PSA Looks to Power Ahead in China, Defends Cutbacks in France

PSA Peugeot-Citroën has given further details of its plans and ambitions for the Chinese market at a ceremony kicking off the construction of a new factory in Shenzhen (China) to support its new joint venture (JV) with Changan, Changan PSA Automobile. The automaker's chief executive officer (CEO) Philippe Varin was in attendance and told Reuters: "The European situation is a bit uncertain for the time being… This makes a point that to be in China as a big player, it is very important for us because there is growth. There is a win-win spirit with our partners".

The CEO of PSA's Asia operations, Gregoire Olivier, reiterated this point, stating: "There is a very rapid growth of the Chinese market so all of our efforts are going to be focused on taking a strong Chinese position". He said that passenger car sales are expected to increase at a slower rate than previously, with gains of between 4% and 5% during 2011 and 6% and 7% in 2012, and PSA anticipates that this will continue for several years to come. He told the news service, "the long-term prospect is excellent. Don't believe what you have seen in Shanghai and Beijing," adding there were a lot of opportunities in small cities with around 1-2 million people. Olivier said that he believed that these "small cities have entrepreneurs which like distinctive cars," like those of the Citroën DS series which are going to be built at the new factory. In order to sell these new premium-focused vehicles, PSA intends to start with 16 dealerships in the country, executive vice-president for the JV Zhanwang Ying told Bloomberg News, before this rises to 25 by the end of 2012.

At the same time, Bloomberg News has reported that PSA will work with Changan to develop alternative powertrain technology, and that Varin said that the pair will also explore the manufacture of hybrid and electric vehicles (EVs) locally. However, the launch of PSA's China-only brand in 2014 should take place first.

An interview with Varin in France's Le Journal Du Dimanche has seen the executive defend plans by the automaker to reduce its headcount in Europe. Varin told the newspaper: "Fears over jobs aren't justified," adding that jobs at the manufacturing part of its business would not be cut despite the car market in the region not picking up as expected, and will end the year flat at best. The senior executive added that this was the reason why the company is looking to expand production near emerging markets which are continuing to grow, but that it had nothing to do with outsourcing vehicle manufacturing.

Outlook and Implications

Although PSA has invested or plans to invest in all four main developing markets globally—Brazil, Russia, India and China—which will help to reduce its dependence on Europe, most of its efforts are going to China. The automaker has been involved in China for around 25 years now, most notably with its partner Dongfeng, but signed up to a JV with Changan in 2010, with approval from the Chinese government having come this year. This approval has allowed it to start building this new production site, supported by the joint preliminary investment of CNY8.4 billion (USD1.3 billion). Covering an area of around 1.3 million square metres, the initial production capacity of the site will be 100,000 passenger vehicles and 100,000 commercial vehicles, as well as 200,000 engines, when manufacture begins in mid-2013. The first vehicle to be built here will be the Citroën DS5, currently the automaker's only model under the DS brand, although the full range of vehicles under this banner will be supplied as imports, at least initially. The DS5 should give the JV to offer an alternative powertrain vehicle given that the DS5 is available in this specification in Europe. However, it is likely that the JV will use its new research and development (R&D) centre (see China: 27 July 2011: PSA JV to Open CNY500-Mil. R&D Centre in China) to develop this with a gasoline (petrol) engine, as diesel engines—which the vehicle uses in Europe—are not popular in China. PSA hopes that all these efforts with this JV and its Dongfeng Peugeot-Citroën Automobile will result in it taking 8% of the Chinese market between 2015 and 2020, up from the 3.2% it controlled last year. However, given the rate of growth that IHS Automotive expects for the Chinese passenger car market, this would require the automaker selling around 1.9 million passenger cars alone here, around five times greater than it sold in 2010 and almost three times the amount we anticipate at this point. With this in mind, we consider that PSA is extremely over ambitious in its expectations.

Having announced that it was looking to reduce its headcount in Europe as part of its efforts to cut costs (see Brazil – France: 27 October 2011: PSA Formally Announces Cost-Cutting Measures for 2012, to Undertake Brazilian Expansion), PSA has come under vast pressure from France where it has the majority of its operations and where a large part of the cuts are expected to take place. Unsurprisingly, its unions have been keen to stop any impact on their members, and many of the reports in the media have stemmed from these sources. However, the French government has also become embroiled in the matter, partly in response to the impending presidential election, and incumbent Nicolas Sarkozy has taken time to have meetings with Varin (see France: 18 November 2011: French President Wades Into Discussion on PSA Job Cuts, Claims No Local Jobs Will Go) in an effort to appease the electorate. However, while Sarkozy has said that PSA will not cut jobs, the automaker has already said that the majority of staff numbers that will go will be through retirements and other natural attrition. As a result, PSA could well achieve a large part of the hoped-for reduction without the embarrassment for the government that widespread redundancies would bring. It remains to be seen whether this remains a bone of contention with stakeholders despite the lack of impact that this programme is perceived to have.