IHS Global Insight Perspective | |
Significance | PSA has signed a Letter of Intent with Chinese automaker Changan Automobile Group to manufacture light commercial vehicles under a new joint venture (JV). This coincides with the automaker's chief executive revealing that the company is looking to pay back loans to the French government early. |
Implications | The announcement of the preliminary agreement in China comes as no surprise as speculation has suggested that PSA had been looking to set up a second JV in the country to drive its growth plans in some of the fastest growing developing markets. |
Outlook | Although PSA is planning to pay down this debt early, it remains to be seen whether it will be able to do so before April 2011, or whether the French government will make it stick to the original plan or add conditions in order to achieve earlier goals. |
PSA Peugeot-Citroën has confirmed that it is looking to widen the extent of its involvement in China, with the announcement of a preliminary agreement with one of the largest Chinese automakers. In a statement made on the French company's website, it revealed that it had signed a Letter of Intent (LoI) with Changan Automobile Group on the creation of a 50:50 joint venture (JV). Under the deal, the pair will manufacture "environmentally friendly light commercial vehicles [LCVs] and passenger cars." It added that the new JV will be complementary to both automakers' existing JVs in China, and without direct competition to them. However, discussions are still continuing with further details to be revealed at a later date.
PSA Planning to Pay Back Part of Loan Early
PSA has also revealed that it is planning to pay back part of the 3 billion euro (US$3.87 billion) soft loan it received from the French government in 2009 by the end of the year, reports Dow Jones International News. PSA's chief executive Philippe Varin made the statement during a lunch with industry executives yesterday. He told the audience "PSA... having for its part straightened out its cash flow, is proposing to repay the state loan in advance for an amount of 1 billion euros [US$1.3 billion]." Varin also indicated that the government would use the funds to help support the French component supplier community.
The senior executive also told listeners that the company was expecting to see a decline in its domestic market of 9% year-on-year (y/y) during 2010, but that its first-half 2010 earnings would be "largely positive." He also suggested that the company may enter the low-cost sector of the light vehicle market, but added that if it pursued this, it would not be with the Peugeot or Citroën brands.
Outlook and Implications
The announcement of this preliminary agreement with Changan comes as no surprise as speculation has surrounded a second JV for PSA Peugeot-Citroën to support its relationship with Dongfeng for more that a year now. This reached a peak at the recent Beijing Motor Show (China), with discussions having been confirmed by Changan's vice-president Du Yi, who suggested that an agreement could be signed by June (see France - China: 26 April 2010: Changan Vice-President Expects PSA JV Deal within Two Months). Although there are still some details to be hammered out, from the statement that has been made by PSA it is likely that the agreement will centre around the LCV market. This part of the market is anticipated to expand from around 4.3 million units per annum (upa) in 2009 to over 6.2 million upa in 2015, with much of the gains being made in the small van and truck market. This could prove to be an opportunity for its Peugeot Partner and Citroën Berlingo models which are already popular in Europe, and also have passenger variants. It would also mean it would not compete with Dongfeng Peugeot-Citroën Automobile (DPCA), which has had renewed success over the past year, bolstered by the surging passenger car market. During 2009, sales reached 270,000 units, having fallen during 2008 from what was a slow growth rate. The automaker is expecting these gains to continue, with demand in the Chinese market as a whole expected to increase by 20% during 2010 according to Varin. PSA should be able to take advantage of this as its two brands bring to market the Citroën C5 and the new Peugeot 408 sedan, developed for sale in markets such as this. The JV with Changan also reiterates PSA Peugeot-Citroën's goals to improve its presence in fast-growing developing markets such as Brazil and Russia. It has previously stated that it hopes to see these regions contribute 15% of its expanded profitability plan over the next few years (see France: 13 November 2009: PSA Unveils Profitability Strategy).
It seems that both PSA Peugeot-Citroën and Renault, which received the 3-billion-euro loans from the French government to help with ongoing financing through the economic downturn which reached its lowest point during the first quarter of 2009 (see France: 10 February 2009: France to Provide PSA and Renault with Up to 7 bil. Euro in Loans to Weather Crisis), are keen to begin paying these down as soon as possible. Late last week, Renault chief executive Carlos Ghosn said that he would also be keen to take this strategy (see France: 3 May 2010: Renault Shareholders Approve Chairman for Four More Years, Profitability Expected to Return in 2011), as the improvement in the financial markets meant that was no need to hold on to the money. With both having mentioned this strategy in a narrow timeframe, it seems that they will work in concert to lobby the government for them to take this approach. Whether it will be as simple as taking this approach remains to be seen though. The French government had initially set an early repayment date of April 2011, with a final payment set for 2014, and is likely to be keen for the two automakers to stick to this in order to make use of its influence and achieve some of the conditions that it set out as part of the loan agreement in the first place. These included the development of low-emission vehicles (although this is something that both companies are undertaking in any case), an improvement in their relationship with component suppliers and, perhaps the most controversial, the maintenance of employment levels in France. Following the announcement, French industry minister Christian Estrosi said that the government had yet to receive a formal request but would "examine this in a calm manner." By bringing up the possibility of the returned cash being provided to the supply chain through a programme of support, there seems to be a pre-empting of the government's stance. However, the French government may well impose additional conditions on the loan repayment plan, in order to achieve what it originally envisaged.