Mahindra to Invest $74 Million in Ssangyong Product Development

Mahindra & Mahindra of India is investing an additional $73.7 million in paid-in capital to provide its struggling Ssangyong Korean subsidiary with badly needed funds, primarily to finance new-product development.

Ssangyong is Korea’s smallest auto maker, specializing in light trucks.

The transaction, approved by Ssangyong’s board of directors this month, involves the issuance of 11.54 million new shares of Ssangyong common stock by early June. The Korean company will subscribe for the full amount.

This will reduce Ssangyong’s debt-to-equity ratio and increase Mahindra’s holding to 73% from 70% acquired in its initial investment in March 2011.

“This paid-in capital increase reflects Mahindra’s strong commitment to support Ssangyong Motor in its efforts to achieve an early turnaround,” Ssangyong Chairman Pawan Goenka says in a statement.

“As we carry out the investments in new models, including a small cross/utility vehicle, our product development will gain momentum,” Ssangyong CEO Lee Yoo-il says.

Some analysts believe Ssangyong’s CUV concept, designated the SIV-1 (Smart Interface Vehicle) to be showcased at the Geneva auto show next week, is a prototype of the new small vehicle that Mahindra’s financing will cover.

The SIV-1 is the fourth version of a small CUV presented in previous concept form as the XIV-1, XIV-2 and e-XIV. The latest version is expected to be slightly larger in size.

Although computerized renderings of the 4-door SIV-1 have appeared on some websites, a Ssangyong spokesman tells WardsAuto the auto maker has no knowledge of where the renderings came from and has not released any photos or information.

Analysts note that while the announced investment is good news for Ssangyong, it falls far short of the $900 million in funding that Goenka last month said Ssangyong would need for product development over the next four years.

He also said the new vehicles and engines would be developed jointly by both companies and that financing would involve new equity investment, internal accruals and outside credit facilities.

To carry out the 4-year vehicle- and engine-development program, Mahindra and Ssangyong still need to look at raising more than $800 million in new funding.

But executives at the two auto makers worry that the pending investigation of Ssangyong’s past employee-relations practices by Korea’s National Assembly will pour cold water on their efforts to raise the additional capital.

They caution the investigation could dishearten would-be investors, make possible credit facilities difficult and have a negative influence on potential Ssangyong customers.

The National Assembly has formed a special investigative body to review Ssangyong’s severance of 2,600 workers in 2009, before Mahindra acquired ownership of the company.

Union factions and some Korean legislators allege Ssangyong at that time falsified its books to make its financials look worse than they were in order to justify major reductions in its workforce.

The two auto makers have denied this, saying Mahindra did extensive due diligence before acquiring a majority stake and found nothing wrong with the accounting or with Ssangyong’s compliance with Korean labor law.

Analysts say Ssangyong could be ordered to rehire hundreds of workers who were forced to retire in 2009, dashing the auto maker’s hopes of becoming profitable.

Ssangyong earlier this month said it planned to rehire 455 of the 2,600 workers who had elected to take unpaid leave instead of retirement. The remaining 1,900 employees will not be rehired, the company says.