French Government Aid to Auto Makers Comes With Strings Attached

PARIS – French auto makers are expected to divide €5 billion-€6 billion ($6.4 billion-$7.7 billion) in government aid in the coming weeks to help them get through the country’s economic crisis if agreement can be reached on the accompanying conditions.

To get the money, the companies have to promise not to close factories in France and to forego executive bonuses.

At a recent automotive summit here before six different ministers, the industry was defended as a strategic key for the country. Vehicles account for 6% of employment and 6.4% of the gross national product.

The European Union imposes strict rules on government subsidies for industry, but these are outweighed by the current economic crisis, and President Nicholas Sarkozy has said he would look favorably on requests for financial assistance from French car makers.

French passenger-car sales fell 15.9% in December, car manufacturers’ association CCF says, as the effect of the global economic crisis continues to weaken consumer confidence. Adjusted to the same selling days as year-ago, the group says deliveries actually slid 23.5%.

However, because sales of light vehicles in first-half 2008 were strong, second-half losses were barely worse than prior-year, down 0.6% to 2,510,564 vehicles. The country’s two French marques held a combined 55.3% share of the nation’s sales for the year, up 0.9 points from 2007.

Renault Megane sedan among Renault’s best-selling cars.

Government help will come in a mixed package of loans and loan guarantees, capital investment and other means that are under negotiation with the auto makers.

Renault SA CEO Carlos Ghosn already has agreed to the government’s stipulations (France still owns about 16% of Renault).

However, PSA Peugeot Citroen SA CEO Christian Streiff is resisting a commitment to keep all domestic plants running. “We will right-size our industrial sites in France,” he says. “We have done so, and we will continue to do so.”

Both auto makers reportedly are looking to move some production to lower-cost countries in order to compete with Asian competitors. In order to manufacture in higher-cost France, Renault and PSA are asking the government to reduce corporate charges and taxes.

“Between a car assembled in Flins (France) and a model made in East Europe, the difference in cost is €1,400 ($1,800), or 10% to 12% of the sales price,” Ghosn says. “Of that, €750 ($962) is linked to a difference in employment charges and €250 ($321) to corporate taxes paid in France.”

Meanwhile, a separate fund will provide €300 million ($385 million) to modernize supplier companies. Financed in equal parts by the state, PSA and Renault, the fund will be directed by Herve Guyot, who heads PSA’s lending-arm Banque PSA Finance.

The money will be used to inject capital in suppliers “that have the best potential technology, the best potential for growth, for exportation and with the know-how to emerge at the end of the crisis as world-class companies in their segment,” says Gilles Michel, the former Automobiles Citroen general manager who now heads the French Strategic Investment Fund.

Michel says the objective is to accompany companies through the restructuration and inevitable reorganization of the automotive supply chain.

The fund is expected to eventually total €20 billion ($26 billion) and will cover various industries considered critical. Michel says he already has received 25 requests for help. The first support will be granted in February.