PSA will open Morocco plant to cut costs, lift emerging market sales

RABAT (Reuters) -- PSA/Peugeot-Citroen unveiled plans to build a 557-million-euro ($630 million) Moroccan factory, as the carmaker seeks to reduce production costs and its reliance on Europe following a brush with bankruptcy.

The site near the coastal city of Kenitra will begin assembling subcompact and compact models for Africa and the Middle East in 2019, PSA said in a statement. An initial annual production capacity of 90,000 vehicles is expected to rise to 200,000 as sales increase, CEO Carlos Tavares said after signing the investment deal at Morocco's royal palace in Rabat on Friday.

The models built in Morocco are likely to replace the Peugeot 301 and Citroen C-Elysee sedans produced in Vigo, Spain, for many of the same markets including Turkey and North Africa. They will be built on a new low-cost vehicle architecture, CMP, developed by its joint venture with Dongfeng for future models produced in China for the domestic market and southeast Asia.

The factory represents a belated step by PSA to expand into lower-cost vehicles and emerging markets, reducing its exposure to Western Europe's relatively stagnant demand and high production costs.

It is also a sign of Morocco's growing industrial clout, which has seen it draw increasing investment in sectors ranging from cars to aerospace. PSA said it expects the plant to source 60 percent of components locally, rising to 80 percent as the supply chain develops. It will have a 4,500-strong workforce once at the 200,000-vehicle capacity.

"Africa and the Middle East are historic markets for PSA and the region is expected to become a profitable driver of our internationalization," Tavares said.

The former Renault second-in-command took over at PSA last year following a 3-billion-euro government-backed bailout in which it sold matching 14 percent stakes to the French state and Chinese carmaker Dongfeng after racking up billions of euros in losses.

Under his "Back in the Race" recovery plan, PSA is pursuing a 5 percent operating margin. The core automotive division returned to a small profit in 2014, but with about 60 percent of sales still recorded in the cut-throat European market, where the profitability of mass-market carmakers is under constant pressure.

Until now, PSA has lacked a low-cost production capability to rival Renault plants in Romania and Morocco that assemble budget models including the hot-selling Duster SUV. Weak sales of the current no-frills offerings reflect plant and labor costs that are too high to compete effectively against Renault rivals such as the Duster or comparable offerings from Hyundai and Toyota.

Union anger

The Morocco plant represents only a modest shift by PSA towards lower-cost production but is nonetheless politically sensitive in France, where the carmaker is cutting jobs.

Concerns mounted following a Reuters report that detailed plans by the carmaker to outsource some engineering functions to a Moroccan R&D centre run by Altran, a process now underway.

PSA's CGT union said on Friday the carmaker had eliminated 14,800 jobs over the past two years, denouncing the plant investment as a sign of further pain to come. "There's no way we are going to accept that PSA's internationalization strategy be carried out at the expense of workers," the union said in a statement.

PSA said the Moroccan plant will complement production in Nigeria. The company signed an agreement last year for PAN Nigeria Ltd. to assemble the 301 under contract in Kaduna, with a possible addition of the larger 508 sedan and the 308 hatchback.

As output ramps up in Morocco and is expected to resume in Iran - where international sanctions have forced western carmakers to halt sales - Tavares is targeting 1 million annual vehicle sales by 2025 in the Middle East and Africa. That represents a 12.5 percent share of a market that is forecast to expand 44 percent over the next decade. PSA's current market share stands at 3 percent.

PSA’s sales in Africa and the Middle East dropped 25 percent last year to 169,400 vehicles and accounted for 5.8 percent of its worldwide deliveries. In the first five months, the company's new registrations in the same markets increased by 18 percent to 76,900.

Bloomberg contributed to this story

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