Last updated: February 15, 2012 7:36 pm

Peugeot head raises possibility of plant closures

PSA Peugeot Citroën’s boss has given his clearest signal yet that the financially squeezed carmaker might need to downsize operations and close plants in France because of sagging demand and high labour costs.

Philippe Varin said the company faced higher payroll costs in France than in Germany and that the under-used capacity at its plants was “not sustainable” over the long term.

“If you look at the cost of one hour of manpower in our plants, this is in France close to €35 an hour - higher than in Germany,” Mr Varin told the Financial Times. “France is not going the right way, especially in the level of benefits you have [such as] social security.”

Peugeot’s boss said that this compared with the €10 per hour it paid to build cars in Slovakia, where it has one of its largest plants, or €22 an hour in Spain, where it has a plant near Madrid.

Mr Varin’s remarks come at a sensitive time, before a French presidential election in which jobs and the economy are top campaign issues. Peugeot faced controversy last year after a newspaper published a leaked internal company document outlining plans to close its plant in Aulnay, near Paris.

The carmaker is one of France’s biggest employers with some 100,000 employees. The French group is seen as unlikely to take any action before the election. Mr Varin emphasised that PSA hoped to resolve its capacity utilisation by selling more cars like its forthcoming 208 model, and would only face decisions on plants as old models came up for replacement.

Mr Varin spoke after Peugeot reported sharply lower 2011 earnings, and disclosed that it burned through $1.6bn of cash and piled up an additional $2.2 bn worth of debt last year.

The French group disclosed that its Banque PSA Finance division was considering tapping three-year refinancing at “a very competitive rate” through a European Central Bank facility

Peugeot, Europe’s second-largest producer by sales after Volkswagen, faces declining demand for cars in three of its largest markets – France, Italy and Spain – and a brutal price war in its core small-car niche.

The group said that it would sell $1.5bn of assets this year, and cut its spending on research and new projects, including by delaying a planned plant in India’s Gujarat state.

Moody’s, the ratings agency, on Wednesday put the carmaker’s Baa3/ P-3 ratings on review for a possible downgrade, citing its rising debt and falling cash as main reasons for the move.

Mr Varin said that the carmaker’s western European plants were only working at 86 per cent capacity on two shifts, and 76 per cent capacity for very small and small “A” and “B” segment cars. “The current situation of a utilisation rate of 76 per cent on the A and B segments is not a sustainable solution,” he said.

When asked whether the company might need to close some plants in future, he said: “I’m not ruling anything out – that’s my message.”

PSA Peugeot Citroën plans to sell €1.5bn worth of assets, including shares in its Gefco logistics division, after reporting sharply lower 2011 earnings amid the eurozone crisis and a price war in small cars.

Philippe Varin, chief executive, said the French carmaker aimed to raise more than €500m by opening Gefco’s capital to outside investors and about €500m from real estate sales, on top of the €440m it raised selling its Citer car rental business earlier this month.

Mr Varin also said that Peugeot-Citroën would cut capital expenditure, including by slowing its expansion plans in India and halting unprofitable projects. In order to conserve cash and cut its rising debt, the company said it would increase the cost savings it is targeting under a plan announced in November from €800m to €1bn.

The company, Europe’s second-largest carmaker by sales after Volkswagen, on Wednesday reported 2011 net profit of €588m, down from €1.13bn in 2010, which Mr Varin described as “disappointing”.

The result reflected a €497m second-half loss in its core carmaking division, which is being hurt by Peugeot-Citroën’s reliance on declining western European markets and its focus on low-price, low-margin small and very small “A” and “B” segment cars.

The company said that it burned through €1.6bn of cash last year. Net debt at Peugeot-Citroën’s manufacturing and sales divisions soared last year to €3.36bn at end-December, from €1.24bn at end-2010.

Moody’s put Peugeot’s Baa3/P-3 ratings on review for a possible downgrade, citing the carmaker’s negative cash flow and rising debt.

“We definitely have to turn around the automotive division,” Mr Varin told an analysts’ conference. “This is the heart of the group.”

Peugeot-Citroën had warned last year that it would report a significant financial loss in the second half of 2012.

France, Spain and Italy, which are at the heart of Europe’s debt crisis, account for 59 per cent of Peugeot-Citroën’s European sales. The company sold 42 per cent of its cars outside Europe last year, a smaller proportion than most of its mass-market competitors in Europe.

Peugeot-Citroën said that it expected Europe’s car market to contract by 5 per cent this year and France’s to decline by 10 per cent.

Goldman Sachs, in a research note, said that while PSA’s results were “mildly better than expected, they reveal the extent of the strategic impasse” facing the company.

Most of Peugeot-Citroën’s plants are in high-cost locations in France and western Europe, where structural overcapacity means that producers are building more cars than the market needs and then discounting competitively in order to sell them.

“The treatment of the overcapacity issue cannot be avoided,” Mr Varin said. “It will just take more time in Europe than in the US”.

To reduce its reliance on unprofitable small cars, Peugeot-Citroën is accelerating its roll-out of higher-margin products like Citroën’s upscale new DS line.

Premium models now represented 18 per cent of the company’s product mix, but 40 per cent of its commercial margin, Mr Varin said. The company is launching four diesel hybrid cars and two sport utility vehicles, the Peugeot 4008 and Citroën C4 Aircross.

Industry analysts and competitors have speculated that Peugeot-Citroën cannot survive unless it merges with a rival. Thierry Peugeot, the company’s chairman and family shareholder representative, has indicated the company’s openness to alliances.

However, Mr Varin discounted the notion of any imminent tie-ups. “We don’t rely on alliances to sort out the profitability and cash flow problems,” he said.

The company would extend its existing co-operation with other producers, including BMW, with which it is working on parts for hybrids and electric cars, he added.

Analysts said that the company would have little problem finding a strategic investor in Gefco, but noted that the company was selling a profitable asset in the down-cycle.

“They’re buying time. said Philippe Houchois, of UBS. “It doesn’t address in any way the challenges of excess capacity or excess manufacturing costs, but it gives them the time and the serenity to address the issues.”

He added: “What isn’t clear is what they do next.”

UBS estimates that Gefco is worth between €900m and €1.3bn, so it would be able to meet its target of raising more than €500m from the sale without having to sell control. The division earned recurring operating income of €223m last year, up from €198m in 2010.

“The question is what happens when they face the next downturn,” said Stuart Pearson, at Morgan Stanley. “A strategic partner will be required to change the game for Peugeot.”

Shares in Peugeot-Citroën were 1.8 per cent lower at €14.85 in afternoon Paris trading, against a 1 per cent rise in the broader market.

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