PSA Sticks to Battle Plan as First-Half Losses Mount

PARIS – While thousands of workers demonstrate in vain outside PSA Peugeot Citroen’s headquarters, CEO Philippe Varin meets with journalists in a rented hall about 2 miles (3 km) away to explain how the company came to lose €662 million ($804 million) in its automotive operations in the first half of the year and how it plans to return to good health in 2015.

The demonstrators were upset about 8,000 jobs to be lost in France, including 3,600 in mostly administrative jobs.

While there is no hope of altering PSA’s decision to close the assembly plant at Aulnay or trim assembly operations at Rennes, Varin says, no employees will be fired.

The 3,600 administrative cuts will come through buyouts, while 1,900 blue-collar workers will find work at the Poissy assembly plant and other locations and 2,500 will leave the company for other jobs or government unemployment.

“We are going to find answers outside the group,” Varin promises, adding PSA will work with the government to convert the Aulnay site to other industrial uses, perhaps involving suppliers.

PSA’s first-half operating loss on automobiles, which compares to a profit of €405 million ($491 million) a year ago, was caused partly by a market much worse than expected and higher prices for raw materials. About half of the decline is attributed to PSA’s loss of market share and the cost of improving its products.

It would have been worse, Varin says, had PSA not saved €503 million ($610 million) in the first half of 2012 from a previously announced cost-cutting program that is targeting €1 billion ($1.2 billion) in savings for the whole year.

The current challenge, says Frederic Saint-Geours, executive vice president-brands, is the most difficult the auto maker has faced in his 26-year career at PSA.

“The European market is down 23%, or 4 million vehicles,” he says. “(PSA is) losing 400,000 vehicles.”

Varin says the auto maker got into trouble because its plans were based on a market that was expected to be in recovery this year, according to a 2009 outlook by analysts Global Insight. Instead, the European market is worse than last year, and PSA forecasts it to remain as bad in 2013.

Through June, European new-vehicle sales were down 7%.

“The effect of the euro crisis on the automobile market was not anticipated,” Varin says.

For the full year, PSA now believes Europe deliveries will be down 8%, China up 7%, Latin America up 2% and Russia up 9%. The figures are more optimistic for Russia and less optimistic for Europe and Latin America than PSA forecast in February.

Part of the public controversy over PSA’s strategy is government criticism the plan is flawed, but Varin says the auto maker’s goal of becoming more international and moving upscale is more important than ever.

Much of PSA’s European volume decline this year is in the small-car segments, which were boosted in 2010 and 2011 by government incentive programs.

While higher-priced, upscale models are generally of lower volume, Saint-Geours says PSA’s intention is to add upscale customers, not move away from average buyers.

He says some versions of the Peugeot 208, described as an upscale replacement for the 207, actually cost less than comparable 207s.

Next year, PSA will introduce four new Peugeots and four Citroens in Europe, and in 2014 each brand will launch two cars. The ’13 models include the Peugeot 208 Gti hot hatch, and an extension to the Citroen DS line.

Varin mentions two other new products in the pipeline: a small electric utility van under development with Mitsubishi for 2013 and a new vehicle for the factory at Rennes in 2016.

Rennes makes high-end cars such as the Peugeot 508 and Citroen C5 and C6.

PSA is counting on its alliance with General Motors to cut development costs for new vehicle programs. Varin says a working group will decide before the end of the year on projects the companies can share.

The first fruit of cooperation was GM’s agreement to use Gefco, PSA’s logistics subsidiary. That new client will make it easier to get a good price for selling control of Gefco later this year to investors. A joint purchasing arm also has been set up, Varin says, and it should start operations in the fourth quarter.

PSA is counting on saving more than €100 million ($120 million) a year from shared purchasing as part of €350 million ($424 million) in overall savings on costs of production. In all, the auto maker sees €1.5 billion ($1.8 billion) in additional savings from its “Rebound 2015” plan. The rest comes from the plant closing and a reduction in capital investments.

New factories in China, Russia and South America are expected to provide enough capacity for growth in the near term. Plans for a factory in India have been put on hold, as have several smaller projects, Varin says.

The upshot will be a balanced cash flow at the end of 2014, he predicts. Right now, Chief Financial Officer Jean-Baptiste de Chatillon says, PSA is losing about €200 million ($243 million) a month, and the goal for 2013 is to cut that loss in half.

Succeeding depends on PSA holding onto its 13% market share in Europe, Varin says. It controlled 12.9% in the first half of 2012, and expanding sales of the Peugeot 208 into other countries should boost that above 13% in the second half, Saint-Geours says.

Internationally, PSA is concentrating on China, Russia and South America.

In its China venture with Dongfeng, PSA will launch a stretched Citroen C4 and a Peugeot SUV this year, and its joint venture with Changan has started selling the Citroen DS line, with production of the DS5 starting next year in Shenzen. The Dongfeng JV paid PSA a dividend this year of RMB776 million ($121 million) for 2012.

Unit sales in the first half were up 7.5% in China, 14% in Russia and down 21% in Latin America, where a plant was being rebuilt in the first half. European unit sales were down 15.2%.

One market it won’t get back right away is Iran. In February, PSA stopped sending complete-knocked-down kits there, a result of the international blockade of the country. It is costing PSA €10 million ($12 million) a month, de Chatillon says.