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Peugeot cuts leave strategy doubts unresolved

July 13, 2012
ANALYSIS

By Laurence Frost

PARIS: PSA Peugeot Citroen’s move to slash 8,000 jobs and reorganise costly French production
could mark a turning point for the struggling automaker and its venerable twin brands.

But any recovery is a long way off, analysts say – and chief executive Philippe Varin may not be on the right road.

Announcing the cuts – including France’s first car plant closure in more than two decades – Europe’s No 2 automaker warned of a first-half net loss and said its core manufacturing division was burning 200 million euros (US$245 million) a month.

“Today’s announcement was just too timid,” Paris brokerage Alphavalue said in a note to investors. “We don’t see how the company is going to finance its negative operating cash flow.”

Even after the reorganisation, Peugeot will remain more dependent on high-wage western European plants and slumping southern European markets than most of its mass-market rivals.

The company is building emerging-market sales from a low base after previous false starts in China and India and a patchy recent performance in Latin America, despite its long presence there.

While the cuts are “a move in the right direction, we also believe Peugeot’s business model will remain structurally challenged,” Goldman Sachs analyst Stephan Puetter said.

Reiterating his bank’s “sell” recommendation on the stock, Puetter cited the company’s “lack of competitive economies of scale and emerging-market exposure”.

Europe’s outlook does not bode well for Peugeot, with domestic rival Renault warning this week that car registrations in the region may not return to pre-crisis levels until around 2017.

Beyond the slump – which has seen Peugeot lose ground to competitors including market leader Volkswagen – some analysts question Peugeot’s determination to move upmarket.

Branding ambitions

Unlike Renault with its no-frills Dacia models assembled in Romania and Morocco, Peugeot has no “crisis cars” to offer thrifty consumers and no plans to build low-cost models for Western Europe.

Instead, Citroen has rolled out a range of plusher cars bearing the DS name – harking back to the brand’s iconic limousine with space-age curves, introduced in 1955.

For Peugeot, once known for its prowess in colonial-era African rallies, the strategy has seen the launch of new crossovers and larger cars such as the 508.

“These are very fine cars, but unfortunately it’s just not enough to turn this thing around,” said Erich Hauser of Credit Suisse.

“If you blindfold someone and drive them around in a 508 they will be very happy,” he said. “But that doesn’t mean you can price it to match a VW Passat.”

Varin is sticking doggedly to the branding ambitions he inherited from predecessor Christian Streiff when he joined Peugeot in 2009, after turning around British steelmaker Corus.

“We’re facing a tsunami in Europe, and at times like these you have to keep a steady course,” Varin told reporters yesterday.

“I’m absolutely determined to see this plan through and that the strategy of moving upmarket continues,” he said. “It’s the only way forward.”

While Peugeot is sitting on 8.9 billion euros of cash and liquidities, said Barclays Capital analyst Kristina Church, it is “quickly burning through its 1 billion-euro capital increase” carried out in March.

Alliance partner General Motors acquired a 7% Peugeot stake as part of that operation.

“Management has been working as hard as feasible to turn the business around in the longer term,” Church said. “But the jury’s out on whether the markets will recover in time.”

There are still some believers out there.

“Varin knows about restructuring from his Corus days,” said Stephen Reitman of Societe Generale.

“These things take time, but a lot of people once thought VW didn’t have a chance,” Reitman said. “And look where it is now.”

- Reuters


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