PSA, Renault pursue turnaround plans to ease dependence on Europe
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One might argue that France's automakers are the sick men of Europe. Beset with a stagnant home market, excess production capacity and costly payrolls, they are struggling to fend off opportunistic rivals such as Volkswagen and Hyundai-Kia.
But Renault and PSA/Peugeot-Citroen aren't ready for the scrapheap. As Europe enters its fifth consecutive year of declining sales, the two automakers are cutting excess capacity, expanding their product lineups, allying with other automakers and expanding overseas.
Though the two French automakers suffer similar problems, Renault arguably has made more progress. Renault is less dependent on the sluggish European market, and it shares the cost of product development with its Japanese partner, Nissan.
By contrast, PSA's new alliance with General Motors won't pay big dividends for another five years or so, and its growth in new markets like China has been fitful.
In the first six months of 2012, Renault's net profit plunged 37 percent to 786 million euros. That's nothing to brag about, but Renault still managed a profit.
During that same period, PSA suffered a net loss of 819 million euros, compared with an 806 million euro profit a year earlier. Thus, PSA is in a deeper financial hole.
But Renault is not ready to declare victory. In an interview with Automotive News Europe, Renault Chief Operating Officer Carlos Tavares warned that Europe's extended downturn will force the company to remain in turnaround mode for some time.
"The current problems [in Europe] are something that are going to last for a few years," Tavares said. "You need to do more with less, or better with less."
Tavares wants every employee to think twice before spending.
"We need to have people inside the company acting as if what they spend is their own money," he said.
Here's a look at each company's turnaround plans, and their progress — or lack of it — so far.
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To help break PSA out of its “splendid isolation,” CEO Philippe Varin (right) has formed an alliance with GM CEO Dan Akerson that the companies say will save them billions and make them more competitive in Europe. |
'Splendid isolation'
Much of PSA's misery can be attributed to its tradition of "splendid isolation."
The company, which was founded in 1810 to manufacture coffee mills and bicycles, historically avoided equity partnerships with other automakers.
While the Peugeot family zealously maintained control, the company began to stagnate.
In February, PSA finally broke its isolation when it formed an equity alliance with General Motors. For 1 billion euros, GM acquired a 7 percent stake in PSA, becoming the second-largest shareholder behind the Peugeot family, which controls 25.4 percent of the company's stock.
PSA and GM will share vehicle platforms and jointly purchase parts. About five years from now, the alliance will generate combined annual savings of $2 billion. But analysts offered faint praise for the alliance.
"It's easy to be cynical about the PSA-GM plan, as it has many of the features common to failed alliances from the auto industry's past," said Max Warburton, an auto analyst at Bernstein Research in London. "But at least PSA and GM Europe now have a plan of some sort and a direction."
Earlier this month, reports surfaced that GM and PSA are exploring ways to combine their European operations in a second phase of the alliance. One option is for GM's Opel European unit to merge with PSA's automotive operations in a joint venture, Reuters and the French newspaper La Tribune reported, citing sources who asked not be identified because the discussions are confidential.
GM could take a 30 percent stake in the joint venture and inject up to $10 billion into the new company, a source familiar with GM's thinking told Automotive News Europe.
By taking a 30 percent stake, GM would not have to consolidate Opel's financial results, thus limiting the U.S. automaker's biggest financial liability, the source said.
Burning cash
While the GM alliance eventually will generate savings, it won't solve PSA's immediate cash-flow crisis. In the first six months this year, the automaker burned through 954 million euros of operating cash.
In response, the automaker has announced plans to cut 8,000 jobs and close a factory in Aulnay, near Paris, in 2014.
To raise cash, PSA recently sold its Paris headquarters in a lease-back deal. It halted construction of an Indian plant, ended work on a dual-clutch transmission and halted development of a plug-in diesel hybrid vehicle.
PSA also is trying to sell a large stake in its money-making logistics division, Gefco.
The cutbacks will save 1 billion euros this year, plus an additional 1.5 billion euros through 2015. But the automaker has warned it will continue bleeding cash through 2014.
"The depth and persistence of the crisis impacting our business in Europe requires the launch of the reorganization of our French production base and a reduction in our structural costs," PSA CEO Philippe Varin said in a statement last month.
However, industry experts are not impressed by the pace of the turnaround. "We do not see any reason to expect conditions to improve in the second half or in 2013," said Barclays analyst Kristina Church in a note to investors. "PSA capacity [reduction] will not take effect until 2014 and we therefore assume that the company continues to be loss-making and cash-burning."
If the turnaround lags, financial markets could lose confidence in Banque PSA Finance, PSA's captive financing operation. The unit's credit ratings have followed its corporate parent's ratings in a downward spiral.
