How Tavares has turned PSA into a profit machine

A challenging year in 2018 left many of Europe's automakers struggling to put a brave face on falling margins amid worries about the high cost of complying with tougher emissions rules while also investing in electric cars and autonomous driving technology.

This was not the case at PSA Group, where CEO Carlos Tavares announced record sales and profits, including an operating margin of 8.4 percent for the Peugeot, Citroen and DS brands -- and a 4.7 percent margin for Opel/Vauxhall just 18 months after buying General Motors' money-losing European operations.

Analysts were quick to give Tavares credit for the results.

"The transformation of PSA under Tavares has been extraordinary," Max Warburton of Bernstein wrote in a note to investors in June. Tavares successfully applied his proven approach on cost, capital discipline, distribution and pricing to Opel/Vauxhall, Warburton wrote.

Arndt Ellinghorst of Evercore ISI said Tavares and his team are on track to do what few would have thought possible in turning around Opel/Vauxhall. "PSA, under CEO Tavares' leadership, shows how to get the job done," Ellinghorst said in  a note to investors.

The praise for Tavares grew last month after PSA said that recurring operating income rose 11 percent to 3.34 billion euros, lifting its operating margin to a new record of 8.7 percent in the first half. Ellinghorst called it "a hugely impressive result."

That being said, Tavares' record is not perfect. Sales in the Chinese market have fallen to about 200,000 this year from nearly 750,000 in 2014; sales in other global regions such as the Middle East and Latin America have slipped recently; and the upscale DS brand has not yet gained traction.

The Tavares formula, if there is one, includes a focus on improving pricing even at the cost of volume; keeping a tight model lineup with strong branding; and efficient allocation of capital, analysts said.
But there are other factors such as: Tavares' qualities as a leader; a willingness to explore lesser-known revenue streams such as used cars; and an agile production network.

Some of the success can also be attributed to luck or good timing, analysts said.

Tavares arrived at a troubled PSA in early 2014 after stepping down as No. 2 at Renault under then-CEO Carlos Ghosn. The departure came after Tavares publicly expressed his wish to lead an automaker. With PSA bleeding cash after the 2008 recession, earlier management made some hard decisions. PSA was restructured to give the French government and China's Dongfeng Motors a 14 percent stake each.

The move injected more than 1.6 billion euros into PSA while reducing the Peugeot family's stake to 14 percent from 25 percent. Assets were written down, lowering PSA's cost basis.

A factory at Aulnay, near Paris, had just been closed, as part of a plan to trim more than 10,000 jobs in France by 2015. A development deal with GM, signed in 2012, had yet to bear fruit, but it later resulted in key SUV models that hit the European market in 2016-2017, and laid a trust base for PSA's acquisition of Opel/Vauxhall from GM in 2017.

European consumers were poised for a four-year car-buying binge that erased the losses from the 2008 recession and 2012 "double dip."

Even if Tavares was able to hit the ground running at PSA, analysts praised him for his leadership qualities, operational efficiency, and discipline in reducing complexity and focusing on improving pricing. 

"There is a long list of executional decisions that have been strong," Morgan Stanley analyst Harald Hendrikse said.

"Having not had as much capital available as, say VW, PSA has been forced to make some more intelligent choices."

Said Denis Schemoul of IHS Markit: "The recipe isn't genius. The fact is that he can execute on it as a leader. If you talk internally to people at PSA they are so glad to have someone who provides organization and leadership vision. That was a big change."  Tavares has managed to get people behind him "even with some disruptive changes," Schemoul said.

In person, Tavares is direct and approachable, with little of the "great man" mystique attached to powerful CEOs. He flies on discount airlines and stays in budget hotels. Away from the office, which he says gets 100 percent of his time from 8 a.m. to 6 p.m., his passion is vintage racing, whether it's a 1980s Formula 3, a rally-prepped Peugeot 104 or sharing the driver's seat in a thundering Lola T70.

"He flies on low-cost airlines because he believes in it," Schemoul said. "He is applying to the whole organization some aspects of his personality. That's probably one of the reasons why people tend to follow him -- they can see that he's genuine."

Yet Tavares' racing exploits point to a fierce competitiveness. In recent years he has referenced Charles Darwin and the principle of natural selection to describe the seismic changes starting to appear in the auto industry.

