Mahindra-Peugeot – 12 Things That Excite Us…and 3 That Have Us Worried

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Mahindra has announced the acquisition of Peugeot Motorcycles (PMTC). The Indian automotive major will take a controlling 51% stake in PMTC and will have three members on the five-member board. IndiaAutoReport (IAR) takes a look at what this acquisition means for Mahindra in the two-wheeler business.

A number of inferences can be drawn from Mahindra’s bold move and here are 12 that are on the top of our list:

1. Return to Relevance

Mahindra as a two-wheeler brand was fast losing its relevance. After entering the business in 2008 through the acquisition of Kinetic Group’s two wheeler businesses, Mahindra has not been able to make a significant impact and remains a very small player in the very large Indian two-wheeler market.

As of 2013, Mahindra accounted for sales of 160,980 units, representing a market share of 1.12% in two wheelers. A series of misadventures, delayed product introductions and the lack of customer enthusiasm meant that Mahindra was struggling in a market that has been delivering 20% growth for the leaders.

In fact, the analysts at EMMAAA had a particularly pessimistic view of the Mahindra brand and did not forecast it to be present at all in the two-wheeler market beyond five years. To order EMMAAA’s unique model level two-wheeler forecast, click here.

The acquisition of Peugeot brings Mahindra back into the reckoning. While the French brand adds insignificant volumes, it is the promise that the brand holds, and the technology it brings, that makes us optimistic.

 

2. Brand

Peugeot is a respected brand with a decent, though uncelebrated, heritage. On the analyst con-call, Rajesh Jejurikar, Head – Tractor and two-wheelers division of Mahindra, made it a point to start-off by highlighting Peugeot’s rich 200-year heritage. While most of the heritage is trivial in today’s context, a company with a long history often has maturity in its departments, most-of-all product development.

It is this maturity that ensures that the products hatched by the R&D / Engineering department are niggle free and designed keeping in mind the attributes the customer expects from the brand.

 

3. Some More Brand – Two-tier Strategy 

The acquisition of Peugeot allows Mahindra to approach most global markets with a two-brand offering. While Peugeot will target the premium end of the market, Mahindra will focus on the mass-market segment.

Mahindra feels that there are pockets around the world where Peugeot is very well known and that recognition can be leveraged to grow sales. African countries are relatively virgin territories in terms of two wheelers and are also French speaking, especially in the Northern part of the continent. As these economies improve, vehicle population should grow fast and Mahindra has a huge opportunity to leverage the French brand in these French-speaking countries.

On the other hand, Mahindra as a brand has strengths in certain markets and that would come in handy to improve sales.

 

4. R&D / Engineering Capabilities

Peugeot has a full-fledged R&D centre with powertrain development capability as well as an engineering and styling centre. All its products are developed in-house and (from what we see on their site) appear stylish and contemporary.

In fact, Jejurikar made a special mention of Peugeot’s styling capabilities, finding them quite impressive. However, more than that, Peugeot’s maturity comes most in handy in the area of engineering.

Product development is more art than science and the final offering is often an ode to how many hours the designers have spent in their design centers and how cohesive the team is. Automotive R&D is like a snowball rolling downhill – it needs to roll a bit to gather momentum and mass. However, once it does so, things keep on improving and products keep getting better. Even new engineers, starting work with established engineering departments, gain from the wealth of knowledge, accumulated over the years.

Peugeot ranks well in this aspect and that reflects in their extensive range of machines and the wide range of engines powering them. This is an attribute that would come in handy in the future too and Mahindra is aiming to leverage technical and product development capabilities of Peugeot to develop a new range of products.

Exposure to Peugeot’ R&D will also bolster Mahindra two-wheelers’ own R&D set-up in India, allowing for accelerated learning for Indian engineers.

 

5. Completeness of the Range

While a good Engineering team is a strong leverage to have, new product development still means spending a lot of money. Again this is an area that Mahindra believes they have got covered. Peugeot has a wide variety of engines and products and Mahindra believes that no major investment is needed to develop new products in the near future.

Minor investment would still be needed to develop products to exactly match consumer expectations (new skin on existing platforms, new blinkers etc.) but between Mahindra and Peugeot, they feel that they are well set in terms of new product platforms.

 

6. Peugeot’s lack of exposure

Arguably, this is a double-edged sword. You see, when the European market for two-wheelers went under, Peugeot sank with it. From 230,000 units in the year 2000, Peugeot has come down to selling 79,000 units in 2013 and the bottom may not have been found yet.

This sharp decline in sales stems from the brand’s limited exposure outside the European market and is an indicator of Peugeot’s failure to spread its presence outside Europe. The brand is the strongest in its homeland and accounts for more than 15% of the French market. Peugeot derives 70% of its sales from the European market where it has a 9.3% market share. It is fifth in the pecking order in the European market, a market that now accounts for less than 4% (by volumes) of all two-wheeler sales globally, sales having fallen from a peak of more than 1.6 million units per annum about six years back to less than 600,000 units last year.

With Mahindra on the driving seat, Peugeot would be able to expand its presence in other markets. In their comments, the Mahindra management indicated that nearly 75% of the global market is still virgin territory for them. This figure is arrived at by discounting India (21%) and Europe (4%) from the global mix and is a bit unrealistic if we start believing that Mahindra-Peugeot has the potential to enter all these markets. However, even a chunk of these markets would mean many million units, enough potential to multiply sales many times over within the next five years.