PSA's consumer financing costs are now about three times higher than VW's. Since 70 percent of Europe's new-car sales are financed, PSA cannot match the attractive car loans that its German competitor offers.
No 'car guys'
One might expect a family-owned company to be more stable in a recession. After all, the Peugeot family owns 38 percent of PSA's voting rights – enough to assert control and fend off takeover attempts.
But PSA has had a revolving door of top managers.
In 2007, PSA abruptly ended CEO Jean-Martin Folz's decade-long tenure and replaced him with Christian Streiff. After only two years, Streiff stepped down, citing ill health. He was replaced by Philippe Varin in 2009.
With three different chief executives in just 28 months, PSA lacked management consistency. Moreover, none of those executives came from the auto industry, notes retired supplier CEO Thierry Morin.
"While German CEOs are real 'car guys,' in France many people thought that being a wise and talented CEO was enough to be successful in the automotive business," Morin said. "It sometimes proved wrong."
Despite the turmoil, Varin has formed a turnaround strategy:
• Boost sales in fast-growing overseas markets such as China
• Nurture PSA's new alliance with GM
• Move upscale with the premium DS brand
• Revive the company's sputtering EV lineup.
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Citroen created its DS subbrand to offer upscale, more expensive versions of volume cars. The strategy is paying off. This year, the average sale price of the DS5 in Europe is 13 percent higher than the C5 on which it is based. |
False start in China
In the first six months of 2012, PSA generated 40 percent of its sales outside Europe, up from 22 percent in 2002. But the automaker has not kept up with Renault, which generates 47 percent of sales outside Europe.
China could have been a bright spot for PSA, where the French automaker was an early entrant with a joint venture established in 1985 with the government of Guangzhou province.
But the French automaker fell behind when it offered reworked version of aging European models, while competitors introduced their newest models.
In the first six months, PSA sold only 209,000 units in China, for a market share of 3 percent. By contrast, VW enjoys a market share of 19.7 percent, according to Morgan Stanley.
The automaker also is introducing a new range of low-cost compact models intended for emerging markets – PSA's answer to Renault's successful Logan brand.
Peugeot already has unveiled the 301 sedan, and Citroen will follow at the Paris auto show in September with the C-Elysee sister model.
Moving upscale
While PSA trails behind Renault in international expansion and in low-cost models, it has managed to move upscale with the DS subbrand at Citroen.
Unveiled in 2009, the DS strategy aimed to squeeze more profits out of volume models by creating upscale versions named after the futuristic DS large sedan launched in 1955.
Citroen has sold more than 200,000 DS models so far, and it says its pricing strategy is paying off. This year, DS3 prices were 12 percent higher than the C3 it is based on. Prices of the DS4 were 10 percent higher than a C4, and the DS5 commanded prices 13 percent higher than a C5. The DS line represented 15 percent of Citroen's first-half orders in Europe and 10 percent of its global sales, versus 7 percent in the year-earlier period.
The DS lineup has also given PSA an opportunity to revive its fortunes in China. In June, Citroen introduced the DS brand in China, and it is opening a network of stores devoted exclusively to the subbrand. Citroen will expand the number of dedicated DS dealerships in China from 24 to 80 next year, and to 200 by 2015. Next summer, Citroen will localize production of the DS5 in Shenzhen, and it is working on a large sedan to be built in China. In April, Citroen unveiled a DS9 concept model at the Beijing auto show.
Renault's turnaround
Renault is not feeling as much pressure as its French rival to reduce capacity and cut costs.
The company only produces light commercial vehicles, EVs and mid-sized cars in France, where labor costs are high. Renault has shifted production of minicars, subcompacts and compact models outside western Europe to locales where labor costs are 30 percent lower.
"Renault has already restructured its footprint," said Laura Lembke, a financial analysts with Morgan Stanley in London. According to Lembke, Renault enjoys other key advantages:
• Its financial unit, Renault Banque, is solid
• Partner Nissan shares product development and provides earnings support
• Dacia, Renault's low-cost brand, continues to grow in emerging markets. It has helped Renault boost overseas sales from 17 percent of total deliveries in 2002 to 47 percent this year
• Renault is poised for growth in Russia, where it has formed a partnership with Russian automaker AvtoVAZ.
Strong overseas sales cushioned Renault from the full effect of Europe's stagnant market. In the first six months, Renault's global sales declined only 3 percent to 1.3 million units.
Schweitzer's big bets
Renault's expansion overseas is arguably the brainchild of former CEO Louis Schweitzer, who ran the company from 1993 through 2005.
