March 26, 2014 / 7:36 PM / 5 years ago

Peugeot signs Dongfeng deal, recovery hurdles remain

PARIS (Reuters) - PSA Peugeot Citroen’s (PEUP.PA) tie-up with China’s Dongfeng (0489.HK) was signed on Wednesday, bringing the French carmaker much-needed cash and greater access to Asia but leaving major challenges ahead.

From L-R: Robert Peugeot, director of the board of French carmaker PSA Peugeot Citroen, Philippe Varin, outgoing Chief Executive Officer of PSA Peugeot Citroen, Xu Ping, Chairman of Dongfeng Motor Group Company and French Minister of the Economy and Finances Pierre Moscovici attend a news conference in Paris, March 26, 2014. REUTERS/Charles Platiau

French President Francois Hollande and visiting Chinese counterpart Xi Jinping oversaw the signing of a framework deal for state-owned Dongfeng Motor Group (0489.HK) and the French government to take matching 14 percent Peugeot stakes in a 3 billion euro ($4.1 billion) capital increase.

New Peugeot CEO Carlos Tavares must now turn around unprofitable European operations, halt persistent Latin American losses, deliver on China plans that many consider ambitious and treat a Russian headache that may be about to worsen.

The tie-up allows Peugeot and Dongfeng to extend their existing Chinese joint venture to co-develop vehicles, ramp up production to grab a bigger share of the world’s largest auto market and export their cars around Asia.

After Wednesday’ signing ceremony President Hollande said that deal makes Peugeot “a carmaker of global dimensions that can be present on all markets”.

“This is no longer just about selling, it’s about investing together,” he said.

Tavares, former second in command at rival French carmaker Renault (RENA.PA), takes over as CEO next week, with Thierry Peugeot bowing out as chairman in a deal that had pitched him into public conflict with cousin Robert over the dilution of the family’s stake and loss of control.

“When you pass major milestones it’s normal that there be discussions and differing opinions,” Robert Peugeot, who heads the family’s holding company FFP (FFPP.PA), said in a radio interview. “But when the day comes for decisions, they are taken unanimously.”


With losses mounting almost everywhere else, Peugeot has high hopes for China, pledging a near-trebling of sales with Dongfeng to 1.5 million vehicles in 2020.

In a second Chinese venture with Changan (000625.SZ), Peugeot expects to sell out its annual production capacity of 200,000 upscale DS vehicles by 2016, a spokesman said as the company prepares to roll out a new DS5 LS mid-size sedan.

“We don’t doubt PSA’s ability to capture additional share in a Chinese premium market that is growing very strongly but caution (against) too much optimism,” Erich Hauser, of International Strategy & Investment, said in a note.

Meeting the company’s goal of a 10 percent share of the premium market would require its network of 56 Chinese DS dealers to expand at an unlikely rate and match the 2012 sales of Mercedes-Benz (DAIGn.DE) through 262 outlets, the London-based analyst said.

“With only 3,500 unit sales in China in 2013 there is nowhere near as much brand awareness for DS,” he added.


While Peugeot gave no geographical breakdown of last year’s 2.32 billion euro loss, the carmaker has confirmed it is losing money in Latin America and Russia.

Tavares faces a long haul to restore profitability to plants in both regions, in part by reducing a heavy dependence on imported components that has left Peugeot critically exposed to a recent currency slide in emerging markets.

Peugeot’s sales tumbled 16 percent in Brazil last year and 19 percent in Russia, with its outlook vulnerable to a weaker ruble and possible trade sanctions over the country’s military incursion into Ukraine.

While rival Renault (RENA.PA) buys 80 percent of Russian parts locally, Peugeot is 70 percent import-dependent at the Kaluga plant it shares with Mitsubishi (7211.T).

“Peugeot is small in Russia and has the wrong product,” said UBS analyst Philippe Houchois, who predicts that its losses in the country may be worsened by the ruble’s weakness.

In the saturated European market, which still accounts for 58 percent of the company’s sales, Peugeot registrations have begun to bounce back after a six-year slump, rising 5.1 percent in the first two months of 2014.

Philippe Varin (2ndR), outgoing Chief Executive Officer of French carmaker PSA Peugeot Citroen, shakes hands with Xu Ping (2ndL), Chairman of Dongfeng Motor Group Company, as French Finance Minister Pierre Moscovici (R) and Robert Peugeot (L) director of the board of French carmaker PSA Peugeot Citroen attend a signing ceremony at the Elysee Palace in Paris March 26, 2014. REUTERS/Benoit Tessier

Peugeot closed its Aulnay plant near Paris last year and may need to pursue more cost savings beyond the current recovery plan, Tavares said this month.

Pressed during his Europe1 radio interview on the possibility of further cuts, Robert Peugeot said on Wednesday that factory closures are “not currently part of the plan”.

($1 = 0.7258 Euros)

Additional reporting by Elizabeth Pineau; Editing by Andrew Callus and David Goodman

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