BRUCE GAIN

PSA will survive for now, but long-term challenges remain

Bruce Gain is an Automotive News Europe correspondent in France.Bruce Gain is an Automotive News Europe correspondent in France.
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PSA/Peugeot-Citroen CEO Carlos Tavares' Back in the Race business plan and a cash injection from Chinese partner Dongfeng are almost certainly enough to ensure his company's short-term survival, but PSA's long-term prospects remain uncertain.

To compete effectively against global players such as General Motors, Toyota, and Volkswagen, PSA must achieve significantly higher volumes of scale, which Tavares’ turnaround strategy does not yet address.

For now, Tavares’ plan is about rescuing a company that was recently on the verge of bankruptcy, instead of addressing how PSA’s profits can eventually match those of its larger competitors.

PSA’s profitable rivals are well ahead: Tavares’ margin goal of 2 percent on sales is significantly modest compared to GM’s operating margin target of 10 percent, for example, said Deutsche Bank analyst Gaetan Toulemonde.

In the short term, Tavares’ track record at Renault and Nissan shows that he is capable of setting PSA on the right track. He can accomplish this by reducing the overlap between the Citroen and Peugeot brands, slashing PSA’s lineup, adding more localized production in Russia and South America and using Dongfeng to help expand in Asia. He can also make the DS profitable when he hives it off into a separate premium subbrand.

However, Tavares still faces the problem of making PSA competitive against its larger rivals that are often three times larger than the French company and have much greater spending power.

Fiat CEO Sergio Marchionne believes a volume automaker needs annual sales of 6 million units to be viable, which was one of his reasons for merging Fiat with Chrysler. PSA's 2.82 million global vehicle sales last year were much lower than those of rivals. Fiat and Chrysler sold 4.4 million vehicles, GM's volume was 9.71 million and VW Group sold 9.72 million units. Renault and Nissan had combined sales of 8.27 million.

PSA will be significantly challenged to achieve the volumes it requires through organic growth alone and will need to find a larger third party to do that, similar to what Renault has accomplished with Nissan, Toulemonde said. "PSA's size difference is contributing to its handicap," he said.

PSA must also establish a much deeper and wider alliance with a third party compared to its existing tie-ups, including its alliance with Dongfeng, Toulemonde said.

“The relationship between Renault and Nissan is much different than PSA’s alliances with Fiat, Opel and Toyota,” he said. "It is easier to have one spouse than it is to have five mistresses. When you have one bride, you tend to maintain the relationship for better or for worse for the next 50 years."

In the meantime, PSA faces immediate hurdles in achieving modest profit goals with the Back in the Race plan. PSA needs a sustainable rebound in Europe and an end to profit-sapping discounts. And the relationship between stakeholders Dongfeng, the French government and the Peugeot family shareholders must succeed and not degenerate into what one analyst called a “three-head monster” that could stall Tavares’ back-to-profit plans.

"PSA shouldn’t think too much about step 3 before completing step 1 and step 2," Toulemonde said.

You can reach Bruce Gain at bgain@crain.com.

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