It was Schweitzer who gambled on a partnership in 1999 with Nissan, a company that was in big trouble at the time. Schweitzer put his trusted deputy, Carlos Ghosn, in charge of the Japanese automaker's turnaround.
That same year, Schweitzer acquired Dacia, a nearly defunct Romanian automaker, and transformed it into an overseas powerhouse brand.
The entry-level Dacia brand has been surprisingly profitable. While Renault does not report individual results for its brands, Morgan Stanley estimates that Dacia has an operating margin of about 9 percent, a level typical for premium automakers.
That was good news for Renault, whose global automotive operations in the first half reported an operating margin of only 0.4 percent.
"There seems to be a common mis-perception that average sales price for the Dacia business are extremely low, in the range of about 8,000 euros," said Lembke of Morgan Stanley. But Lembke notes that Dacia models branded as Renaults in international markets sold for 20 percent more than Dacia-brand models in Europe.
In Brazil, Renault sells the Duster small SUV for 21,000 to 27,000 euros, compared with a price range of 12,000 to 19,000 euros as a Dacia in Europe, Lembke estimates.
Given Dacia's rising sales, the division is generating a significant profit. Combined sales of vehicles based on Dacia's inexpensive M0 platform are expected to reach 1 million units this year, up from 813,000 units in 2011, said Arnaud Deboeuf, chief of Renault's entry-level range.
Ghosn gambles on Russia
Schweitzer retired in 2005, leaving Renault and Nissan under the control of Ghosn. In 2008, Ghosn showed his own willingness to gamble when he acquired a 25 percent stake in Russia's largest automaker, AvtoVAZ, for $1 billion. The Russian automaker's Lada brand accounts for nearly 20 percent of all vehicle sales in Russia, but its models are ancient, and the company has propped up sales with rock-bottom prices.
To boost AvtoVAZ profits, Renault and Nissan will invest $750 million to upgrade the Russian automaker's plant, technology and model lineup. In turn, the two partners will gain a 67 percent stake in their joint venture with AvtoVAZ. The joint venture expects to command a 40 percent share of Russia's new-car sales by 2015, up from Renault and Nissan's 13 percent share today.
That is significant because Russia is already Europe's second-largest car market and analysts expect the country's total vehicle sales to surpass Germany for No. 1 sometime this decade. The Association of European Businesses expects that 2.8 million vehicles will be sold in Russia this year, up 8 percent from 2011.
Renault, Nissan and Lada sold 507,711 units in Russia from January to June, while PSA sold only 45,759 units.
EVs a non-factor
While Renault is profiting from its strong overseas alliances, the company's investment in electric cars has yet to pay off.
Both Renault and PSA pioneered electric cars in Europe, with modest rewards so far.
PSA was the first European automaker to introduce pure EVs in late 2010, but the Citroen C-Zero and the Peugeot iOn are mere rebadges of the Mitsubishi i-MiEV imported from Japan.
Combined sales of PSA's two electric vehicles declined 3 percent to 1,788 units in the first half, according to data from JATO Dynamics.
PSA was forced to temporarily suspend supply from Mitsubishi due to high inventories.
Meanwhile, Renault core's EV model, the Zoe, is late. The first units will not be delivered until year-end.
In the EV segment, Tavares says: "We are not in a 100 meter race, but in a marathon" and adds that Renault will introduced four different EVs by the end of the year.
"One thing that is sure is that we are not going to discount our [EV] cars to chase volumes," he added.
Moving upscale
If there is one area where Renault trails PSA, it would involve its effort to introduce more upscale products.
Renault still depends heavily on its lineup of low-margin small cars, and Tavares is trying to fix that. "We plan to start with something that will be similar to Citroen's DS series that will eventually become something like Infiniti at Nissan," he said.
Deutsche Bank analyst Gaetan Toulemonde said an upscale brand would help Renault in Europe by giving it a more exciting image, which is the automaker's weak point. "Tavares knows something about the luxury car division from his former job as head of Nissan in North America," Toulemonde said.
Ian Fletcher, an analyst for IHS Automotive, said Citroen has shown how its DS line can boost profit margins.
"DS customers are adding thousands of euros worth of extras onto their cars, so the margins start to widen significantly," Fletcher said. "Renault can do that by using existing technology to add a couple of thousand euros worth of value to different models."
If PSA and Renault manage to boost their profits per vehicle, it would help them ride out a European economy that seems likely to remain stagnant for years to come. Any automaker that relies heavily on volume sales of inexpensive entry-level cars is likely to face a Darwinian battle for survival. That's a fate that Renault and PSA would be wise to avoid.
You can reach Luca Ciferri at lciferri@crain.com.
