Dealers Caught in the Middle

If you saw the recent World Cup Soccer games, you probably noticed Mahindra ad banners along the playing fields. It made me wonder if indeed Mahindra & Mahindra vehicles will ever hit our shores.

While there was certainly excitement over the last few years of that happening, that thrill fades with every delay.

The latest setback occurred when the U.S. distributor for Mahindra, Global Vehicles, filed a lawsuit against the Indian auto maker to protect its dealer network from the possibility of a launch with a competing distributor. As a result, these vehicles will likely not hit U.S. soil before 2011. By then it may be too late.

Approximately 350 dealers have signed up and paid anywhere from $100,000 to $300,000 to Global Vehicles for the franchise rights to sell Mahindra products.

Assuming each dealer paid an average of $200,000, Global Vehicles has received approximately $70 million in dealer sign-up fees. And yet, the 350 dealers will likely not see Mahindra vehicles or their deposit money anytime soon.

Because all the information we have to go by are public statements and motions filed in court, we are only left to interpret what these public statements may mean.

Without having to read too far between the lines, it is clear that communications between Mahindra and Global have broken down. At this point, it is difficult to believe the parties will resolve the matter any time soon.

The real question at hand regarding who wins and who walks away is this: How much value does Mahindra place on the prospect of entering the U.S. market?

For Mahindra to realistically launch in the U.S., it will have to repurchase its distributorship rights back from Global. It cannot afford the time it would take to litigate it in court.

For Global Vehicles, it can likely make more money in the resale of the distributorship back to Mahindra than it can selling vehicles to dealers. It would probably take Global several hard fought years of pushing product to reach the same profitability that it can obtain by simply relinquishing the distributorship.

Then again, Mahindra may simply cancel its plan to enter the U.S. market. If I ran the company, I would. It has little name recognition here in one of the most competitive auto markets in the world.

Emerging markets beyond the U.S. present better opportunities for Mahindra, as opposed to investing $50 million or $100 million here for marginal returns.

They could invest those same funds elsewhere and yield much higher returns.

As one of the few people in this country who has actually driven a one of these utilitarian vehicles, I assure you that they will have greater success outside of our borders. They are designed to be reliable rural vehicles that are not known for their comforts or configurations.

An additional reason that I believe Mahindra might pull out of the U.S. market is that its expansion plans in other countries have been done in partnership with local distributors, similar to its initial plan with Global.

From all appearances, they want to manufacture vehicles for a distributor with local knowledge of the market and not have to retail directly to dealers. So, buying the dealer network from Global would put them in the position of having to either run their own distribution or sell the distributorship rights. No obvious suitors wait in the wings, given the exit price Global may want.

As is so often the case, the dealers who put up their deposits will be caught in the middle of this ongoing dilemma. They will find themselves waiting for some time before they ever see Mahindra vehicles on their lots or portions of their deposit returned.

The lesson learned: Don't be too quick to put up deposit money for franchise rights. As with established auto companies in the U.S., franchise rights are typically awarded to the most qualified candidates, not to the first to pay the deposit fee.

Phil Villegas is a principal at Dealer Transactional Services, LLC. (an affiliate of Morrison, Brown, Argiz & Farra, LLP) in Miami, FL. He is at [email protected] and 305-318-8515.

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