instead of exploring the joint venture route, Neeraj said it was in keeping with Apollo’s strategy of expanding through acquisitions. “Joint ventures are not in our DNA,” he said.
Apollo ended fiscal 2012-13 with a turnover of $2.3 billion, while Cooper’s revenues for calendar 2012 stood at $4.2 billion.
“We believe that to de-risk ourselves from the markets is very important. Today, economies are very dynamic, especially in our country — given the economic and political situation — making it important for companies to de-risk themselves from being focussed in one economy, one country,” said Neeraj.
Apollo will continue to focus on India and at the same time look at newer markets so that its balance-sheet remains protected.
“The deal will be concluded as per the timeline and there is no reason for anxiety. Middle of October the deal will close,” he said, addressing scepticism on Apollo’s ability to complete the Apollo deal.
The board is convinced, the long-term investors are convinced, so why this noise, he wondered. Long-term investors and those in the US market understood the deal structure, he pointed out. “Where is this concern stemming from? Eighty-five per cent of the debt is international, it has historically low interest rates and there is no amortisation.”
Besides, less than 25 per cent of the combined company revenues were expected to be in rupee, as the rupee depreciation against the dollar, the euro and the renminbi would lead to higher reported revenues in rupee terms, he added.
“A lot of thinking went into it. We started the initial discussions with Cooper for a strategic tie-up in 2006, but nothing happened. It was in 2011 that we started discussions again,” he recalled.
This June, Apollo and Cooper announced the deal, under which a wholly-owned subsidiary of Apollo (Apollo Tyres BV) will acquire the Ohio-based company in an all-cash transaction valued at $2.5 billion (approximately Rs 14,500 crore). This is the largest transaction in India’s automotive industry. Tata Motors’ Jaguar deal was worth $2.3 billion.
Clear rationale
The rationale behind the deal was clear, Neeraj said. Apollo acquires a profitable and scaled business in the critical markets of North America and China. It also gets a set of complementary products and brands, and reduces dependence on one market (India), according to him.
Neeraj is also clear that there will be no layoffs after the acquisition is completed, as trained manpower is an asset. The deal reportedly faced opposition from one of the Cooper plants in China and concerns were also raised in the US. Since the deal is yet to be completed Cooper is the one sorting out the issues.
The deal will help Apollo leverage the combined distribution network in Europe to sell the Vredestein, Cooper and Apollo brands. The Indian company also gets access to Cooper’s new markets such as Latin America, Russia and East Asia.
Analysts say the deal means a lot for an Indian company. Besides, the two factories of Cooper in China may also make tyres for the Indian automotive industry, especially truck and bus radials.
However, having said this, they also caution that it may lead to China-made truck and bus radials coming here in bulk, including for the aftermarkets. This could lead to issues of anti-dumping.
What will ultimately be crucial is investing in research and development and in human resources, according to Neeraj.
“We need to create very strong teams. And this is what Apollo is doing.”
Two years down the line, Apollo will be looking at new markets, and the US and China will be the primary drivers for growth. He is confident Apollo will ‘go the distance’.
(Inputs from S Ronendra Singh)