Magna Steyr, the vehicle assembly arm of $26-billion diversified auto supplier Magna International, has managed production projects for carmakers like Mercedes Benz, General Motors, Chrysler and BMW for a decade. Guenther Apfalter, President of Magna Steyr, talked to Special Correspondent Kunal Talgeri about how its business model evolved, the need to understand and take forward the manufacturing culture of a range of automakers – and why India is Priority No. 1 for Magna.

How does Magna Steyr see India as a potential zone of vehicle assembly? What is a realistic target for a contract-manufacturing player (in vehicle assembly) in the country?

Guenther Apfalter: Everybody knows India is a fast-growing market. There are strong brands in India like Tata Motors and Mahindra & Mahindra, among others. When we look back in our history in India, we established our engineering company in Pune in 1999, which has also been fast growing in India’s auto industry. We do see potential for our philosophy of contract manufacturing.

Prasen Agali: The relationship with Tata Motors and the Mahindra & Mahindra (M&M) has extended over many years, right from the start of our Pune engineering centre. We have been doing lots of engineering projects for Tata Motors. For M&M, we have been engaging in lots of dialogue for engineering projects and, in the past three years, for manufacturing projects.

We have about ten groups in Magna. Out of this, about five are in active projects – in serious discussions with both the Tatas and Mahindras.

Apfalter: We don’t have a complete (vehicle assembly) project with any Indian OEM (original equipment manufacturer) yet, but we are negotiating. Already, we have some ideas (on this front). There are strong Indian OEMs which are moving westwards. With smaller volumes, we can help them, so that they don’t have to establish their own plant in West Europe, North America or somewhere else. Instead, we can help them build there and share our plant with other OEMs as we are doing currently in Austria. As it is, at the Austrian plant (of Magna Steyr), we do contract manufacturing works for various OEMs. This means we are sharing costs and, therefore, are competitive.

Apfalter: We want to be more aggressive in this space, but it has to make sense for both parties – us and the OEM.

Klaus Drobnak: What is very important in emerging markets is that after a certain point, when competitive OEMs are growing and capital/money/funds are available there, they will not go back to their home markets for contract manufacturing. As Mr. Apfalter mentioned before, the opportunity lies more in localisation projects abroad. We have seen such developments in China.

I expect this to take some years until Indian OEMs go in for contract manufacturing as a Tier 1 supplier. This is what will be a win-win situation.

Apfalter: We have had two such modes of entry in Turkey and Russia. This is what Klaus just mentioned, where we offer to OEMs not to invest in capacity in other markets. Instead, we can share capacity and resources. There has to be a need on both sides. For our existing contract manufacturing projects, it has made sense both in terms of volumes and costs -- and also, in terms of future strategy of the OEMs.

Apfalter: Absolutely! We are always looking for such opportunistic approaches. The focus is now on India, China and Russia. India is certainly Priority No. 1.

Apfalter: We have some projects in our view. This is also why we installed our existing organisation and strengthened it with more people. Klaus is now moving from our Shanghai headquarters to New Delhi. So, we are establishing our own Magna Steyr office in New Delhi to work with Prasan Agale who heads Magna International in India, to be closer to the market and discuss issues such as the ones you mentioned with local OEMs.

Agali: The investment is in terms of engineering at the moment. India is an attractive place for engineering. By putting in the engineering skills (and capabilities), which are pretty much world-class, which are then supported by 8-9 engineering centres of Steyr worldwide, we are able to deliver global expertise to local and foreign OEMs in India.

Going ahead, once we get good enough experience and credibility with the customer as a capable engineering partner for complete vehicles, we will look at going up the value chain, manufacturing engineering and finally operations here.

Guenther Apfalter: There are always ups and downs when you look back in history. When we look at the new environment and requirements of customers (OEMs), we have to offer more than just developing cars and manufacture those cars. We are offering them more USPs today that makes us more attractive to them.

Apfalter: We have to be cost-effective, benchmark ourselves against current plants located in Europe and North America. We have to be very quick and flexible. Certainly, one of our USPs is that we are experienced in developing cars, developing and integrating complete systems – and also capable of a one-stop shop concept of manufacturing cars.

