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26833944 Cases for Mnc Failure (1)

26833944 Cases for Mnc Failure (1)

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Published by: Akhbat Haque Sangita on Oct 15, 2010
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10/15/2010

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Peugeot leaving india
Abstract:
The case explores the reasons for the poor performance in, and the eventual exit of the Frenchautomobile company Peugeot from India.It discusses various problems faced by Peugeot and Premier Automobiles Ltd. (PAL), their jointventure partners, in their formative years.It played a major role in the joint venture company's failure and its eventual closure
Closing Down
In October 1994, Europe's 4
th
largest automobile major, Peugeot of France (Peugeot), entered theIndian automobile market through a joint venture with Premier Automobiles Ltd. (PAL),christened as PAL-Peugeot Ltd.As Peugeot was one of the first automobile MNCs to enter India, the early mover advantage wasexpected to help the company make its mark in the Indian automobile market. According toreports,
1
Peugeot was set to achieve cash breakeven within two years and to begin generating profits by 1998. Peugeot decided to enter the Indian market with its passenger car model,Peugeot 309, as the car was believed to be the best suited for Indian terrain. Production began atthe Kalyan plant and the car was launched in 1995, positioned in the mid-size segment, againstDaewoo's Cielo and Maruti's Esteem. The initial response to the car was positive, with thecompany selling around 10,000 units in the first year of the launch.However, Peugeot's ambitious plans soon went haywire when production at the Kalyan plant wasdisrupted due to labour unrest in mid 1996. Production of the Peugeot 309 had to be haltedresulting in mounting losses and a severe cash crunch.Problems surfaced with PAL regarding certain strategic issues including infusion of fresh fundsand violation of the PAL-Peugeot MoU. By 1997, the company's accumulated losses touchedover Rs 3 billion. In November 1997, Peugeot announced its decision to exit from the jointventure and leave the Indian market. The news came as no surprise, as there had been severalmedia reports about how Peugeot was finding it difficult to survive in the Indian market. Peugeotof course claimed that it was moving out of India only because of a policy decision by its parentcompany to concentrate only on European markets. Pegueot's exit from the Indian marketopened up a debate on a host of issues including the company's blunders, and more importantly,the survival prospects of MNC players in the newly-liberalized Indian economy.
Background Note
 
The history of Peugeot dates back to the early 1800s, with the France-based Peugeot familysetting up a milling business. In 1810, the family converted its grain mill into a steel foundry,which began supplying springs to the clock industry.Over the next few decades, the company soon diversified into producing coffee grinders, razorsfor hairdressers, sewing machines, roasting spits, clocks, garden furniture, bicycles, tricycles, andgramophones, through the company Les Fils de Peugeot Freres (LFdePF). In 1896, a newcompany, 'Automobiles Peugeot Company' (APC) was formed which began producing cars andtrucks. By 1913, it was credited with having produced half the cars in France. The initial modelsof the company included Type 15, Bebe Peugeot and Peugeot Lion. In 1910, LFdePF and APCwere merged to create Automobiles et Cycles Peugeot (ACP). In 1921, Peugeto acquired acarmaker De Dion Bouton. Five years later, ACP was separated into two companies, CyclesPeugeot and Societe des Automobiles Peugeot.In 1929, the Peugeot 201 was launched, becoming the first model whose name included a '0' for the second digit.
2
The next few decades saw the company expanding significantly on a globalscale. In 1974, Peugeot acquired 38.2% stake in Citroen,
3
with each company maintaining itsmodel range and sales network.Peugeot took over the management of the combined organization and shared operations such asresearch, purchasing and investments. In 1976, Citroen was merged with Peugeot. By 2001,Peugeot Citroen was present in over 142 countries (Refer Exhibit I) and had diversified into anautomotive equipment, transportation and finance businesses with sales of over 27,025 millioneuros. Peugeot's partner, PAL, was one of India's first automobile manufacturing companies,established in 1944 by the Walchand Hirachand family. The family owned many other  businesses, including Hindustan Shipyard, Hindustan Aeronautics, Hindustan Construction,Rayalgaon Sugar and Walchandnagar Industries. In the early 1950s, PAL entered into a technicalagreement with the Italian automobile major Fiat for manufacturing Fiat 500 in India...
EXCERPTS
Starting Problems
Despite the impressive 10,000 unit sales in its first year, Peugeot recorded a loss of Rs 920 million for the year 1995-96 (12 months). The company's problems could byand large be traced back to PAL's association with Fiat.
After having partnered Fiat in India for a significant time, PAL entered into a new technicalagreement to assemble the Fiat Uno at its Kurla plant and the technical agreement was changedinto a joint venture in 1997. The June 1996 production slowdown at the Kalyan plant had itsroots in the problems at PAL's Kurla plant where the workers had gone on strike over issuesrelated to wages, incentives and VRS. PAL was manufacturing the Premier Padmini and thePremier 118NE at the Kurla plant (later the Uno and Siena models as well) and the Peugeot 309
 
and the 118NE at the Kalyan plant. The Kurla and Kalyan plants were dependent on each other as the Kurla unit was the sole supplier of components such as gearboxes and rear axles to the
Kalyan
plant...
The Final Countdown
PAL was reportedly unhappy with Peugeot over the indigenisation of the 309. The 309 was only24% indigenised. This made the spare parts very expensive and the company was unable toreduce the price of the car.PAL claimed that Peugeot was just not interested in increasing the indigenization level of thevehicle. There were reports of disagreements over the high price of the CKD from Peugeot aswell. Due to the 1996 labor problems, the company had to bear heavy inventory carrying costs.To compensate for this, PAL reportedly asked Peugeot to cut down the CKD prices and releasefunds as loan to the joint venture.PAL sources said that Peugeot could have advanced loans to the company by treating CKD andother equipment with the venture as security for the loan. PAL even requested Peugeot to use itsname to raise bank loans abroad for the joint venture, where the cost of funds was much lower than in India...
Gone Forever?
Peugeot's announcement in August 1999 that it had agreed to license its diesel engines to PALfor 5 years took observers by surprise. Peugeot also decided to write off claims on PALamounting to Rs 850 million on account of license and technical fees.The fact that the deal did not involve any royalty payments and that Peugeot had agreed totransfer its stake in the joint venture to PAL added to the mystery. In January 2001, PeugeotCitroen and Telco began discussions for introducing a luxury car in India. There were alsoreports of Peugeot planning a tie-up with the Indian two-wheeler major Hero Honda to enter themotorcycle segment in India. Interestingly enough, the FI's were reported to be planning to usetheir clout in the Foreign Investment Promotion Board (FIPB) to protest against the re-entry of Peugeot. However, in July 2001, after the completion of various feasibility studies, Telco andPeugeot decided against going ahead with the project for the time being...

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