France’s PSA Raising African Profile in Morocco

PARIS – The €557 million ($621 million) deal between PSA Peugeot Citroen and the Kingdom of Morocco inked June 19 followed weeks of speculation over the exact nature of the French automaker’s long-awaited move into North Africa.

PSA will establish a factory in the free-trade zone of Kenitra on the west coast of Morocco. It aims to assemble 90,000 cars and engines starting in 2019, increasing production capacity to 200,000 units by an unspecified date.

In Kenitra, PSA is expected to build compact cars, namely the Peugeot 301 and Citroen C-Elysée models that are proving successful in emerging markets. These currently are assembled in the group’s Vigo, Spain, factory. The automaker recently opened an assembly plant in Nigeria and has announced plans to open a factory in Algeria.

In talks to secure the go-ahead for the project, PSA promised Morocco to source at least 60% parts and components locally. Morocco’s government hopes the move will create 4,500 jobs at the local Peugeot factory and 20,000 more in the country’s burgeoning auto-components industry.

The automaker aims to cater to the growing North African and sub-Saharan African market from its Morocco unit. It bets on car-market volume of 8 million units in the region by 2025 and hopes to account for 1 million of those sales. Currently, the region accounts for only 5.8% of the group’s global sales, according to a PSA statement on the Morocco deal. But these sales are growing fast: 22% between January and April compared with year-ago.

Challenging Renault in North Africa

PSA’s African strategy follows in the footsteps of its bigger rival Renault, which established a factory in Tangier in 2012 and has just opened a plant in Algeria. Carlos Tavares, PSA’s new CEO, was recruited from Renault, where he had been involved in the French automaker’s North African investment strategy.

Tavares hopes the new gambit makes a key difference to struggling PSA following its bailout through a French government 14% equity acquisition and alliance with Chinese automaker Dongfeng, to help PSA grow in Asia. The group has been battered by the rise of more cost-effective rival Asian manufacturers in its market segment.

Tavares is on a mission to put the group back on its feet. PSA has adopted a cost-cutting, innovation and market-expansion strategy called Back in the Race, which aims to make the group profitable again by 2018. Efforts already are paying off. In April Fitch Ratings upgraded PSA’s long-term issuer default rating to BB- from B+ with a positive outlook.

To Peter Cooke, of the Centre for Automotive Management at the U.K.’s University of Buckingham, PSA’s decision makes sense: “Morocco is a very logical place. They’ve got a growing population, a young population, well educated, and enthusiastic to work. There’s growing demand for cars in North Africa and further afield.”

Flavien Neuvy, director of Observatoire Cetelem de l’Automobile, a French think tank, notes Morocco “is a country that offers political stability. From the point of view of manufacturing and labor costs, it is well placed.”

Morocco has offered generous tax incentives for automakers to set up shop there and is building a deep-water port off Kenitra, to boost the country’s location advantage as a launching pad to export into sub-Saharan Africa.

But uncertainties around this investment remain.

Will PSA use its Kenitra plant as a low-cost production site to sell on the European market? The automaker’s trade unions have voiced concerns about further job losses in France if it did so. The launch date for the plant also has been moved from 2017 to 2019 for reasons not made clear.

“The biggest problem that (PSA has) got is the French government. There is a horrendous amount of negotiations and legal issues,” Cooke says.

The ability of Morocco’s government to ensure the country remains an attractive low-cost production location also is uncertain. Rabat’s decision in 2014 to increase the statutory minimum wage 10% has raised eyebrows among investors as the country still needs to upgrade the labor force’s skills to make up for such costs.

PSA’s move follows Ford’s announcement of plans to open offices in Kenitra to source car parts, disappointing some Moroccan industry-watchers who had hoped the U.S. automaker also would reveal plans to launch production in the country.