We have to benchmark ourselves against plants in low-cost countries. This is also why we seek projects in Turkey, India and Russia. In effect, we have to ensure that we adjust and adapt the concept of contract manufacturing in North America and Europe to other parts of the globe.

Apfalter: The best example I can give is of our current Austrian facility, where we are doing contract manufacturing for General Motors, specifically the Saab range which is a convertible. Parallel to this, we are assembling Chrysler SUVs and the BMW X3 in the same plant, followed by the BMW Mini just awarded to us before Christmas. We are looking to expand this model to light commercial vehicles (LCVs), which could be a business model for Russia and Turkey. As far as India is concerned, we are still finding out which model will suit its cars and commercial vehicles.

Apfalter: You must have a very experienced and flexible workforce because it has to be capable of designing and engineering, as you said, across various platforms simultaneously. Over time, you build up more and more experience, which is a USP we have in the Austrian facility. Otherwise, we would not have been able to provide the right competitive price for such projects. This has to be carried out for future projects in other parts of the world.

Apfalter: Yes, long-term relationships are very vital because lifecycle for just one model will not be cost-competitive enough. So, with our Eurostar plant, we started to build a relationship with Chrysler. The new award (contract) from BMW also goes back to our collaboration with them on the X3. Further, when we are doing contract manufacturing for General Motors (in one geography), it has a good experience with us, and then we consider expanding this business model to other markets.

Apfalter: There is the acquisition phase, wherein we identify the project up to the point of winning the business award; this is approximately two years. It takes another at least 24 months to get it into production. This means engineering, development, sourcing and production. And then, the lifetime of such vehicles is seven to nine years. Totally, the lifecycle works out to between seven and 11 years.

Apfalter: It has become essential to develop platforms for OEMs which can be used for more than one OEM. So, for example, if you see the European and North American markets, a lot of the OEMs are developing niche cars which have low volumes. So, when we are capable to book these niche models on one or two platforms and share them (with more than one OEM), it certainly benefits the customer. This also applies to new technologies like electric and hybrid vehicles.

Agali: As far as average timeframe for profitability of a business unit is concerned, I’d like to take it further and say that not just every plant, but every product that the plant makes must be independently viable. So, every programme that we take at a Steyr plant has to be independently viable. This helps us survive even if there is a change in some other programme.

Apfalter: The acquisition, planning and development phases are financed for Magna Steyr in most cases, for example. So, I talked about the two-year acquisition phase. When you run into production, after a period of five or six years, you are running into a profit situation with a specific vehicle depending on the volumes, of course.

Apfalter: With the Mercedes-Benz G Wagen, we produce 7000 units per year and give a benefit to the customer because we are experienced in this kind of a vehicle. We develop such vehicles further. On the other hand, we are supplying the BMW X3 with more than 100000 units a year with benefits. It’s something between being flexible, cost effective, having the right resources on board, and being quick.

Apfalter: Currently, Magna Steyr has about 12,000 people. In 2001-02, we had about 4,000 people. It grew with the business awarded. When business awarded and volumes are going down, of course, headcount will go down. In the meantime, we went global in 2002 and 2002. So, we have grown significantly since.

Apfalter: The key is to have the right programme and project managers. When you are defining a project with prospective customers, you have to have individuals on board who are capable to manage the internal resources – in terms of developing and engineering a complete vehicle, integrating systems, and simultaneously being capable of discussing, negotiating and working with their counterparts in the OEM.

Only when these two parties fit, we can deliver something to our customers, which is a benefit to them. In other words, project managers, programme directors, engineering department managers and experienced production managers are the keys to our success.

Apfalter: In most cases, the Greenfield approach is better because it allows us to plan for what is specific to a certain project. The Brownfield approach – when you talk about our acquisition of Eurostar – it fitted perfectly for the challenge we faced with BMW, in terms of bringing a new car (X3) to the market very quickly. And on the premises of our car facility at Eurostar, we had people and equipment to a certain extent in surrounding areas. That’s what drove the acquisition. But there is no real pattern.

Of course! India is certainly one of the topics that are discussed. I can’t name the OEMs, but we are often asked by them if we are ready to invest for them in India.