PSA takes the first step in drafting India script

Peugeot’s bonding with India is like the boy who cried wolf. Each time, the PSA Group, which owns the brand, indicated that it was going to set up shop here, nothing eventually materialised.

The first time was sometime around in 2001 when a project with the Tatas to manufacture the Peugeot 307 never took off. A good 15 years later came the big announcement of setting up a gigantic plant in Gujarat at an investment of ₹4,000 crore. This was shelved when the slowdown in Europe happened and the PSA Group found itself on a sticky wicket.

It was only last year when Carlos Tavares, Chairman, made known that the French carmaker was indeed serious about its India outing and plans would be finalised by 2018. To that extent, Wednesday’s announcement in Paris was welcome news where PSA announced its intent to join hands with the CK Birla group to kick off operations from a ready-to-use plant in Tiruvallur near Chennai.

The details, of course, are in the public domain and what is particularly interesting is that the initial outlay is ₹700 crore for a capacity of one lakh cars annually. The Hindustan Motors plant in Tiruvallur has a capacity of just half the number, which perhaps means that there is more news to come from the PSA side.

It is likely that this is some kind of a ‘first phase’ plan where the company will test the waters here before deciding to grow beyond 2020 when the market will have grown to five million cars annually. This is also borne out by the fact that the investment planned is a fifth of what is usually set aside for a capacity of one lakh cars.

Localisation will help the cause and this is where the PSA tie up with AVTEC for supply of engines and transmissions becomes critical. The company is based in Hosur and meets the powertrain requirements of a host of other automakers based in India. This will translate into a substantial cost benefit for PSA which, along with a ready plant, means the back-end manufacturing base is in good shape.

Of course, there is no indication of the products planned in this intensely competitive market. There is also the added challenge of setting up a retail network and working overtime to take on established players such as Maruti and Hyundai, which account for nearly 70 per cent of the Indian car arena. As the former chief operating officer of Renault-Nissan, Tavares knows only too well what his company is up against in India and, therefore, would have wanted to ensure that a cost structure was in place first.

Another French automaker, Renault, had spent less than ₹600 crore in manufacturing the Logan in a partnership with Mahindra & Mahindra a decade earlier. The factory was in Nashik and even while the alliance did not quite last the course, it proved that frugal engineering could translate into huge cost savings. This is what PSA will also hope for and puts in perspective the choice of partner and location.

The CK Birla group has had car alliances in the past apart from being the manufacturer of the once iconic Ambassador car. In the years following liberalisation in India, the Birlas had forged alliances with General Motors and Mitsubishi.

As in the case of PSA, the GM tie-up involved a readymade facility in Gujarat as part of a 50:50 partnership. The American ally eventually took control while the Birlas went in for a technical collaboration with Mitsubishi. This involved assembling cars at Tiruvallur and through the years speculation was rife that this would eventually become an equity-based alliance.

Mitsubishi has now been snapped up by Nissan and it is only reasonable to assume that production of its future models will now happen from the Renault-Nissan plant in Chennai. The Ambassador plant in West Bengal has also shut shop as demand for the model slumped and it made little economic sense to continue production.

While this is a return to the car business for the CK Birla group, it remains to be seen how the partnership evolves. It may be recalled that in its first innings way back in the early 1990s, PSA opted for a ready facility near Mumbai which was a Premier Automobiles plant. It was hived off as a joint venture and was home to the Peugeot 309 before the curtains came down in end-1997.

For many years since that abrupt closure, the French company has tried unsuccessfully to stage an India comeback. There were concerns that its brand had taken a beating since the exit seriously impacted the supply chain of dealers, suppliers and customers. Worst hit were the employees at the plant who found themselves jobless overnight. As PSA gets ready to roll out its first cars by 2020, nearly 25 years will have passed since the jinxed first innings.

It will also be interesting to see if its Chinese ally, Dongfeng Motors, will be keen on leveraging this passage to India and making an entry too. The two are already working out plans to build an ASEAN presence through exports from China.

There is no reason why Dongfeng will not be equally keen to build its presence in India which will be the third largest car producer by the end of this decade. PSA, in its turn, could also access new global platforms jointly developed with Dongfeng for India. There are some interesting dynamics in store after 2020 when the French-Chinese script possibly gains momentum in tandem with the CK Birla group.

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