Dongfeng Nears Dubious Peugeout Deal
Despite all my warnings, car maker Dongfeng (HKEx: 489) is moving ahead with a plan to invest in struggling French rival Peugeot (Paris: PEUP) as part of a drive to reduce dependence on its current Japanese partners. Dongfeng’s newest tie-up will cement a growing alliance with the French, since this new investment would come just months after Dongfeng inked a separate joint venture deal with that country’s Reneault (Paris: RENA) after more than a year of talks. While France and Japan are completely different animals, each will pose significant challenges for Dongfeng, which is quickly emerging as China’s least politically savvy car maker in its choice of foreign partners.
I’m probably getting slightly ahead of myself here, as Dongfeng hasn’t actually announced any deal yet with Peugeot. But the company requested a halt to trading in its Hong Kong-listed shares on Monday, leading to widespread speculation that a deal was imminent. (English article) When contacted by reporters, Dongfeng would only comment that it was still in talks about an investment in Peugeot, but that no deal had been reached yet. Sources had previously told reporters that French government and Peugeot officials would be in China this week for what they hoped would be final negotiations on a deal.
Peugeot is one of Europe’s weakest major automakers, and has been struggling for years as its primary home market remains mired in an economic slump. The company has said it needs new funding to keep operating over the medium term, and its finance arm is running on a 7 billion euro loan guaranteed by the French government. Previous reports have indicated that both the French government and Dongfeng would inject a combined 3 billion euros into Peugeot in exchange for equal stakes of 20-30 percent in the company. (previous post) If a deal is reached this week, it could be put to the Peugeot board for a vote at a February 18 meeting.
I previously praised Dongfeng in December when it announced its Renault joint venture, since Reneault is a relatively healthy automaker and could genuinely help Dongfeng in its broader diversification drive. (previous post) I was hoping that following that deal, Dongfeng might drop its talks with Peugeot to focus on building up the new joint venture. But clearly that hasn’t happened, and Dongfeng appears determined to form tie-ups with both French companies.
Dongfeng’s reasons for pursuing the 2 French tie-ups are logical enough. The company currently relies on joint ventures with 2 Japanese car makers, Nissan (Tokyo: 7201) and Honda (Tokyo: 7267), for a big portion of its sales. While both Japanese names are known for their quality, they also carry political risk due to recent tensions between Beijing and Tokyo due to a territorial dispute. A flare up in that dispute in 2012 caused sales of Japanese brand cars to plummet in China, dealing a big blow to Dongfeng and creating an imperative to form new foreign tie-ups with non-Japanese partners.
I have nothing against France in general, though the country does have a reputation for tough labor laws that make doing business there extremely expensive and difficult. It also has a reputation for government interference and protectionism that prevent many domestic companies from becoming globally competitive. All of those factors lead me to question the wisdom of building a diversification strategy that relies so heavily on the French. In this case I really do think the Renault deal looks smart, as it will rely mostly on manufacturing and decision-making in China and not in France. But the Peugeot investment is another matter completely, and is most likely to end in failure and a major write-off for Dongfeng.
Bottom line: Dongfeng’s probable investment of more than $1 billion in struggling French rival Peugeot is likely to end in failure, resulting in a major write-down.
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