Why the PSA-Dongfeng deal does more harm than good

Yang Jian is managing editor of Automotive News China.Yang Jian is managing editor of Automotive News China.
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SHANGHAI -- The bailout that PSA/Peugeot-Citroen negotiated with the French government and its Chinese partner, Dongfeng Motor Corp., will prop up the French automaker in the short term. But the deal has shortcomings that could cripple PSA's competitiveness in the long run.

To be sure, PSA desperately needs money, and this deal provides it. Dongfeng and the French state each will pay 800 million euros ($1.09 billion) for a 14 percent stake in PSA. In the real world, nothing is free, and this agreement creates two big headaches for the French automaker.

One headache is inefficiency. With too much production capacity and too many employees, PSA is not an efficient company. That's why it has suffered so much in the weak European market at a time when leaner competitors like Volkswagen and Renault are surviving. That problem isn't likely to get any better now that the French government will have representatives on PSA's board. How will those directors respond if PSA tries to cut costs in France?

The second headache is technology: PSA has it, and Dongfeng wants it. Dongfeng, one of China's oldest state-owned companies, has been a truckmaker for most of its existence. It did not make passenger cars until 2009 and its automotive technology is not competitive. By acquiring a 14 percent stake in PSA, Dongfeng naturally expects to tap PSA's latest technology. And China's government will certainly try to make sure of it. And since state-owned Dongfeng will have two representatives on PSA's board, China will insist on it.

Dongfeng clearly expressed its expectations in a statement released last week after it inked the deal with PSA. The Chinese automaker said it would establish a joint r&d center with PSA in China. That facility will help develop Dongfeng's new Aeolus models as well as Peugeot and Citroen vehicles built in Wuhan. Dongfeng says the deal will allow it to upgrade its vehicle technology to international levels and achieve "large scale" exports. But is PSA willing to share its latest technology with a Chinese company?

Technology is vital to a company's competitiveness. Supported by PSA's technology, Dongfeng's Aeolus brand might compete someday with Peugeot and Citroen. Few companies would want to lose control of their own technology. Consider the travails of SsangYong Motors, which was acquired by SAIC Motor Corp. in 2004. The Korean SUV maker repeatedly accused its state-owned Chinese parent of stealing its technology, even though it was 100 percent owned by the latter. SAIC denied the accusation. But the dispute went on and eventually SsangYong went bankrupt.

To avoid snarling up its own operations, PSA should repurchase Dongfeng's stake after the French automaker regains financial health. Otherwise, its deal with Dongfeng and France will hobble its efficiency and antagonize its powerful Chinese partner in the world's largest auto market.

You can reach Yang Jian at yangjian@autonewschina.com.

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