Peugeot’s Gujarat move – a lesson to Andhra Pradesh and Tamil Nadu

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Peugeot's Indian entry

Peugeot's Gujarat drive


Peugeot joins major car makers

PSA Peugeot Citroen (shortly called Peugeot), the French automobile giant, has lots of plans and ambitions in India. Philippe Varin is the CEO of the company. Peugeot was to set up a plant in Andhra Pradesh or Tamil Nadu. But in the last minute, the plan was changed and the company has moved to Gujarat. Many auto majors have already entered India and established their shops. Indian economy is the fifth largest economy in the world behind USA, Germany, Japan and China. In terms of purchasing power, India stands third in the world. In Asia, India is the third largest economy. Indian economy is growing at a high rate. Many opportunities are created for all the players. Mercedes Benz, Audi, Rolls Royce, Toyota, Suzuki, Hyundai, Ford, General Motors and many other players have already established their shops in India. Their cars are selling reasonably well. Now it is the turn of Peugeot.

Gujarat woos Peugeot

Peugeot wants to gain a significant market share in the C segment. Peugeot wants to produce cars locally in this segment that are specifically designed to meet India’s needs. Peugeot plans to launch its locally assembled Peugeot 508 in India in 2014. Before that, it will import its cars and sell them in India. Gujarat is developing into an automotive cluster around Sanand with high potential. Sanand is 30 km from Ahmedabad. Gujarat government offered Peugeot a combined package of land, infrastructure and support. Moreover Gujarat is close to the major automobile markets in India, which are concentrated in Northern and Western areas. Gujarat government was a willing partner with the company in setting up the Automotive Skill Development Institute to cater to the industry’s requirements. The State has committed to develop an automobile hub. There is also an opportunity to create an automobile cluster as Tata and Ford are already in the same place. All these factors have gone to clinch the deal favourably for Gujarat from the company’s point of view.

India, third largest automobile market in the world in 2020

Peugeot’s plant will have a capacity to produce 170000 cars every year. Automobile experts are forecasting that India is going to emerge as the largest right hand drive market in 2021. It will be the third largest market for automobiles overall by the same time. It is estimated that India will be selling around 7.5 million cars by that time. The company has the option of either introducing Peugeot or Citroen cars in India. But to begin with, it has opted for the Peugeot brand. Peugeot brand cars are present in 160 countries in the world and well globalised. Actually, the company introduced Peugeot brand cars in India some years back. But it met with a failure. Maybe, automobile market in India was not matured at that time. Today, the situation is quite different. Therefore, the company’s expectation of doing a good business in India is a good judgement.

Europe is already saturated

Automobile market in advanced countries like USA, Japan and European nations are already saturated. But in India, it is still at a nascent stage of development. There are 600 cars for every 1000 people in Europe, 35 for every 1000 in China. But there are only 12 cars for every 1000 in India. With growing wealth and purchasing power of the people, automobile industry in India has a huge growth ahead. The debt crisis in European countries has affected the plans of Peugeot. It is planning to cut jobs. Peugeot is Europe’s second biggest car maker. Now the company is in an unenviable position of effecting job cuts and intensifying a three-year savings drive to retain profitability. European economy may slip into a recession, as indications reveal. Greece is sinking in debt. Spain, Portugal and Ireland are mired in debt. Next in waiting is Italy. The debt burden of Italy is much more than the combined debt of Spain, Portugal, Greece and Ireland. In fact, there are talks that the credit rating of France itself, where Peugeot is headquartered, may be downgraded by credit rating agencies. Under the backdrop, Peugeot faces intense pressure to search opportunities worldwide and expand avenues to compensate for the loss of its European business. Asia presents a golden opportunity to it.

Peugeot may have to revise its plans

Peugeot is a Paris-based company. It may close down its Aulnay plant north of Paris if the competitiveness of its domestic operations does not improve. Cost reduction and savings cannot be effected without job cuts. The plan may involve loss of jobs to 3600 workers. Peugeot is trying to narrow the profitability gap between itself and Volkswagen AG. For this to happen, it has to generate 3.7 billion Euros ($5 billion) more between 2010 and 2012. This can be done through cost reduction or improved sales or a combination of both. Auto demand and prices are falling in Europe. Last year, Peugeot achieved an operating profit of 1.8 billion Euros. But analysts like Credit Suisse are sceptical about achieving additional amount of 3.7 billion Euros. Each passing day becomes murkier and murkier in European economy. The company may have to revise its goals and profit estimates to bring down to realistic levels.

