PSA-Changan to Sign Agreement for New Chinese JV; Dongfeng JV to Expand Capacity

French automaker PSA Peugeot-Citroën will tomorrow formalise its new Chinese joint venture (JV) with local automaker Chongqing Changan Automobile Group. Dow Jones International News quotes PSA's head of sales and marketing, Jean-Marc Gales, as asserting that the move will help the company increase its presence in fast-emerging markets such as China and in turn reduce its reliance on Europe. Saying that the company already signed a preliminary agreement with Changan in May (see China - France: 6 May 2010: PSA Signs Preliminary Agreement with Changan, Plans to Pay Back French Government Loan Early), he added that, "All the big [overseas] car makers [currently] have two partners in China." According to the initial letter of intent (LoI), the PSA-Changan alliance (rumoured to be based in Shenzhen in Guangdong province) will manufacture light commercial vehicles (LCVs) and environmentally friendly vehicles, given that demand for these is accelerating in the local market amid government support measures.

Meanwhile, the senior executive revealed that PSA may eventually also create a third brand during the coming months to sell its low-cost vehicles outside Europe. "Low-cost means compromises in terms of safety, style and environmental performance and we've clearly said we won't sell [such vehicles] in western Europe under the Citroën and Peugeot brands", Gales said. He added that, as a result, the company is looking at expansion in China, India, and Brazil: "Two-thirds of the growth over the next 10 years will be in Asia, and half of that in China, 10% in India and the remainder in southeast Asia."

In addition, PSA is currently reported to be looking to expand production capacity at its existing Chinese JV with local automaker Dongfeng Motor Group through the construction of a third facility (see China: 13 May 2010: PSA-Dongfeng JV Considering Construction of Third Chinese Plant—Report). China Knowledge reports that construction of the new plant will begin by the end of this year. The Dongfeng-PSA alliance currently operates two plants in Wuhan (Hubei province) with a consolidated vehicle manufacturing capacity of 450,000 units per annum (upa).

PSA reported that its vehicle sales in China rose by 49% year-on-year (y/y) during the first half of 2010 to 176,000 units, helping the automaker achieve a market share of 3.3% (see World: 7 July 2010: PSA Peugeot-Citroën Posts Record Global Sales in H1). The majority of the sales volumes was driven by the Peugeot 207, 307, and recently launched 408 sedan, along with the Citroën Elysee, revamped C4, and new C5 models. The French automaker currently targets sales of 400,000 vehicles in China this year and aims to raise annual volumes to 2 million units by 2020 (with a market share of 10%). In order to achieve this ambitious target, PSA intends to launch 12 new and revamped models in the country by 2015.

Outlook and Implications

The Dongfeng-PSA alliance has recorded impressive growth this year and the impending deal with Changan is not meant to threaten this alliance, but rather complement it. Like many other large automakers in China, PSA is looking to expand by forming a second JV that will look to exploit regional opportunities in the vast country and add to and complement its existing vehicle portfolio and manufacturing facilities with Dongfeng. Meanwhile, Dongfeng-PSA is still not able to fully utilise its available capacity, so the rumour that it is considering a third plant may be a little premature, although the company's ambitions are clear. The JV unit saw its production volumes rise by over 50% y/y in 2009 to around 263,000 units, but IHS Automotive expects output to reach only about 365,000 units this year, 20% below the current capacity of 450,000 upa.

Currently, PSA is enjoying a positive response to the new Citroën C5 and Peugeot 408 models, and the talk of a third plant, coupled with plans to launch further models in China, could support the argument for expansion of the Dongfeng JV. PSA has been rumoured to be considering local production of its Peugeot 107/Citroën C1 in China, but this is a JV with Toyota made exclusively in the Czech Republic and such a move would thus require Toyota's approval. Similarly, the Mitsubishi-based Peugeot 4007/Citroën C-Crosser sport utility vehicles (SUVs) have been mooted for local production, but again this will depend on Mitsubishi's plans. However, we expect that PSA will remain focused on the middle of the market with its proprietary technology, eventually replacing the Citroën C2 with the Citroën C3 and introducing production of a number of new vehicles, including a Peugeot 407-based model and the Peugeot 3008.

Meanwhile, the formation of PSA's new alliance with Changan is expected to offer both automakers an expanded presence in China's fast-growing LCV segment. However, again, most of PSA's LCV products are built on shared platforms with Fiat, so it is expected that the new Changan JV will concentrate on its proprietary LCV technology: the Citroën Berlingo/Peugeot Partner models and the passenger-carrying versions. Both models are already in the advanced stages of being electrified and could thus also serve China's fast-developing electric vehicle (EV) market. LCVs are enjoying strong sales growth in the lesser-penetrated regions of the country, where ongoing government incentives are generating maximum rewards (see China: 10 June 2010: Vehicle Sales in China Rise 28.4% Y/Y During May). Further help is available with the increasing availability of affordable credit and the resumption of infrastructure development projects, which were sidelined amid the global economic downturn during the latter half of 2008. The Chinese LCV market is anticipated to expand from around 4.3 million units in 2009 to over 6.2 million units in 2015, with much of the gains being made in the small-van and truck segment.

PSA's plans to create a sub-brand for low-cost offerings also add some weight to the recent rumours that it may resurrect the Talbot brand to serve that purpose. Talbot was killed off in 1986 and could fulfil the job performed by the Dacia brand for domestic rival Renault. PSA retains high hopes for the Chinese market, but a sales goal of 2 million upa within the next decade remains extremely ambitious, not least as it would require it to compete aggressively with overseas rivals including Volkswagen (VW), General Motors (GM), and the like. Moreover, the increasing own-brand portfolios of domestic automakers and the lack of China-specific models in PSA's portfolio will also pose challenges for the automaker. As with much of PSA's global growth strategy, its Chinese plans are high on ambition but short on real substance.