PSA Signs Russian Plant Deal; Investment Worth 300 mil. Euro

PSA Peugeot-Citroën will sign a deal with Russian authorities today on building a car plant in Kaluga southwest of Moscow, Russian news agencies reported (see Russia: 28 December 2007: PSA Confirms Russian Manufacturing Plans, No Talk of Mitsubishi JV). The report said PSA will invest 300 million euro (US$443 million) in the plant, according to Economy Minister Elvira Nabiullina. The plant is to be completed by 2010, with initial production targets set at 75,000 unit per annum (pa), focusing on mid-range cars. The plant will employ around 2,600 people, Nabiullina said.

PSA has indicated that Russia, along with other growth markets of China and South America are absolutely key to its delivering on its ambitious CAP2010 growth plans (see World: 11 September 2007: PSA Peugeot-Citroën Targets Operating Margin of 5.5-6% by 2010).

Outlook and Implications

The project was confirmed last month by a PSA spokesperson and the signing of the agreement with Russian authorities will enable groundbreaking and construction to begin in Kaluga. Although the plant is 100% PSA's investment, the French giant has not ruled out cooperation on products at the plant. The spokesperson said: "but that does not prevent us from being open to possible co-operation with a partner to share the costs of a new plant," in the statement made last month.

PSA's confirmation combined with Mitsubishi's intention to build a plant in the region, and the overall tone from PSA, appears to indicate that whatever PSA and Mitsubishi manufacture in the region, at least one model will have a degree of commonality to make it financially beneficial to them. Currently their cooperation agreements are in the early stages, but with Mitsubishi willing, if not in need, of a suitable alliance partner and PSA in need of expertise outside its specialities of diesel and front drive compact to midsize cars, the extension of the alliance appears logical, mutually beneficial and with virtually no downside. The stumbling block could be a financial one, with PSA seeking an alliance partner that is able to buy into the group in order to dilute the Peugeot family influence (see France: 11 December 2007: PSA CEO Reported to be on Hunt for New Partner). Mitsubishi is not in a position to do that at present, without significant help from either its parent group or financiers. Progress in Russia will be a key indicator of how this fledgling alliance fares.

PSA has indicated that the new factory will produce vehicles in the midsize segment, Peugeot 308/Citroën C4 size models, which represents nearly 60% of all sales in the fast-expanding Russian market, according to PSA. The new facility is central to PSA Peugeot-Citroën's development strategy in Russia, considered by the company to be a priority growth market, it added. The Group plans to sell 100,000 Peugeot and Citroën vehicles in Russia in 2010, with a commitment to eventually raising this number to 300,000 a year by 2015.

Sales of foreign brands in Russia rose by 63% in the January-November period 2007, the last month for which data is available, compared with the same period in 2006, according to data published last month by the Association of European Businesses. European-based brands are trying to catch up with the Japanese, Korean and Chinese companies in Russia, all of which are more advanced in their plans and manufacturing operations.

Kaluga is on course to become Russia's second-most-important vehicle manufacturing centre behind St Petersburg, with Volkswagen opening a plant there last month, Mitsubishi and PSA's agreements and Volvo Trucks which is already established in the region.