Everything depends on Presidential elections next year

The Aulnay plant of the company assembles Citroen cars C3 class. These cars are scheduled to be replaced in 2014. But any closure announcement depends on the Presidential election results in France. The election is scheduled for next year when the French President Nikolas Sarkozy will be defending his post. Therefore politics also plays a crucial rule in executing the company’s plans. If the Socialists come to power, they may not permit the company to close down the plant. In any case, the Aulnay plant will function till 2014. Peugeot was not successful with its two models of electric cars.

Worldwide facilities

It is interesting to note that the CEO of Peugeot Philippe Varin worked earlier in Tata Motors from 2007 to 2009. He saw the move made by Tata Motors to shift its factory from Singur in West Bengal to Sanand in Gujarat. Perhaps this experience would have weighed in his mind while taking a decision to open Peugeot’s plant in Sanand in Gujarat. Peugeot has two joint ventures in China. It has presence in Latin America (Brazil and Argentina). The company has set up a plant in Russia. In Europe, Peugeot ranks second with a market share of 14%. Peugeot wants to offer Indian customers their expertise in design, style and value for money products with latest technology. Peugeot wants to introduce a family of cars in the top of B, C and D segments. Everything will begin with model 508 in 2014. But it will not be the same car as it rolls out in Europe and other places. It will have adjustments suited for Indian roads and conditions. Peugeot has a tie-up with Ford for diesel engines and with BMW for gasoline engines. Peugeot also has in its repertoire, hybrid cars (a combination of diesel and electric) which can give a mileage of 30 km per litre.

50% of sales outside Europe in 2015

Peugeot’s B, C and D class cars constitute 45% of the total Indian car market. In Europe, Peugeot was the first to launch electric cars. They have two cars with a market share of 33% in Europe. But the problem with the electric cars is that they are fit only for city driving and they need to be charged once for every 150 km of travel. Indian infrastructure is not ready for it yet. That is why Mahindra & Mahindra’s Reva is not seen much in Indian roads. Peugeot will have to maintain a cordial rapport with the vendors in order to make a success of its re-entry into India. With the establishment of auto cluster, more and more vendors from all important cities in India are expected to crowd the Sanand area in future. Peugeot earlier had a joint venture with Premier Automobiles and it ended in 2000. The venture was a failure. But the company would have learnt the right experience. This time, it is not partnering any Indian company and is launching its mission on its own. Peugeot expects 50% of its sales to come from outside Europe by 2015.

What went wrong for Andhra Pradesh and Tamil Nadu?

What went wrong with Andhra Pradesh and Tamil Nadu? Initially Tamil Nadu and Andhra Pradesh competed to woo Peugeot to set up its factory in their States. Andhra Pradesh did everything possible. It even offered land free of cost to the company. Tamil Nadu gave a commitment letter in advance, setting up its promises on power, land, water and other facilities along with the time line on completion of each commitment. Moreover, Tamil Nadu is already home to Ford, Renault-Nissan, Hyundai, BMW and Hindustan Motors-Mitsubishi. But the crucial issue was land. Peugeot wanted possession of land immediately. But Tamil Nadu government had to acquire land and then only could give it to Peugeot. Acquisition of land invited opposition from the land owners who went to the Court. Even though the government secured a favourable judgement, Peugeot was scared of further appeals or protests and demonstrations that could take place against its plant. The plant, had it come to Tamil Nadu or Andhra Pradesh, would have generated employment to 50000 people directly and 25000 to indirectly. Peugeot’s CEO had the first hand experience of the Singur demonstrations against the Tata Nano plant. He did not want to take any risk and hence opted for the safe haven place Gujarat. The lesson Andhra Pradesh and Tamil Nadu governments should learn from this episode is that they should have a land bank ready to offer to potential investors in future. There is no point in acquiring land and then handing over to the investors. Since the last two or three years, starting with Singur case against Tata Motors, situation has dramatically changed with regard to land acquisition. Whenever the ruling party tries to acquire land, the opposition parties, many civil societies and other interested parties put up a stiff opposition and erect barricades. The company officials cannot move to the site at all. Thus the Rs.4000 crore ($932.7 million) investment plan moved over to Gujarat.

Fully integrated plant

Peugeot’s fully integrated manufacturing plant being set up in Sanand is spread over a 584 acre plot. It will have a cutting edge vehicle manufacturing facility integrating stamping, body plant and assembly operations. An engine and gear box plant using state-if-the-art technology will help constitute a full fledged and modern industrial automotive production facility. By 2020, Peugeot proposes to expand its capacity to 3.40 lakh cars, 3 lakh engines and 3 lakh gear boxes. Gujarat Industrial Development Corporation (GIDC) has reserved another 25 acres of land for setting up ancillary units. Peugeot also envisages exporting around 25% of its production to right hand drive countries. The Indian plant is Peugeot’s 17th plant worldwide. It will give direct employment to 5000 and indirect employment to another 25000.

Peugeot's re-entry into India after a decade

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