November 30, 2012 2:35 pm

Peugeot struggles to switch gear

Peugeot©Bloomberg

In October, PSA Peugeot Citroën reversed from the edge of the abyss when the French government pledged €7bn of guarantees to fortify Banque PSA Finance, the carmaker’s in-house bank, and fend off an expected rating downgrade to “junk” status.

Analysts said this could have triggered a potentially lethal downward spiral for Europe’s second best-selling carmaker after Germany’s Volkswagen, because its inability to finance customers’ purchases competitively would erode market share and fuel financial losses.

Peugeot-graphic

Peugeot-graphic

The state guarantees, which still await approval from EU competition officials, will give Peugeot €18bn, including €11bn of bank credit lines, about €5bn of which the carmaker has lined up, and the rest of which it expects to have secured by the end of the year.

Peugeot says of the rescue – the biggest yet by a government in Europe’s year-old car industry crisis – will keep its operations securely funded until 2016. By then, the French group expects to be sharing $2bn a year of cost-saving synergies with its ally General Motors, and possibly Europe’s car market will have stopped shrinking too.

Peugeot is confident that Brussels will approve the aid package, as it is part of a broader restructuring in which it will cut 8,000 jobs, close a plant and shed non-core assets, including its profitable Gefco logistics arm, control of which it is selling to Russian Railways for €900m.

But just over a month later, markets are still taking a largely bearish and sceptical view of the carmaker’s near-term prospects.

Peugeot’s shares have fallen roughly 15 per cent since the bailout, more than most of its peers and France’s overall market, and the company is one of the 10 worst-performing stocks in the Bloomberg Euro 500 index of companies so far this year.

Analysts say that while Peugeot has escaped immediate peril, it faces serious threats to its near-term financial health, ranging from ruthless competition from the likes of VW to an activist Socialist government that is already joining battle with another big company cutting jobs, ArcelorMittal.

“I think that it is way too early to say they have managed to go through the peak in terms of pain – I think that peak is ahead of us,” says Erich Hauser, autos analyst with Credit Suisse. “The company will require either some further restructuring action or a recovery of the European market, and both outcomes are unlikely.”

Philippe Varin, Peugeot’s chief executive, insists that the company’s plan to turn round its business within two years is firmly on track. Peugeot is bleeding €200m of cash a month but says it will have halved this to €100m by the end of next year, and that it will be cash-neutral by the end of 2014 thanks to deep cost cuts and restructuring.

In October, when reporting third-quarter revenues of €12.93bn, down 4 per cent on a year ago, Peugeot said it was on course to meet its goal of €1bn cost-savings this year and €1.5bn raised from asset sales.

“The risk to them was a death spiral if they could not finance cars; that was removed,” says Philippe Houchois, European autos analyst with UBS. “The risk now is how ugly the downturn is next year.”

Peugeot says that it has drafted its turnround plan conservatively, planning for a flat car market until 2015 and a stagnant market share of 13 per cent. Europe’s car market is down 7 per cent in the year to the end of October and most carmakers expect demand to shrink further next year, by 5 per cent or possibly more.

The biggest threat to Peugeot, say analysts, is a steeper drop in demand for cars in 2013 of 10 per cent or more, which would force the carmaker to dig deeper to raise more cash or cut costs further, and potentially put it in conflict with France’s government.

“Assuming tough competition in Europe, it’s very difficult to believe pricing pressure will not be there in 2013,” says Pierre Bergeron, credit analyst in the auto sector with Société Générale. “We are all looking for a floor of the European market.”

Peugeot says it plans no further significant sales and will hold on to its controlling stake in Faurécia, the profitable supplier company.

If the carmaker seeks to cut more jobs, it will put it in conflict with the French state, which now has bigger sway over its affairs following the Banque PSA bailout. As the price of the rescue, Peugeot promised to appoint a workers’ representative and a government-approved independent director to its 14-member board, raising fears in the market that a dirigiste state will impede Mr Varin’s ability to save the company.

French government figures, led by firebrand industry minister Arnaud Montebourg, have railed against Peugeot’s plan to close its plant in Aulnay, near Paris, in 2014.

Away from the glare of television cameras, however, the government is taking a more pragmatic tack towards a company that employs 100,000 people and generates 60 per cent of output in an industry that, directly or indirectly, accounts for about one in 10 French jobs.

While a further plant closure would probably be too politically sensitive, Peugeot may look to cut quieter deals with its workforce aimed at ensuring its operations’ competitiveness, similar to arrangements that its competitors such as GM’s Opel and Renault are making with workers.

In August Peugeot announced an agreement with unions and local authorities at its commercial vehicle plant in Sevelnord to bring its cost base down to compete with a rival plant in Spain, thanks to more flexible labour rules and a two-year wage freeze. In exchange Peugeot agreed to invest €700m in the plant.

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