PSA chief announces new "Back in the Race" mid-term strategy

The new chairman of PSA Peugeot-Citroën's managing board Carlos Tavares has revealed his intentions for the company under the "Back in the Race" mid-term strategy. The relatively brief plan gives an indication as to the direction of the company between 2014 and 2018, and some of the milestones that the company is intending to hit along the way. According to a statement released by the company, there will be three metrics through which the success of the plan will be measured. These are:

• Recurring positive group operating free cash flow by the end of 2016 at the latest
• Total group operating free cash flow between 2016 and 2018 of EUR2 billion (USD2.78 billion)
• A 2% operating margin to be achieved by the Automotive division by 2018, and a target of 5% to be achieved during a following mid-term plan to be drawn up to take place between 2019 and 2023.

In order to achieve these objectives, the company is targeting four key operational objectives. These will be:

1. Leveraging the automaker's brands: PSA intends to turn the DS nameplate in to a standalone premium brand within the group alongside Peugeot and Citroën. It will feature dedicated product and marketing, as well as a high level of service, with a particular emphasis on China. There will be three new vehicles to be launched here between 2014 and 2017, followed by five global launches between 2018 and 2020. At the same time, Peugeot and Citroën will also be repositioned, the former being a high-end generalist brand targeting the best competition while the latter will be seen as a "design-to-value" brand with competitive pricing and total cost of ownership (TCO).
2. A focused, targeted global product plan more aligned with market demand: The intention is to streamline the number of models from 45 to 37 in 2018, and then 26 by 2022 in order to improve market coverage and margins through targeting more profitable segments. These will include multi-purpose vehicles (MPVs), crossovers and light commercial vehicles (LCVs). It is expected that this will also help to optimise platforms and programmes around the world, as well as result in it being able to allocate research and development (R&D) expenditure and capital expenditure (capex) more efficiently, at a level of between 7% and 8% of revenues. It also notes a great deal of efficiencies will come from its partners such as General Motors (GM), Toyota and Dongfeng. Planned new technology as part of the plan includes development of a new four-wheel drive system, next generation hybrid technology and autonomous driving capability by early next decade.
3. Profitable international growth for its Automotive division: As already previously noted as part of its capital increase plan announced in February (see China - France: 19 February 2014: PSA announces EUR3-bil. capital increase, Dongfeng, French government to take stakes), the automaker reiterated that it intends to triple the volumes it sells in China with Dongfeng Motor by 2020, as well as undertake faster growth in the Association of Southeast Asian Nations (ASEAN) region. However, it is also targeting the successful development of the DS brand in China with its partner Changan. In addition, PSA will look to reverse its fortunes in Russia and South American markets with the aim being to return to profit by 2017 helped by cost reduction measures and a more optimised strategy. It will also seek expansion opportunities in new growth countries, such as Africa or the Mediterranean basin. This is not to forget its European operation with which it intends to improve profitability through improved competitiveness and continued fixed cost reduction. In an effort to support this renewed international strategy, PSA will structure the business in to six key regions – Eurasia, Europe, Middle East/Africa, Latin America, China and ASEAN, and Asia-Pacific.
4. Upgrade competitiveness: As part of its efforts to upgrade its efficiencies, particularly in Europe, the company has stepped up plant modernisation and bring them in line with global benchmark production facilities. It will also continue to reduce the business' costs and inventory.

The statement has also said that another intention is to continue a change in the corporate culture of the business, with the next step to focus on developing "a real profit-driven culture and a global approach in order to return to profit more quickly" and would be an important prerequisite for meeting the preceding four objectives.

Outlook and implications

After the automaker has agreed to restructuring and new labour agreements with its French workers, as well as announced its plans to increase its liquidity through a capital increase, it is now showing the world how it intends to return the business to profit in the long term. In some cases, it is easy to see why Tavares is intending to pursue the path he is, particularly in the area of branding and product ranges. The Peugeot and Citroën brands have struggled for some time, particularly in Europe, with a significant overlap in their ranges, notably in the core B- and C segments. The strategy will hopefully see the differentiation between brands widen significantly, and perhaps prevent both pursuing a market where one is already successful, reducing cost and cannibalisation. Potentially, this is the most interesting for Citroën, its C4 Cactus having been positively received by the media for its ambitious design and innovations in the area of both engineering and marketing (see France: 13 March 2014: Citroën to price C4 Cactus very aggressively, offering innovative financing solutions) and laying the foundations for the future of the rest of the brand to some degree. The spinning off of DS is not altogether unexpected, particularly given that in China it is already seeing vehicles sold and built under a separate joint venture (JV). This will allow the brand to achieve a greater differentiation from the rest of its range and hopefully further develop the premium credentials that some of the brand's models are starting to attain.

While it has already noted its intentions for the Chinese market, which currently forms the lynchpin of its non-European operations and will continue to do so with its new partner, it is also showing how it will support International growth elsewhere. The situation in Russia and South America has deteriorated markedly due to a range of factors – overlapping of brands, too little local sourcing and overhead costs – and the plan will address this by refocusing its strategy here. However, as ASEAN is seen as a key market for the PSA-Dongfeng JV, supported by local production and assembly in some cases, as well as specially adapted models, PSA is also keen to tap other markets, including South Africa, Nigeria and Angola, while in vast swathes of the Middle East are seen as having a good potential for the brand over the next 10 years. It has also noted its keenness to re-enter the Iranian market in future.

It now remains to be seen whether Tavares and the rest of his management team can achieve the great many targets that it has laid out – both from a market and a financial perspective. Certainly it will not be easy, particularly given that it will have two stakeholders in the French government and Dongfeng, which may at points have contrasting opinions on the direction of the business.