Mahindra & Mahindra's American Speed Bump

The Indian auto biggie wanted to launch its trucks in the USA. But now it is embroiled in a legal spat in the country

Published: Jun 26, 2012

On January 1, 1959, the government of Fulgencio Batista fell and Fidel Castro seized power in Cuba. Rumours started doing the rounds that all children would be taken against their parents’ wishes and sent to military schools or to Soviet labour camps. America’s Central Intelligence Agency launched Operation Pedro Pan. From December 1960 to October 1962, more than 14,000 Cuban children arrived alone in the United States and were relocated in 30 states.

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 John Perez was one of the Pedro Pan boys.  

He was 12 when he came to the US. From then on he has been trying to pursue the American Dream, trying his hand at various entrepreneurial ventures. In 2006 he started Global vehicles, a car distribution company, to help Indian auto major Mahindra & Mahindra (M&M) launch its pick-up truck in the US. But more recently, he has been giving Anand Mahindra, M&M’s chairman and managing director, sleepless nights.

Since 2010, Perez and M&M have been locked in a legal tussle that has virtually derailed the $15.4 billion (by revenue) company’s plans to launch a pick-up truck in the USA. Perez has fought one arbitration case. He has been a co-accused with M&M in a legal suit. And he himself has been sued twice—both legal suits mention M&M as one of the reasons why Perez has been dragged to the courts.

 

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THE issue
The entire dispute can be summarised thus: M&M wanted to launch a pick-up truck based on the Scorpio platform in the US. It chose Global Vehicles to distribute its trucks; John Perez was the head of Global Vehicles at the time (the company ceased operations in 2011). While M&M was getting the necessary certifications, Perez signed on dealers, 347 of them, and collected signing fees. But the trucks never came and when the dealers wanted their money back they found Global Vehicles didn’t have it.

Perez says his entire operation was predicated on the launch of the trucks and the money was spent on getting the network ready for that. Because M&M did not launch, it suckered him and the dealers. M&M says the launch was subject to certification (called homologation) from the US authorities, which did not come. The dealers want someone—either Perez or M&M—to pay.

Anand Mahindra would really like all of this to go away. For years he has wanted to make M&M’s automotive products a success in the US. In an interview to Business Times on January 4, 2010, he said: “We want to build a globally renowned brand in our niche area of sport and utility vehicles. When you have that mission, you have to be global, and you just have to be in the US.”

 BATTLE STATIONS
On June 4 this year, the latest round in this battle began. Five automobile dealers in the US filed a suit against M&M in the district court of Georgia. They accuse the company of fraud and conspiracy, and claim damages of $60 million. What makes it significant is that Pawan Goenka, president of M&M’s automotive & farm equipment sector, will be testifying under oath in a US court in the near future.

M&M is clear in its defence and cites an earlier judgement of a Missouri court where it was a co-accused. “While the ruling speaks for itself, the court noted that Mahindra had no contractual relationship with any of Global Vehicles’ dealers. Also, Global Vehicles has been sued by a number of other dealers because those dealers correctly recognised that Global Vehicles was the party responsible for taking the money and making false promises,” says an email response from the company.

M&M says the dealers’ financial relationship was with Global Vehicles and Perez had no business spending their money before he gave them the product. “Under Generally Accepted Accounting Principles, Global Vehicles should have treated these amounts as deposits and been prepared to refund them to the dealers in the event we were unable to certify vehicles for sale in the United States,” says the email.

John Perez, CEO,Global Vehicles
Image: Dreamstime.com
John Perez, CEO,Global Vehicles

Perez says he spent the money because M&M led him to believe that it was ready with the product and so he had got the network ready for it. He also says that M&M took away trade secrets. He alleges that they also tried to buy him out. He wants M&M to compensate for this.

M&M rubbishes all this. “Mahindra spent almost $100 million to reengineer the Scorpio for the US markets. Mahindra received $9.5 million from Global Vehicles, primarily consisting of $8.5 million appointment fee to become an exclusive distributor for the US. Yet, Global Vehicles allegedly collected $30 million from the dealers. We do not know what has happened to the rest of the money,” says the email from M&M.

M&M admits it tried to buy out Global Vehicles, but only because it realised that this company was in deep financial trouble. “Global Vehicles lost its credit lines in 2009 and which raised doubts [about] its ability to pay for any vehicles, had they been ready for export. Global Vehicles was pressuring M&M to buy them out in order to save the venture. Mahindra considered doing so but before it could access diligence information Global Vehicles broke off negotiations and sued,” says the M&M email.

 M&M DREAMS OF AMERICA
How did it all get to this stage?
Go back to 2003. Just a year after its launch, the Scorpio had become M&M’s best-selling product, adding almost Rs 600 crore to the company’s revenues. Its shares outperformed the Sensex by a huge margin. Anand Mahindra’s American Dream began soon after. According to Perez, Pravin Shah, who was then heading M&M’s international business, called him to discuss a possible partnership. Perez came to India, saw M&M’s operations and went back impressed.  