Even India, a 16-million plus units (EMMAAA forecast for 2014 sales) market is virtually untapped for Mahindra-Peugeot as Mahindra has little more than a 1% share of the market.

 

7. Peugeot’s Reach

Well, this point may seem like a counter to the previous one but the Peugeot Scooters site does claim that the brand is present in 50 markets. Unfortunately, importers and not Peugeot service many of these 50 markets.

What also makes us cautious is that these 50 markets include the Caribbean nations (each counted separately), and the likes of Polynesia, Tunisia and Luxembourg. However, even after discounting the insignificant markets, one does get the impression that Mahindra, through the Peugeot brand, is getting a respectable toehold in many markets where Mahindra as a brand is not present.

In Europe, Peugeot can gain some more ground. A key product is the recently launched Metropolis three-wheeled scooter. The company believes that such three-wheeled scooters would be popular in the coming years in the European market as they provide greater stability over conventional machines.

 

8. Rational Pricing of the deal

Unlike many automotive deals we have seen in the past (Kinetic-Italjet anyone?), the Mahindra-Peugeot deal appears to be rationally priced and structured. The Indian automotive major will pay EUR 13 million for buying shares from PSA and a further EUR 15 million has been committed as fresh investment in the company. At EUR 28 million, Mahindra anticipates that PMTC would be a nearly debt-free company.

For this money, getting the rights to the Peugeot brand indefinitely, the two production facilities, 13 scooter models, many engines (50cc-400cc, including air cooled and liquid cooled motors), electric-scooter tech and a promising R&D set-up is a good deal whichever way one looks at it.

 

9. Getting Peugeot to Stay on

PSA-Peugeot-Citroen is a large group fighting multiple battles on many fronts. In such a situation, the small two-wheeler business is a big distraction for the group. PSA would have preferred to exit the business altogether. However, shrewd Mahindra has convinced the French to stay on. At 49% share of the business and only two board seats (out of five), this is irrelevant to the day-to-say running of the operation. However, this ensures that the two-wheeler business will continue using the Peugeot brand name indefinitely.

Keeping Peugeot involved also soothes the management’s nerves and ensures that key employees do not get nervous and jump ship. This is the critical to the future success of the venture.

 

10. Synergies

While Mahindra management stressed during the call that Peugeot will operate at an arm’s length and the current management will keep running the company, a number of synergies would be exploited between the two brands.

The first line of interaction would be at the part purchasing level. Mahindra would like to see at least some of Peugeot’s purchasing move to cost competitive Indian suppliers in the near future. Over the longer-term, the company would like the brands to share assembly lines and facilities. In most markets, Mahindra-Peugeot would follow the assembler-distributor model and the two brands should be able to employ the same back-ends even though the customer-facing front-ends are kept separate.

 

11. China

Peugeot has a presence in the Chinese market with a 50-50 joint venture – Jinan Quingqi Motorcycles – with Quingqi Motorcycles. The joint venture has a plant in Jinan province in China making low end Peugeot scooters, accounting for more than 50% of Peugeot production. These scooters are mostly being exported to European markets from the plant, as the local sales presence in China is very small.

For Mahindra, the deal brings a plant in China as well as access to the huge Chinese market. Even a very small fraction of the market would give Mahindra-Peugeot huge volume gains.

 

12. Strategic Fit

Mahindra sees a strategic fit with Peugeot brand. The management feels that they have consciously not purchased a very premium brand. Peugeot is semi-premium in the Scooters segment and (in the future) the French brand’s range will take off from where Mahindra range ends. SO there is a clean fit without any overlaps.

In a way, the situation is similar to Mahindra-SsangYong where the Korean brand starts at the apex of the Mahindra range. The Rexton SUV sold in the Indian market is much higher priced than Mahindra’s XUV 5oo range and provides a neat fit.

 

And Three Things That Worry Us

The key to Mahindra-Peugeot’s success is to utilize Mahindra’s Indian supplier base, Indian / Chinese production facilities, Peugeot’s extensive engineering experience and technology, broaden the range, enter new markets and strengthen position in India and Europe.

That is the automotive equivalent of the 10-Day MBA, a sort of cheat book for B-School grads. At best it is a cheat book, at worst nothing happens as per the plan.

While things appear promising in the Mahindra-Peugeot deal, there are a number of things that may go wrong. We list three of the top worries from the deal:

 

Peugeot’s lack of exposure

Mahindra feels that the drop in Peugeot sales numbers over the last decade has been mostly due to the brand’s limited exposure – it is mostly present in Europe and has limited presence outside. While Mahindra would see this as an opportunity, expanding into new markets is not a small thing. Every new market entry is a separate, large-scale exercise and requires meticulous planning and careful execution.

 

Maintaining Peugeot Brand & Quality

One of the critical areas of cost reduction identified by Mahindra is in the area of purchasing. This involves getting Indian suppliers to supply to Peugeot programs. While we do not question the quality standards of Indian suppliers, the mixture of over-jealous purchasing managers and a greedy supplier is quite potent. A six-month dose of the mixture is enough to kill any brand.

 

Because its Mahindra Two Wheelers

Right from acquiring Kinetic Group’s two-wheeler business to the Chinese adventures of the early models, Mahindra has made many a misadventures in the short duration of its stay in the market. While we do agree that mistakes are a part of understanding the business, any more in the future may cripple Mahindra-Peugeot.

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