Chetan Maini Spells out the Rationale behind Selling Reva

Image: Gireesh GV for Forbes India

Chetan Maini, Mahindra Reva's chief of technology & strategy, and its co-founder

Can you tell us about the relationship between the three companies owned by your family?
They are completely separate companies, [that are] part of Maini Group. Each one has a separate shareholding pattern, independent boards and management teams. There are synergies in the group in procurement, policy, HR, best practices, etc., but decision making is independent.

In the boards, there are more people who are non-family and independent directors. The group companies have helped Reva tremendously in the early stages. For example, this factory is on land given by Maini Materials. There are various components (plastic systems, charging systems) that are supplied by the group companies. Since 1986 we have been making electric vehicles (golf carts), so there is a lot of synergy in the supply chain. In the early years Reva received a lot of support and was given a high priority within the group. When there were investments to be made in areas of component developments, the group companies took over some of that. The group has helped in giving management bandwidth and financial perspective. In the group, there is strong emotion to Reva. There was a high level of commitment, sometimes to the disadvantage to other group companies. I am not on the boards of other group companies so we run independently. I have shareholding in these companies.

Over the last few years, have these companies have become reluctant to put in more money in Reva?
That’s very true. We started the business in the initial years with a lot of our own money and AEV invested money. We got support from ICICI Technology financing and other debt financing and that helped the programme grow. The opportunity that we saw in 2005-2006 was much bigger for all group companies. Each of these companies needed capital and if they were only going to support Reva then we would have constrained their growth significantly. We believed that it was time for Reva to get more investment; the product had matured by then. We were already selling cars in India and Europe. DFJ (Draper Fisher Jurvetson) and GEF (Global Environment Fund) came into this sector, which helped Reva.

Was it true that Maini Precision had an external investor at that time and they wanted that the company should re-invest surplus in that business and not invest in Reva?
I don’t remember the exact year, but the auto components business was growing tremendously, the company was looking at going into aerospace business and they had global opportunities. They were positioned well and they needed more capital to grow. It wasn’t one versus the other. We just felt it was the right time for the group to grow. We couldn’t self fund ourselves; Reva wasn’t profitable at that time. Other businesses were very profitable. But a lot of their investment came into Reva to support it.

So this was done amicably?
It was done very amicably; there were no differences between the investors or the family members. When we started in 1999, before we moved back from US, my father had a discussion with the three of us, that if we do this, we should commit zero or 200 percent. That was an understanding that we had as a family and they were very supportive of me and the idea. They are still very supportive and have been the back bone of why we can do this today.

From 2006 onwards, did their priorities change?
No, each had their own business to run. But when it comes to financial and overall capital, we get together. We decide what to do; this is a financial decision not an operational decision. Once we saw that each company needed capital to grow, we took a call whether we should bring in external capital or do it ourselves. We believed that raising external capital was the right decision for all companies.

They did not feel that supporting Reva was becoming a drain on their resources?
I don’t think so. At some point we had to put our shareholder cap on. It is not a drain, but it was a question of opportunity. The options were, should we — as a group — grow slower and own larger portions, or grow faster and own smaller portions. As a family we chose the second route and said that this was the right time for capital infusion. In December 2006 we got in external funding.

What was the premise on which DFJ and GEF invest in the company and why did they exit?
DFJ was very interested in this space, they had invested in Tesla and they wanted to invest early in a space they believed was hot. This became a part of their cleantech investment. GEF also wanted to invest in EV for a while.

So why did they exit?
For me it was more of how we saw the next step coming. We were seeing that capital requirement was going to be significant going forward. But not at one shot. The business is so dynamic, so should you focus as a company continuously raising capital? Or should you focus on creating value? It is very time consuming to continuously raise funds. The money we had raised was not very large and the growth we are envisioning will be higher. We wanted a strategic investor now. We needed more than money, we needed growth capital. These companies invest more in early stages rather that in the latter stages. We were going to the next stage.

Did they get impatient because the company wasn’t making profits?
No. I wouldn’t say that. We were not profitable but we had showcased two new models. We had developed complete next generation of technology, and we had a tie up with GM. We were on a path. The investments they made went into creating this value; we started our new manufacturing plant. I don’t know what their internal constraints were.

How stressful has it been for you to run a company that doesn’t make profits?
It is challenging and difficult; especially in the initial years. It was very tight. Everything that we had as a family was going into this. Every day that we were losing was putting a strain on the entire group and especially for me personally as I was the only company that was draining it. But we created a lot of value. Technology value is still coming; it is very nascent to India. To me, it was an investment and we all saw that. We were efficient and spent the money in the right things.

Was the pressure building up on you (to sell)? Were things coming to a head?
It was a combination of a lot of things. It was also about seeing a large opportunity, to see that I was able to manage the non-profitable part of it because of the value I had created. To me it was more the opportunity than the pressure.

You felt it, if you didn’t do it now, it would be too late?
Yeah, there is a window of opportunity for partnerships.

But Mahindra had been speaking to you for last two years? Why didn’t you take that offer then?
Our discussion was on technology at that time. There wasn’t an offer to acquisition, it was an equity investment. We were only looking for investments; our investment banker was dealing with them. I did not engage with them too much at that time. There were only limited discussions. I have talked to them in the past only on possible technology development. We also supported smaller engagements with them.

