* Peugeot targets 2 pct automotive margin for 2018
* CEO says firm to cut offering to 26 models from 45
* Pledges new programmes with tight lid on investment (Adds details, background)
By Laurence Frost and Gilles Guillaume
PARIS, April 14 PSA Peugeot Citroen will nearly halve its product line and focus investment on new technology in an attempt to return to profit, the struggling carmaker's new boss Carlos Tavares said on Monday.
Tavares promised to cut costs and excess plant capacity in order to halt losses by 2016 and restore Peugeot's carmaking business to a 2 percent operating margin two years later.
The reduced lineup will "focus the creative power of our teams on a more limited number of products that people want to buy", Tavares said. With fewer models developed for just one region, the total number will fall from 45 to 26.
After losing more than 7.3 billion euros ($10.1 billion) in two years, Peugeot struck a rescue deal in February to sell 14 percent stakes to the French government and China's Dongfeng Motor Group, part of a 3 billion euro cash infusion that bought the company more time.
Tavares, formerly second-in-command to Carlos Ghosn at Renault, took over operational control from outgoing Peugeot CEO Philippe Varin the same month.
Investors were sceptical about the scale of the task outlined in Tavares' 'Back in the Race' plan. Peugeot shares, which have risen almost 50 percent so far this year, were down 6.5 percent at 12.80 euros as of 1402 GMT.
"While they see themselves as back in the race, they don't seem to realize that the competition is moving forward just as quickly," London-based Barclays analyst Kristina Church said.
"They actually need to start spending ahead of the competition."
Peugeot said it would invest in and build plug-in hybrids, four-wheel-drive powertrains and self-driving cars while insisting it would still spend less than peers on research and development.
Capital expenditure, slashed to 4.4 percent of revenue last year, will be limited to 7-8 percent in coming years, Tavares said, compared with 8-10 percent at mass-market rivals. Renault and alliance partner Nissan, for instance, seek to invest 9 percent of their much larger combined revenues.
The margin goal, while short of the Volkswagen brand's 2.9 percent last year and far behind rivals such as Toyota, nonetheless reassured some analysts. Peugeot will pursue a 5 percent objective for 2023, Tavares added.
Peugeot's 1.04 billion euro auto division loss in 2013 had amounted to a negative 2.9 percent margin, compared with a positive 1.3 percent at domestic rival Renault.
"PSA is heading in the right direction," said Erich Hauser of ISI Group in London.
The turnaround strategy "does remind us of what Tavares did at Renault", Hauser said. "Europe can continue to deliver positive surprises."
The streamlined model offering will also help Peugeot's struggling operations in Russia and Latin America return to profit within three years, Tavares said. The group is targeting cumulative positive cash flow of 2 billion euros in 2016-18.
Peugeot will make full use of a competitiveness deal struck with labour unions at the height of the crisis to reduce costs and headcount, Tavares added, cutting overall wage costs to 12.5 percent of revenue in 2016 from 15.1 percent last year.
In a sign that more strife with unions may be around the corner, Tavares said Peugeot planned to move 20 percent of research and development activities out of France. Under the deal deepening their existing joint venture, Peugeot and Dongfeng are to establish a new research centre in China.
The French carmaker will save more cash by doubling the supply of parts from lower-wage countries and "rightsizing" French plants, the CEO added, while raising production at more competitive sites in Slovakia, Spain and Portugal.
"On the pretext of financial objectives, Mr Tavares's roadmap represents a further step against wages and jobs," said Jean-Pierre Mercier, an official with the left-wing CGT union.
($1 = 0.7201 Euros) (Additional reporting by Natalie Huet and Andrew Callus; Editing by Sophie Walker)