The parameters that M&M used to select Perez aren’t clear. There’s little evidence to suggest that he had expertise in launching emerging market brands in the US; nor was it the largest distributor of sports utility vehicles (SUVs) in the US.

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THAT MAN PEREZ
Perez is an intrepid entrepreneur, but not a very successful one. To make matters interesting, he has a history of promising dealers in the US foreign vehicles which eventually never reach American shores!

In the 1990s Perez floated a Florida-based company to bring Romanian cars into the US. Dealers were solicited, but the cars never came. It was a major bust and several dealers lost their money. Perez blamed the whole thing on the attitude of the Romanian government, but didn’t give up. In September 2003, taking advantage of the privatisation wave in Romania, a former Communist country, Perez, along with a bunch of investors, bought Automobil Romanesc (ARO). This company made a cheap SUV. The new venture was named Cross Lander. In just one year it lined up 144 dealers in the US, who paid about $70,000 each in franchisee rights to sell the vehicle. Perez brought in a few vehicles and worked hard to get the homologation done. But they never made it to the US market. Perez claims the authorities in Romania were very corrupt; he was unable to operate the factory.

Late in 2005, Perez abandoned the venture. At the time, several articles were written in Romania and the US calling Perez a ‘crook’, ‘fraudster’ and a ‘dishonest businessman’. He was sued by the Romanian government in 2006.

 PLANNING WITH PEREZ
But Perez’s track record did not deter M&M. After a few meetings in 2004 and 2005, the contract between Mahindra and Perez was signed in January 2006. For this venture he formed a new entity, Global Vehicles.

Mahindra’s plan was to launch two diesel pick-up trucks (a two-door version and a four-door version) and an SUV in the US by 2008. Perez says that once the contract was signed, he again began soliciting dealers to invest in the venture. “All the dealers who were with me in the Romania project, all 144 of them, I put them in the Mahindra project without taking a single dime,” he says. By 2008 he had lined up 347 dealers. But the pick-up truck never came.

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In 2010, M&M cancelled its contract with Global Vehicles. The contract had a clause which said that if the pick-up trucks don’t get launched in the US in four years, the contract would be terminated. Perez now believes that M&M was up to no good because this clause wasn’t in the original contract and was introduced in 2006 at a meeting in Paris. 

Despite all the promises by M&M and Global Vehicles, the pick-up truck couldn’t make it in 2008. M&M made another promise that the vehicle would be ready for delivery in 2009 but didn’t live up to it. In 2009, Arun Jaura, then the R&D head, quit M&M to join Eaton, an auto component manufacturer. That surely must have affected the plans but there are more unexplained issues.

 THE KNOWN UNKNOWNS

There are two possible reasons for the delay. The first is the deflated market for SUVs in the US. Rebecca Lindland, director of research at IHS Automotive, a consultancy and forecasting firm, describes it as a perfect storm for M&M. If you look at the mid SUV segment in the North American market alone, in 2005 this segment saw volumes of 1.3 million units. In 2009, it had reduced to 2,17,000 units.

“This segment had crashed. And Mahindra is an unknown brand competing in a niche which was under tremendous fire at the time and everybody was buying crossovers. It really was a recipe for disaster,” says Lindland.

According to this logic, it did not make business sense for M&M to sink another $100 million or so in launching a pick-up truck.
But if one believes that M&M is a company that takes the long view and such market volatility does not affect its plans, then could it be something else? “At the time we were wondering what was happening. But my sense is that Mahindra underestimated the difficulties of homologation,” says a former Global Vehicles official who requested anonymity.

Now homologation (where an automobile product of one country is certified to operate in another), takes two-and-a-half to three years in the US. Its two critical aspects are safety clearance and a pollution norm certificate. We know that by 2008, M&M had received a Nitrogen Oxide clearance, which means that the car’s engine has been cleared. But the safety and the final pollution certificates were still to be procured.mg_65672_mahindra_mahindra_future_280x210.jpg


Perez believes that M&M had the clearances but did not launch. M&M did not clarify this point but Forbes India has seen the final EPA (pollution norm) certificate which M&M received in February 2011. So, it is entirely possible that it could not get the clearances when Global Vehicles was still its distributor. The vexing issue here is, why did M&M officials, such as Goenka, keep making public statements that the pick-up truck was ready when they did not have the clearances? Was it simply a case of marketing hype?

All these questions will be raised in the latest suit. Whatever the answers, this case is a clear warning to all Indian companies that are trying to globalise. They should choose their partners well and keep to their stated commitments.

(This story appears in the 06 July, 2012 issue of Forbes India. You can buy our tablet version from Magzter.com. To visit our Archives, click here.)

