PSA to end French production alliance with Renault, Dongfeng investment may be smaller than anticipated – reports

A report in the media has suggested that PSA Peugeot-Citroën could attract a smaller investment by Dongfeng Motors than the French automaker had originally hoped. Sources have told Bloomberg News that Dongfeng is now considering taking a 10% stake in PSA – around half of what was originally anticipated, adding that Dongfeng is now keener on expanding an existing industrial venture rather than buying an outright stake in PSA. They also reiterated that a stake sale is progressing slower than planned as Dongfeng, the French government and the controlling Peugeot family bargain over influence and the size of eventual holdings in PSA.

There are also said to be disputes between factions in the Peugeot family over how best to secure the automaker's future. According to people familiar with the matter, the chairman of PSA's supervisory board, Thierry Peugeot, wants to retain greater control if the company while Robert Peugeot, who leads a publicly traded investment vehicle FFP, is opposed to investing further funds. Sources have said that their cousin, Jean-Philippe Peugeot, has been trying to negotiate between the two camps to reach an agreement. His support is said to be crucial to any final decision as he heads EPF, the Peugeot family's unlisted holding company which controls FFP, and which in turn owns the family's main stake in PSA. The family is also said to be in dispute with the French government after an official joined a delegation to China regarding negotiations with Dongfeng last month without the permission of the family or senior executives. The family is concerned as to the increased influence the French government would have on the future of the company if it bought a stake in PSA.

As a result of this situation, a final agreement regarding the sale of a stake in PSA is not anticipated before the end of the year.

Reports have also persisted that the French automaker is canvassing buyers for its stake in part-making business Faurecia (see France: 18 November 2013: PSA explores selling Faurecia, remains keen on proposed Dongfeng stake acquisition – report). People have said that Magna International and other industrial rivals have expressed an interest in buying it, but reiterated earlier reports that this would not take place until a stake sale to Dongfeng has been completed. However, a spokesperson for PSA has told Agence France-Presse (AFP) that "the strategy of the group has not changed. Faurecia is a strategic asset that creates value and of which a sale does not figure on the group's planned route."

Separately, Reuters has reported that PSA and Renault are set to end the cross-shareholdings they have in two French facilities. Spokespeople for the two automakers have said that PSA will buy back the 50% stake that Renault currently holds in its Douvrin engine manufacturing plant, while Renault will buy back the 20% stake PSA holds in its Ruitz transmission production site. The deal, which is set to be officially announced on Tuesday (26 November), is not expected to have an impact on staffing levels at each facility.

On a related note, the success of PSA's early retirement scheme announced earlier this year is set to result in the automaker mothballing several vehicle production lines in France, reports Dow Jones Institutional News citing Le Figaro. According to the report, one production line in Mulhouse is set to be targeted, while another in Poissy could be targeted at a later date.

Outlook and implications

With little official comment on matters relating to Donfeng potentially taking a stake in PSA, speculation continues as to progress and terms of the deal. However, a smaller stake and greater industrial collaboration would fit in with some of the comments that senior executives at Dongfeng have being making on the matter (see China – France: 18 October 2013: Dongfeng executive considers benefits of acquiring PSA stake). While owning a large, influential stake in PSA may be a feather in Dongfeng's cap, the Chinese automaker will be keener on having access to technology that would benefit its self-developed vehicle programmes in its increasingly competitive domestic market as well as supporting wider export sales in future. A smaller stake may also be less disruptive to the relationship that PSA has with General Motors (GM) which holds 7%, and reduce the French government's interest in influencing the future of the business. However, given the reported stagnation of the deal that has occurred recently, there is no certainty at the moment that it will actually reach the point of completion, despite many continuing to suggest that a provisional deal could be reached by the end of the year.

For now, PSA will be keenly focusing on gaining the efficiencies from its domestic operations that it has managed to negotiate over the past 12 months through deals with its unions. Having undertaken the end of production of the Citroën C3 at Aulnay at the end of last month (see China - France: 28 October 2013: PSA finally ends production at Aulnay; Dongfeng executive highlights complexity of possible investment), the reduction of its headcount that is planned to reach 8,000 as part of the plan, should allow it to mothball lines in order to use the remainder more efficiently and improve utilisation levels, something it desperately needs to do to improve profitability here.

With regards Renault and PSA divesting stakes in non-key facilities, this is likely to result in some unravelling, certainly on Renault's side as it still manufactures its the entry level 1.1-litre gasoline (petrol) D4F KAIZEN engine at Douvrin. This is also starting to be phased out through the increased use of the S1G engine produced at Valladolid (Spain) and Pitesti Collibasi (Romania). With this deal, it could well see an increased use of this engine to speed up the phase out of D4F. With regards Ruitz, all of production here is undertaken for Renault, with nothing for PSA. However, the manufacture of outmoded four-speed automatic transmissions could raise doubts over its future, unless the acquisition of this 20% stake represents the beginning of a plan for future investment in this site.