"We are agile because we faced a near-death experience," he said last year. "We are Darwinian. We know that the survival of our company is based on our ability to adapt."

Tavares has increased the metabolism of PSA, analysts said, including pushing for real internal competition among factories for product allocations.

"He has definitely turned the organization around in terms of excitement, willingness to work, the ability to believe that PSA can win," said Philippe Houchois of Jefferies. "That didn't exist for 20 years."

Tavares has hired talent from his former employer, Renault, most recently Thierry Koskas as head of sales and marketing, and Alain Raposo as head of powertrain, battery and chassis engineering.

Earlier, Olivier Bourget, executive vice president for programs and strategy, and Yann Vincent, industrial director, came aboard from Renault. "The years of nonaggression between Peugeot and Renault are gone," Houchois said.

In style and substance, Tavares bears some resemblance to the late Sergio Marchionne, the hard-driving CEO who managed to wring profits out of Fiat Chrysler Automobiles, analysts said. "One of his key strengths has been humility, a realization of what kind of company he has, which Marchionne similarly had in Europe. By having a clear understanding of its strengths and challenges, it's been easier to cut models and not to fight for the incremental sales, and therefore to hugely improve the overall mix," Hendrikse said.

Said Houchois: "Tavares today is probably the closest we have to Sergio Marchionne in the industry, in the ability to drive people to do more." Houchois, however, added a note of caution. "Keeping people on their toes as a management style has a lot of benefits, but it also wears people out," Houchois said. "You have to be careful."

Tavares has turned PSA's relatively small size into an advantage, analysts said. "People have been suspecting PSA of underinvesting, but what we have seen coming out of r&d and the design studio is quite impressive," Houchois said. "There has been a continued focus on capital allocation and savings that is Tavares' imprint on the business."

Tavares has often cited pricing relative to benchmarks as an important metric of success. "His other obsession [outside of efficiency] is to sell well," Houchois said. "When Tavares was COO of Renault, it was about the only period when Renault was particularly good in pricing."

Hendrikse said PSA did not take much market share in Europe from 2014 to 2016 when the market was seeing its biggest gains. Instead the company used the organic market growth to hugely improve the mix on the sales they were making. "They reduced exposure to rental cars and dealer self-registrations," he said. "The overall sales discipline that Tavares has had has been incredibly important," Hendrikse added. "He has not had an outright unit sales strategy, but one based on profitability."

To command higher prices a company has to offer a product that buyers want,  which PSA has done as Peugeot and Citroen have emerged as distinct brands with recognizable styling and a tighter lineup, analysts said.

"Tavares highlighted the fact that PSA had too many models in too many different regions," Hendrikse said. Many were not profitable, and low sales meant high inventory and capital expenditure needs. "By allocating models more intelligently around the world and cutting less profitable models he has turned PSA into a much more efficient company," he said.

Three models cited by analysts as having boosted PSA's fortunes are the new-generation 3008 compact SUV -- "you have more than doubled volume on an existing car," Hendrikse said -- and the Citroen C3, which was based on an older platform but has been the brand's best-selling model. In addition, the new 508 midsize fastback and wagon have met sales targets in a declining segment. "The design and care with which they have brought cars to market on those two brands has been fantastic," Hendrikse said. "That has played incredibly well with a more disciplined pricing and sales strategy."

While new-car launches tend to draw most of the publicity, much of the profit in the auto industry is made after the sale -- through service, parts and the used vehicle market.

PSA has been aggressive in taking some of that profit, which normally goes to dealers or third-party companies, for itself, through several channels.

"None of it is rocket science, but they are doing it with a bit more focus than their peers, and it appears to be paying off," Houchois said.

Among recent moves: It has beefed up PSA Retail, its in-house dealer network, which has acquired or built 29 Opel/Vauxhall sales points since early 2018; and starting in 2020 will distribute Opel parts. In May, PSA launched Spoticar, a new used-car platform for its brands, with the goal of increasing vehicle sales to 1 million from 800,000 by the end of 2021.

"Selling used cars is always a profitable business, but they have taken it one step further," Houchois said. "They are doing more multibrand sales of used cars and they have restructured aftermarket parts deliveries.

"Those two activities earn more than new-car sales," he said. "What surprises me is that more automakers have not done it." The payoff: an estimated profit margin of about 8 percent, he said, on revenues from those services of 11 billion to 12 billion euros.