Peugeot's disaster drive

by 04 Sep 2007

While there are no two ways about the fact that the entry of multinationals ushered in a new era for the Indian auto sector, it also had its dark side in terms of casualties. Readers would doubtless remember the demise of Ideal Jawa India (the maker of the Yezdi motorcycle) which was caught unawares by the Japanese invasion and Standard Motors (Matador and the Standard 2000) which just fell apart after a labour crisis.

However, the big ticket collapses were PAL-Peugeot in the late-1990s and two-wheeler maker, LML, a little over a year ago. In addition, Daewoo crumbled once its parent’s fate was sealed while the likes of Yamaha, Kinetic and even Fiat (despite the tie-up with Tata Motors) still have an uncertain future ahead. PAL-Peugeot, the joint venture between Peugeot and Premier Automobiles, was a script that went horribly wrong from the beginning.

The 309 looked dated and critics had a whale of a time taking it to the cleaners. The French were not too happy with the location of the plant (in Kalyan near Mumbai which was the Premier facility that was spun off into this joint venture) which had a history of labour trouble. This is precisely what happened and the PAL-Peugeot plant was shut for four months in 1996 before it revived operations in a small way. By this time, it was clear that there was a bigger problem in the form of a severe shortage of CKD kits. Remember, this was the time when a company had to export a certain number of cars before its import licence was renewed to be able to get more.


Though Peugeot tried to convince the policymakers in Delhi that there was little it could do on exports in the backdrop of a lockout, these protests fell on deaf ears. The company also realised that valuable time had been lost and that the market was distinctly tilted towards diesel (on the basis of the response to the Ford Escort where 80 percent of the bookings were for the diesel version).

Out came the 309 GLD fitted with the TUD5 engine. By this time, it was clear that PAL-Peugeot was not in the best of shape. Its entire supply chain in the form of its vendors and dealers were not exactly an enthusiastic lot and it was clear now that the partners were not really seeing eye-to-eye either. The bigger battle was just around the corner. Premier Auto already had a technical alliance with Fiat to produce the Uno in its other plant at Kurla but was facing labour problems here too which, in turn, was leading to a liquidity crunch. As a result, production schedules of the Uno were going completely awry at a time when the car had received nearly three lakh bookings.

Fiat was getting anxious because the possibility of large scale cancellations of bookings was getting to be uncomfortably real. The company had planned to set up a new facility at Ranjangaon near Pune for its 178 range of cars but was now compelled to shift operations to Kurla at least to save the Uno from drowning. It also decided to fit the 1.7 litre diesel engine in the car.

The only way out, therefore, was to take charge and infuse funds into this plant. As in the Kalyan formula with Peugeot, Premier decided to spin off the automobile business at Kurla into a joint venture with Fiat. However, there was a serious glitch here in the form of a non-competition clause with Peugeot. Going by this caveat, Premier could not enter into another equity-based alliance nor be involved in the manufacture of a competing model. The 1.7 Uno diesel, it was argued, would be a direct rival to the 309 GLD. The partners sought legal intervention and the court ruled in favour of Peugeot.


By this time, it was clear that Premier wanted out of PAL-Peugeot and the partners decided that this was the best bet in the interests of everyone concerned, including Fiat. The road ahead was clear – Peugeot would take charge at Kalyan while Fiat and Premier would team up at Kurla. Just when it seemed that a happy ending was in sight, Paris dropped a bombshell.

Peugeot’s new CEO, Jean Martin-Folz decided that it made little sense to continue with an operation that was tottering and was not likely to revive either. In a move that shocked everyone and destroyed all the goodwill that Peugeot had built up after the triumph in the legal battle, the Kalyan plant was shut down. In the process, nearly 2,000 people were rendered jobless overnight while bankers, dealers and vendors were left gasping in the dark for their dues which ran into several hundred crores of rupees. This was a decision that defied all logic and even to date, only brings back bitter memories for those who were involved closely with the company.

During the legal dispute with Premier, the Peugeot top brass had met their counterparts in Fiat with an interesting offer. They said they were ready to cede two-thirds of the Kalyan plant to Fiat and that they would be content with the balance one-thirds given the state of the Indian market.


The Italian automaker refused and stuck on to its Kurla plans. Would history have altered its course had it accepted the offer? After all, Fiat made a mess of Kurla and would have gone the Peugeot way had not Tata Motors stepped into the picture and forged a new joint venture. While the PAL-Peugeot debacle smacked of complete myopia and bad judgment, Daewoo’s collapse was unfortunate. It was (like Peugeot) among the earlier entrants and had invested close to Rs 4,000 crore in its Indian operations. However, the parent company was in a complete stage of collapse and was up for sale.

Ford was the highest bidder but backed off midway through the due diligence exercise and this is when General Motors stepped in as the knight in shining armour. However, India was excluded from the list of Daewoo plants that GM acquired and the end was almost tragic. Of course, the Matiz is back in India as the Chevrolet Spark and GM-Daewoo is now the American carmaker’s biggest growth driver for India.


On the two-wheeler front, LML is now virtually history though there have been recent reports in the press of the scooter making a comeback. The company was the biggest challenger to Bajaj Auto in the mid-1990s but the motorcycle deluge left it gasping for cover. Further, its spat with partner, Piaggio did not do it much good either. LML entered the bike segment late but by then, its support system (largely dealerships) was in complete disarray.

Further, there was just no money to keep the operations going. Its CEO, Deepak Singhania, refused to call it quits and went in for a financial recast which barely prolonged the inevitable. When the Kanpur plant was finally closed, an important chapter had come to an end. Even today, there are talks of a revival but there is no way LML can make a dent in a market which is dominated by the likes of Hero Honda and Bajaj Auto. Similarly, both Kinetic and Yamaha have been relegated to the sidelines and it will require a miracle to keep them going for some more years.

comments powered by Disqus