Was there a shutdown in the factory because the money has been tight?
No, there has never been a shutdown.

Have you cut back on production? We understand that you are not taking orders till September 2010?
That’s because we are pre-booked. There were two issues. When we launched NXR and showcased it, we slowed down our supply chain because we were anticipating that the new model would take off much more. We were importing some parts and that had a six month time frame. But we found that our orders started increasing and we revamped our supply chain. That led to a little change, but it was not a financial constraint. We have a healthy order book. We need more money for our new factory and invest in our new products. The reaction we received at Frankfurt was very positive and we knew we needed more investments.

Do you need Rs. 2.5 crore every month to run this operation?
I won’t comment on that. We have 250 plus employees and we invest a lot. We are not profitable and we are investing a lot in our technology.

Your wage bill is very high and you pay a lot of money to your R&D and operations head?
When we got our investors, the board decided that to build a good company we needed strong professional management. Any company growing has to take that call. We were creating a global business and we were moving from a start-up to a more mature company. We were not making huge profits but unless we invest in people and technology you are not going to get there. We had to pay market salaries to get good talent.

The Mahindras think that you understand the domain well, and are among the few people who know the ecosystem of EV. Comments?
I have been looking at electric cars since 1990; have known several people in this space for the last two decades. Meet them every year at Global EV conferences. If you go to EV show, 1600 people attend globally; I have seen 100 of them for the last 15 years. In the last two years there has been a big change, new ventures, big automotive companies, big suppliers have started looking at EV. Every week you hear a new partnership in this space, earlier it would be once a year.

When a technology grows fast, no one knows everything. Understanding that ecosystem is very important — both business and financial. Mahindra saw that, and my title — technology and strategy — signifies that the business will undergo a radical change around both these.

Would you have changed anything in the way you ran the company?
I would have looked at partnerships earlier, like distribution, finance that would have leveraged us. We could have done better had we focused more on this. But it was difficult because we were so involved in getting the technology and prototype right and there were few people who understood this space. Today we have decided to focus on our core and find partners for the rest.

Do you think the pricing of the car could have been cheaper and you could have done more volumes?
You have to look at the total cost of ownership over a five year period. It’s like buying a petrol car and we give you a trail of 3,000 litres of petrol upfront at the time of purchase and say that everyday you fill up your car. If you didn’t have infrastructure in the form of a petrol bunk you would do that. In Delhi where we have a subsidy and the car costs Rs. 3 lakh, if someone is driving 1,200 kms a month, it is Rs. 480 versus Rs. 4,800 in petrol. It’s a volume game. Cell phones were expensive but when the service became available at Rs. 0.40 per minute, the business explodes. The infrastructure fell in place, 10 companies can share the same tower. The hardware became inexpensive.

In EVs, I am the only player in the country doing this so the supply chain becomes a challenge. Today we are seeing significant technology changes, and at each technology change the volume will also change. You will see that, it will be our strength. That is what Mahindra will bring, the supply chain efficiencies.

Three years ago, suppliers weren’t willing to invest in EV technology. China has 500 Lithium Ion battery suppliers; India doesn’t have a single one. Ten years ago, China had zero. Slowly people are thinking about it in India. We need suppliers for motors, electronics, charging systems. Ever since we announced the tie up with GM several of our suppliers have asked me to give them a roadmap for the next 5-10 years. They are thinking about it. Globally we are the most inexpensive car in this space.

On the battery did you change your suppliers, because the range fell from 80 km to 60 km on a single charge now?
We did, we were using Prestolite. It was part of Exide worldwide and they went through a large restructuring. Tudor stopped manufacturing those batteries. We were importing batteries and we were still getting 80 kms but the first battery that we had was exceeding the performance significantly. We had warranty for three years and the customers were using it for 4-5 years. Some lasted till 6 years. Our next set of batteries met our requirements but didn’t exceed therefore this feeling. We wanted to derisk our supply chain and wanted to bring in another partner. It was not just about costs alone.

In those 4-5 years lead prices went up tenfold so it hit everyone, not just us. Battery prices doubled. Today we buy batteries from Exide India.

Our new cars will offer both batteries — lead acid and lithium ion. We will lease it on a monthly basis, when you remove the battery from the car, the costs seem more appropriate. Now if we do that, a consumer will start comparing his energy costs to his petrol cars and find that this makes a lot of sense. We have been investing in all this technology that will make this business model possible.

The money that VCs gave you, did most of it go in paying off the debts that you had from Maini Group companies which had been underwriting this project for the last 15 years?
A very small part, but not all. We had already paid off our debts from TDB and ICICI. The Maini group companies were a set of suppliers among others and whatever was due to all our suppliers had to be paid off. A significant investment has been made in our new facility where we will manufacture up to 30,000 cars. It is 80 percent constructed. We did that in $20 million, other companies take $100 million to do that. The money also went in creating two new models the NXR and the NXG. This plant has a capacity of 6,000 cars. There is no company globally that has created so much value in this much money in this space worldwide. Another EV company would have spent 10 times of what we have spent. And Mahindras see that. We are frugal and efficient.

Will you phase out the old models when the new models are launched?
We will let the markets decide that.