18 January 2019

Should Dongfeng invest in Peugeot?

With sales volume of 3.53 million vehicles last year, Dongfeng Motor has risen to the No. 2 position in China’s automobile industry. But the company finds that it still has miles to go as Beijing expects state-owned carmakers to ship more self-branded marques, rather than just function as manufacturing and marketing agents for foreign partners. In 2013, Dongfeng sold just 80,000 units of Fengshen {風神}, its wholly-owned sedan and SUV brand.

Pouring resources to develop new models can be way too time-consuming for entities seeking some immediate breakthroughs. Under these circumstances, a shopping spree targeting core technologies and intellectual properties owned by foreign companies can be a quicker and more convenient approach, especially for a cash-rich firm like Dongfeng.

Among all of its foreign partners, whose list includes Honda, Nissan, Kia and PSA Peugeot Citroën, it appears that only Peugeot — which has been in deep woes for years — may be a potential candidate to trade some of its core technologies to Dongfeng in return for financial aid. So here comes the deal.

According to media reports, Dongfeng and Peugeot are moving closer to a 3 billion euro (US$4.06 billion) deal over a recapitalization plan for the French automaker after months of talks, and that an announcement could be made next week. The central scenario of the capital boost calls for Dongfeng to buy new Peugeot shares at 7.5-8 euro apiece and stump up about 800 million euro. The Peugeot family, the French firm’s largest shareholder with a 25.4 percent stake, will pump in around 100 million euro.

Dongfeng is pinning high hopes on the deal, as it believes that core technologies to be transferred in return for financial assistance — including gearbox, engine and powertrain design — can be eventually applied to all of the Chinese firm’s own brands, especially Fengshen, to enhance their performance and generate more sales.

Indeed, last year when news about the deal began to circulate, a Dongfeng senior executive told state news agency Xinhua that the automaker would set up a large plant with initial annual capacity of 150,000 units in Chengdu to manufacture new Fengshen models that will piggyback Peugeot’s hit marques such as 408 and 508.

Now, as Dongfeng is about to cut a cheque for the deal, there are some concerns whether the Chinese auto giant will actually reap the expected benefits. Skeptics say the well conceived “money for technology” plan could go off the mark.

The National Business Daily has pointed out that the French government will have a hand in anything major involving Peugeot as the automaker is seen as a symbol of the French manufacturing sector. 

A source close to Dongfeng also admitted that the talks, which began last June, had been tough with the Peugeot family refusing to surrender its controlling stake, let alone core technologies. During the course of the negotiations, four plans were reportedly put forward and subsequently scrapped.

Last month, the Peugeot family even proposed a guarantee financing plan with JP Morgan Chase to raise the 3 billion euro directly from the market to avoid becoming a mere figurehead. Although the plan was rejected by Peugeot’s board, an alternative arrangement agreed by all parties, including Dongfeng, is a “troika” shareholding structure — Dongfeng and the French government will each subscribe 14 percent of new Peugeot shares and the Peugeot family’s holding will also be diluted to the same extent.

Analysts say if the plan indeed turns out in that shape, Dongfeng may be splurging some serious cash for virtually no say and voting power in the French firm. Whenever there is a tussle between Dongfeng and the Peugeot family over technology transfer or other issues, the French government will not hesitate to tip the balance in favor of the family, they say. Such moves could ultimately throw Dongfeng’s plans to jumpstart its own brands off gear.

– Contact the writer at [email protected]


EJ Insight writer

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