How pandemic forced PSA to go deep on efficiency

PARIS -- PSA Group rebounded from a near-death experience in the early 2010s to become Europe’s most profitable automaker through a meticulous focus on efficiency, but CEO Carlos Tavares said the coronavirus crisis has revealed even more potential savings. 

PSA convened regular “Kill the Virus” crisis meetings of the executive committee that sought ways to mitigate the impact, Tavares said at PSA's first half results webcast this week. PSA was able to achieve a positive operating margin in the first half, even as rivals such as Volkswagen Group and Renault reported deep losses. 

"We discovered that you can still find a lot of things that are not at the right level of efficiency and effectiveness," Tavares said. "Many, many things."

PSA's head of European operations Maxime Picat said the crisis forced PSA to look at areas that had been taken for granted.  

"Sometimes when we were in the middle of the [coronavirus] storm, it was like we were in slow motion," Picat said during an Automotive News Europe Congress Conversation webcast on July 30. "Nothing was happening on the cash-in side, and the cash out was still happening."

"It was an opportunity to really look at the business model and ask: 'Why do we do that'?" Picat said. "Even after years and years of trying to streamline the company we found more opportunities."

A key metric for PSA has been lowering the automaker's breakeven point -- the production figure at which operating margin becomes positive. Picat said the focus on that figure since Tavares took over in early 2014 paid off in the first half.

"When we reported every half year that we were improving our breakeven point, we were just preparing, in fact, for this kind of crisis," he said, as PSA still made money with sales down by 46 percent worldwide to 1.03 million in the first half. 

One of the changes necessitated by stay-at-home orders, increased remote working, will become the norm throughout PSA, Tavares and Picat said.  

This will allow PSA to eliminate 1 million square meters of real estate, and also allow it to save 29,000 tons of CO2 in its carbon footprint, he said.

The automaker is in the process of moving its headquarters from leased space in the western Paris suburb of Rueil-Malmaison to its technical center at Velizy, also west of the city.  

The new workspaces will be 90 percent meeting rooms or open space, and just 10 percent desks, said PSA’s Europe chief Picat.

"Honestly, after months of very efficient remote work, where the company was efficient and delivering results, we couldn't act like nothing had happened and go back to the way we worked before," Picat said.  

Another area where future savings could be found is online car sales. PSA had rolled out online sales in a limited basis, largely in the UK, before the crisis, but with showrooms closed for months, the group moved quickly to roll out a more complete online platform. 

Because of high distribution costs in Europe, online sales are more profitable than the conventional dealer model, Tavares said, “as long as you have the right tools and the right customer satisfaction level.”  

PSA now has a dedicated IT team to handle online sales channels, he said, although he noted that there were "some bumps on the road" and parts of the platform had to be re-engineered.  

Some cost savings found during coronavirus lockdowns will not be sustainable in the second half, CFO Philippe de Rovira said during the earnings call. PSA was able to reduce spending on selling, general and administrative expenses, or SG&A, by 521 million euros ($617 million), but much of that was because of government salary subsidies to workers who were temporarily laid off or on short-time work. Similarly, R&D costs fell partly because there was less work.  

De Rovira said PSA would not detail the exact amount of savings achieved that were linked to the coronavirus crisis. But Faurecia, the supplier in which PSA Group holds a controlling stake, said the crisis fueled a first-half drive to cut costs by 536 million euros, by accelerating and intensifying an efficiency plan that was put in place in 2018.  

Among the actions were “flexibilizing” direct and indirect labor costs and manufacturing costs, lowering R&D expenses and maintaining strict control over back-office expenses.  

By continuing those efforts – including reducing R&D costs by 10 percent to 15 percent from 1.33 billion euros in 2019 and lowering capital expenditures by 40 percent from 685 million euros in 2019 -- Faurecia is forecasting a 4.5 percent operating margin on sales for the second half.  

"The accelerated deployment of our key resilience initiatives and additional structural actions will allow us to further increase resilience and return to solid profit and cash generation in the second half of the year," Faurecia CEO Patrick Koller said in a statement this week.

Tavares said there is "more to come on savings" thanks to lessons learned during the crisis. "We see that there are tons of things we can do in a different way," he said. "This is a never-ending story to improve the efficiency and effectiveness on the way we go to market."