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  • Dr.a.jagadeesh

    A critical and unbiased article on the subject. Dr.A.Jagadeesh Nellore(AP),India

    on Oct 28, 2013
  • S. Srinivasan

    The author deserves praise for writing a well-balanced account of a very important dispute that has many shades of grey and could ensnare even a seasoned reasoner in a trap of bias. He has trodden a very careful middle line, relying only on verifiable information. I am a bit disappointed though that Mr. Anand Mahindra, whom I respect a lot, hasn't come clean on this and personally spoken to Forbes India to clear the doubts. Whatever be the outcome of the case, one thing is clear. Even mature Indian companies are complete novices when it comes to globalization. They just don't know how to sequence the execution. In fact, many don't even seem to know what ambitions they need to set for themselves. I think Mahindra & Mahindra is essentially an honest group and will resolve this dispute in a fair manner. But the lesson they must learn is that what works in India may not work abroad. You need to build plenty of capacity in terms of management skills before embarking on major journeys. Meanwhile, don't give fancy interviews to the media misleading them about your projects.

    on Jun 28, 2012
  • John Perez

    I will like ot thank Yvonne Conde for clearing the issue about Pedro Pan, my parents suffer very much when they sent me alone at age 12 to the US so I would not be indoctrinated into the communist system, that is also the reason why I left the business in Romania.

    on Jun 27, 2012
  • John Perez

    Mr. Mirsha. Your article was very well written and fair but there are some things said that need to be clarified because the information you are receiving is not quite the truth. 1. I had a very successful automotive career for 17 years owning two very profitable new car dealerships in Atlanta Georgia until I sold them and decided to get involved in the distribution of vehicles, my first mistake was to do business with a communist country and the mentality that goes with that system, after a few years of trying to do a business in the way we do in the US, the corruption was so great that we walked away from the project, then I thought doing business with Mahindra would be like doing business with a US corporation, BIG SURPRISE, worse than Romania. 2. The EPA certificate was issued by the US goverment on August 17th, 2010, two months after Mahindra claimed they were not able to meet certification, on top of that Dr. Goenka made a public statement on May the 15th, 2010 to Automotive News that they had passed all US standards and will apply for the certificate the end of May, well they applied for the certificate at the end Of June after they deemed the contract had expired and got certified a month later, YOU BE THE JUDGE, who is telling the truth, Goenka?, well see in a US court. 3. Mahindra keeps claiming that GV did not have the financials, well GV was not the buyers, GV was the distributor, the buyers were GV dealers and they had over 160 million dollars in credit lines specific to buy Mahindra vehicles, GV dealers had the financial capacity to buy more vehicles than Mahindra produces in a year. Eventually Mahindra will have to go infront of a US judge and tell the truth, something that is not to common in that company, this time they will not be able to hide behind arbitration, the US judge will never allow Mahindra to walke away from 347 US dealer and their investment without getting to the bottom of the situation, the truth will come out and Mahindra will pay dearly for all the lies, this is the US where they can not do what they do in their country. By the Way, I was told by Mahindra top officials that they own the press in India, if this is true, sounds like Romania. Time will tell the truth and mahindra will pay very big.

    on Jun 27, 2012
  • Yvonne Conde

    Mr. Mishra: Operation Pedro Pan was NOT launched by the CIA. It was started by Cuban parents sending their children out of the country as individual freedom eroded and indoctrination increased in Cuba Yvonne Conde, NYC Author, "Operation Pedro Pan, the Untold Exodus of 14,048 Cuban Children."

    on Jun 26, 2012
    • Ashish K. Mishra

      Thank you for your observation Ms Conde. It seems that there are two views out there on the historical antecedents of Operation Peter Pan or Pedro Pan. And there are many who like you believe that there was no CIA involvement. Certain other sources, apart from Wikipedia, such as the National Archives of the US Government say this \"..From 1960 to 1962, in a program partially funded by the U.S. Government, 14,048 Cuban minors arrived in Miami, sent to America by parents terrified that the new communist government would ship their children to Soviet work camps.\" at http://www.archives.gov/press/press-releases/2005/nr05-130.html. Another book The Bay of Pigs and the CIA By Juan Carlos Rodríguez mentions this: \"...Page 55 | Legal Custody of Children....Operation Peter Pan began to take shape in Washington in mid-1960. (It was called that because Peter Pan had taken the three darling children away to Never-Never Land.) The name was sadly ironic: for many of those children who were sent out of Cuba, the United States would be a land from which they would never, never return home. The operation formed part of the arsenal used to psychologically soften up the Cuban people. With it, the Propaganda Section in Quarters Eye decided to unleash a propaganda campaign to make ordinary Cubans believe that, under a communist government, children - like the land, industries, stores and housing - would become the property of the state. If that happened, parents would lose legal custody of their children....The CIA experts were confident that, if they managed to sow that doubt in some of the people, the fear would gather momentum and could lead to the exodus of thousands of children, split up families and thus undermine the families\' support of the government. Undoubtedly, it would be a most effective destabilizing measure....\" Many authors have also said (http://goo.gl/3jDu2) that because the official documents related to this operation have not been declassified the complete picture is difficult to piece together. But we respect your view and the perspective it brings to this contentious issue.

      on Jun 27, 2012
  • Praveen Pandey

    Fantastic piece.....very well explained what happened....

    on Jun 26, 2012
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