PSA Peugeot Citroën

Back from the brink

The fortunes of the beleaguered French carmaker are looking up

Nov 2nd 2013 |From the print edition

OCTOBER 25th was the end of an era at Aulnay-sous-Bois. Workers stood watching as the last car came off the assembly line at the PSA Peugeot Citroën site there, a Citroën C3. The 40-year-old factory, considered a miracle of industrial modernity at its birth, will close in the first half of 2014. Though sad for those who work there, the closure is good news for European carmakers struggling with overcapacity, above all for the second-largest.

Caught between the collapse of the European car market and an unstoppable investment programme, PSA reported a loss of €5 billion ($6.4 billion) in 2012. The firm will not make money in 2013 and will not say when it thinks it will. But some things are definitely going better now.

Peugeot’s problems are not mysterious. First, it is Eurocentric and Europe is a hard place to sell cars these days, especially France, Spain and Italy, key markets for PSA. Its share of a falling market has fallen too (see chart). Second, PSA produces a lot of the smallish, cheapish cars that have proved vulnerable in the downturn. And third, it lacks scale. PSA makes around a third as many cars as Volkswagen (VW), for example. Its biggest platform turned out 1.2m vehicles in 2012 to VW’s 3.5m, says IHS Automotive, a market-research outfit.

None of these problems can be solved quickly, least of all in France. When Peugeot announced in July 2012 the coming closure of Aulnay, with a broader plan to restore the firm’s fortunes by cutting 8,000 jobs and €1.5 billion in costs, all hell broke loose. The new Socialist government accused bosses of bad faith. PSA’s debt was downgraded and its credit arm, Banque PSA, needed a €7 billion state guarantee to secure refinancing on terms allowing it to compete with rivals. Workers at Aulnay struck from January to May this year.

Yet Peugeot has made more progress than looked likely then. It signed a new contract with its French workforce on October 24th. In exchange for wage restraint and greater flexibility in working schedules, the firm says it will aim to produce around 1m vehicles a year in France by 2016 (more than the 930,000 it now does, though less than the 1.8m it once did).

Not everyone is happy: Philippe Julien, an official of one of the two unions that refused to sign the deal, thinks PSA will close another factory after 2016 and a production line or two before that. But for Rabih Freiha, an analyst at Exane BNP Paribas, a broker, the agreement is a big step forward, and the more positive relationship between the firm, the workers and the government could drive cost savings in future.

Other strategies are beginning to pay off too. PSA has pushed out new products and is edging upmarket. It is switching to fewer and bigger platforms. The financial position is improving and, with resources including credit lines exceeding €11 billion, the firm is safe enough for now. In the longer term, however, it needs more money to invest in new markets and technology.

Peugeot is widely accused of missing two boats: China, and finding a full-scale international partner. A belated collaboration announced in February 2012 with GM, parent of troubled Opel, foresaw joint purchasing and three shared production platforms. But on October 23rd PSA said they were “reviewing” its most ambitious element—developing a joint platform for small cars with low CO2 emissions.

As GM seemingly cools, PSA’s sights are in any event increasingly trained on Asia and its joint ventures with two state-backed Chinese manufacturers. With Dongfeng it is turning out over 400,000 cars a year; PSA’s sales in China have grown faster than the market, albeit from a low base. Its newer joint venture with Chang’an is producing the more luxurious Citroën DS line at a factory opened in September. Total sales could be over 900,000 in a few years—more if Dongfeng is willing to play a bigger role. Dongfeng is considering a proposal to take perhaps a 30% stake in PSA (costing €1.2 billion at today’s prices), though it looks in no hurry to do so. The French government, keen for the firm to stay French, could also be an investor.

But PSA’s fortunes are more likely to be lifted over the coming decade by a slowly recovering car market in Europe and an explosively growing one in China than by any big increase in market share, thinks Pete Kelly of LMC Automotive, a research and forecasting firm. Almost all companies in this competitive industry are planning to cut costs, reposition their products and attack Asian markets. At least Peugeot is now out of the hospital and on the job.

From the print edition: Business