Double or quits? Why M&M's purchase of Peugeot Motorcycles may be a waste

Utility vehicles (UVs) and tractor maker Mahindra & Mahindra (M&M) is doubling its bets in two-wheelers with its decision to purchase a controlling interest in Peugeot Motorcycles, an ailing French brand that makes around 80,000 scooters in France and China.

According to a Reuters report, M&M has made a binding offer to subscribe to 15 million (about Rs 116 crore) of new equity for a 51 percent stake in the ailing company, which hasn’t seen profits in a decade. M&M has promised not to chop labour in France for two years.

As costs go, it isn’t too much to bear for the cash-rich M&M. The price paid is essentially for access to Peugeot’s technology for use in India, and not much else. There is not much of a market left in France or Europe, and in China, where Peugeot sells the bulk of its scooters, the competition is even worse than in India. As Reuters notes, “in Europe, consumers buy 500,000 scooters per year compared with 13 million in China, but competition is intense, with more than 100 Asian brands competing for market share.”

More from Corporate

Maha: Court orders Rs 30L compensation for parents after youth dies in road accident Ashleigh Barty comes from set down to beat Coco Gauff in Australian Open lead-up

The big question that arises is this: Should M&M be increasing its investments in two-wheelers or reducing it?

My own answer is the latter. M&M would be far better off investing in its core businesses of UVs (Bolero, Scorpio, Xylo, etc) and tractors instead of making a needless foray into two-wheelers, where it hasn’t exactly set the tracks on fire so far. If anything, its scooters - essentially the old Kinetic scooters (with a two-decade old technology) masquerading as Mahindra bipeds - have been seeing a fall in shares. According to this Business Standard report, from a market share of 1.65 percent in April-September 2013, it is down to 0.63 percent in the same six-month period of 2014-15.

When I had met Anand Mahindra last year in connection with an interview for Forbes India, I asked him why he wanted to dabble in two-wheelers when there are challenges aplenty in four-wheelers and tractors. His answer was that if Honda could make a successful transition from two-wheeler to cars, why not the reverse for M&M?

Of course, the sky is the limit to anyone’s ambition, and there is no reason to think that if enough money is sunk into a project it will not do better. But every rupee spent on two-wheelers is a rupee not invested in the more important businesses of M&M. It is an opportunity cost that may prove wasteful after five years.

The reason is simple. In the Indian scooters market, M&M is nowhere in the picture. It is No 7 in a market with seven major players. The market is, of course, growing faster than mobikes, but the top three players - Honda, Hero and TVS Motors - account for over 86 percent of the market. Add Suzuki and Yamaha, both players with strong brand images and technology, and the top five players account for 98 percent of the market. What chance does M&M really think it has?

As I have noted before , in any mature market - and the Indian two-wheeler market is about to mature over the next five to 10 years - the Rule of Three applies. The top three players are the only ones who can be big, multi-product players, with a full line of vehicles. The rest have to be niche players.

The Rule of Three, expounded by B-school professors Jagdish Sheth and Rajendra Sisodia in their book The Rule of Three: Surviving and Thriving in Competitive Markets, suggests that “in competitive, mature markets, there is only room for three full-line generalists, along with several (in some markets, numerous) product or market specialists. Together, the three ‘inner circle’ competitors typically control, in varying proportions, between 70 percent and 90 percent of the market. To be viable as volume-driven players, companies must have a critical-mass market share of at least 10 percent.”

Is there any chance of M&M achieving 10 percent when Suzuki, Yamaha and Piaggio are struggling to reach that mark? How is Peugeot going to make M&M any stronger in two-wheelers when even more formidable rivals are struggling to reach this minimum market share mark?

The only way Mahindra can make a mark is if continues to acquire more two-wheeler companies and grows inorganically.

In contrast, it is already a market leader in tractors (with global scales) and UVs in India.

It is difficult to believe that M&M is going to make it big in scooters in the foreseeable future. It should actually exit the business and focus on the two products which will make it a global or national topdog - tractors and UVs.

It should be doubling its bets in tractors, not two-wheelers. Buying Peugeot Motorcycles is a needless distraction.

When it was time for quits, M&M has instead doubled its bets in two-wheelers.