In 1985, Yamaha Motor Company (Yamaha Motors) entered into a technical support agreement with Escorts Limited (Escorts), and started local production of Yamaha motorcycles. In 1995, Yamaha and Escorts signed another contract, establishing Escorts Yamaha Motor Ltd. (EYML) to manufacture and market motorcycles in India. Each company invested 50% of the capital for the Indian motorcycle venture. The joint venture manufactured Rajdoot motorcycles at Faridabad and the RX and four-stroke YBX series at Surajpur. EYML had the largest countrywide network of over 500 dealers, supported by a wide base of sales & service outlets and spare parts stockists. Anil Nanda, chairman, EYML, said the Surajpur and Faridabad facilities would be modernized and upgraded with a Rs. 3.75 billion budget. With the additional investments, volumes were expected to go up from 300,000 units in 1996 to 500,000 units by the year 2000. Sales turnover too was projected to rise from Rs. 9 billion, (including exports of Rs. 1.2 billion) to Rs. 20 billion (including exports of Rs. 3 billion) over the same period. In 1999, EYML closed down its moped manufacturing facility and discontinued production of its two existing brands due to lack of adequate demand. The company decided to concentrate fully on its motorcycle production. Company sources said that EYML decided to discontinue the production as earning was low from moped business. Against a 5% growth recorded by the moped segment in 1998-99, sales of EYML mopeds declined by 17.7%. Its market share also declined from 1.9% in 1997- 98 to 1.5% in 1998-99. In April 2000, Escorts announced that it was likely to sell around 20% stake in EYML to Yamaha Motors. On April 24, 2000, Rajan Nanda, Chairman of Escorts, the flagship of the Rs. 35 billion Escorts group held board meeting of Escorts Limited (Escorts). At the meeting, Nanda informed the directors that, subject to the board’s approval, Yamaha Motors could be given a majority stake in the joint venture company. The Japanese two-wheeler major had offered to buy an additional 24% stake in EYML from Escorts at Rs. 200 per share. The deal would add Rs. 2.3 billion to Escorts’ coffers. The announcement seemed to have been well accepted by the board. In late April 2000, the board of Escorts approved the proposal to divest 24% equity. For the Escorts board, such announcements were not new. In a little over a year, Escorts had offloaded substantial chunks of its equity in three joint ventures to its overseas partners. It all started in 1999 when Escorts sold one-third of its shares in the construction equipment company Escorts JCB to JCB of the United Kingdom for Rs. 490 billion. This brought its stake down from 60% to 40%. Next came the turn of Hughes Escorts Communication, a 51:49 joint venture between Hughes Communications of the United States and Escorts. In December 1999, Escorts offloaded 23% of its stake to Hughes for Rs. 750 million. This brought its shareholding in the company to 26%. Escorts would thus become a minority shareholder in EYML. However, an official said that Escorts’ holding in the joint venture would not be less than 26% and it would not exit from the joint venture. Said Nanda, “I have no intentions of selling off the entire stake to Yamaha. Escorts will retain the 26 per cent stake we now hold in the venture.” With the change in the equity pattern, Yamaha Motors would control the management of the joint venture. Commented Nanda, “We have always believed that business relationships are driven by the value added by each partner. We have decided that it would be appropriate for Yamaha Motors, as the technology provider, to take the lead role in the business.” This was the second such exercise undertaken by Nanda since 1995 when he took over the reins of the company from his father, Har Prashad Nanda as chairman of the group. Nanda identified four thrust areas for Escorts-agri-business, telecom, software and healthcare. The idea behind giving Yamaha Motors the majority stake in the joint venture was to focus more on the four thrust areas. Escorts would now concentrate on agri-business, telecom and healthcare. Escorts’ exit from the joint venture seemed to be a well-planned move. The group had already moved out of businesses where it believed it did not have a sustainable advantage. Escorts would now focus on four core businesses: agribusiness (tractors), telecom services (cellular telephony), IT and Internet services and healthcare services (cardiac healthcare). However analysts were skeptical about Escorts’ success in these areas. One analyst said, “It’s been almost 12-18 months since it identified these as core businesses, and Escorts is still grappling with the new economy initiatives.” Escorts was planning to acquire a controlling stake in at least two circles – Madhya Pradesh and Gujarat. Escotel Mobile Communications, a 50:50 joint venture between Escorts and First Pacific of Hongkong, had earlier lost out on two acquisitions to Skycell in Chennai and Essar Cellphone in Delhi, as its bids were too low. In May 2000, EYML was renamed Yamaha Motors Escorts Ltd (YMEL) following Escorts decision to sell off 24% stake. In May 2001, Yamaha Motors struck a deal with Escorts for acquiring the latter’s 26% shareholding in YMEL for Rs. 700 million. The deal marked Escort’s exit from the joint venture. Yamaha Motors would now hold 100% stake in the company. With the change in management, Yamaha Motors was expected to build global capabilities, bring in new technology and offer a wide range of cost effective quality products. All this was expected to give them an edge over competitors. The company would also have the additional benefit of enlarging its scale of operations for manufacturing and supplying products worldwide. On its part, Escorts would continue to provide a stronger base for manufacturing facilities, a countrywide dealership network and skilled manpower. Yamaha Motors was also working to regain its lost market position. From being number two in 1996, it had slipped to the fourth position in 2001. In December 2000, Yamaha Motors launched Crux-a four-stroke bike. By mid 2001, Crux had already sold 33,000 units. In December 2001, Yamaha Motors had a 14% share in the Indian market which improved marginally in March 2002, to 15%. As a part of marketing strategy, the company planned to introduce one new model each year and was working on one such model.

1. Both Escorts Motors and Yamaha Motors entered into a joint venture to manufacture and market motorcycles in India. What was the rationale behind this joint venture and what synergies were expected out of this joint venture? 2. In May 2000, Escorts took the decision to sell off 24% stake. In May 2001, Yamaha Motors struck a deal with Escorts for acquiring the latter’s 26% shareholding in YMEL for Rs. 700 million. The deal marked Escort’s exit from the joint venture. Why do you think Escorts exited from the joint venture?