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What is PSA Peugeot Citroën driving at?

Marc Smith is deputy editor of Families in Business.

As the world auto industry and its associated business media reel from the sudden resignation of Peugeot Citroën’s chairman Jean-Martin Folz, Marc Smith reflects on whether this was the result of strategic mismanagement or general problems within the sector worldwide

The resignation of a respected chairman that catches
everyone by surprise, a sharp decline in profits, a cull of 10,000 jobs, expansion into eastern Europe and the introduction of internal competition. Such has been the upheaval at family-controlled PSA Peugeot Citroën over the last couple of months that staff and commentators may be forgiven for feeling like extras in a far-fetched TV drama.

The main protagonist in all this has been the chairman Jean-Martin Folz. The announcement of his retirement in January 2007 – after nine years in the job – came as a shock given that his reign saw the sharpening of a largely successful strategy that focused on the development of the firm's Citroën and Peugeot branded cars. The Folz era saw a significant increase in worldwide sales – up from 2.82 million in 1998 to 3.39 million in 2005, which seemed to bear out a philosophy of cost-cutting that was not detrimental to style. Ultimately, however, profits and share price proved to be his downfall. The share price in particular has had a rollercoaster of a ride. In 2002 the price fell to below €39 a share, compared with nearly €48 a year previously. The news of Folz's retirement came as the share price again fell dramatically – the first six months of 2006 saw the firm miss its financial targets, with a 60% fall in profits to boot, and the value of shares declined to €43 a share, compared with €48 in 2005.

Falling sales, rising redundancies
The problems at Peugeot, however, reflect the problems that the automobile sector is having as a whole. Western markets are slowing down amid increased competition, which is demonstrated no more clearly than on Peugeot's home front in France, where it is battling against falling car sales that are down 13.3% on the same period last year. Faced with this challenge, Folz initiated a severe cost-cutting exercise – branded an efficiency drive – that aimed to cut capital spending by €500 million a year.
 
This news was met with scepticism by some analysts. In particular, there is concern about whether the new CEO will agree with the strategy currently in place, and whether more upheaval is to be expected. However, Glenn Brookes, news editor at Automotive World, believes Folz had no other choice. "It is the right strategy. The company has no premium brand in Europe and is reliant on big volume sales. They needed to do something drastic."
 
Staff around the world will be affected by the efficiency drive with the loss of 10,000 jobs in total, but it is the French who will bear the brunt with the loss of 7–8,000 jobs, mostly through the non-renewal of temporary contracts, but also through early retirement packages. In a cruel twist, this announcement came to light during the Paris Motor Show.

France's car industry is not the only one to suffer – Peugeot's UK manufacturing facility at Ryton was set for closure this January, with the loss of 2,300 jobs. Peugeot had originally planned to close the plant six months later but, according to Folz, a faster than expected take- up of rendundancy packages meant the plant would close earlier. Ryton was also the company's most expensive plant with high production and logistical costs. The closure is particularly keenly felt, however, as Ryton was the very first plant to make Peugeot cars in the UK when it opened in 1986.

European expansion
Moreover, the inauguration of a new €700 million plant in Trnava, Slovakia, which has been manufacturing Peugeot's latest model, the 207, since June 2005, has led to anger in the UK, which has already seen MG Rover pull out of manufacturing in the area over the past 12 months. "Peugeot have confirmed their reputation of callous cynicism with this news. Peugeot built hopes up that there would be work well into next year if people wanted it," said David Osborne, national secretary for the car industry at the UK's Transport & General Workers' Union. However, the firm remains unrepentant and believes expansion into eastern Europe is good news. "The Trnava project has met all our objectives in terms of both plant construction and the hiring and training of our teams," countered Folz. "By meeting the deadlines and delivering excellent production quality, the plant is off to a very good start."

Peugeot aims to boost capacity at its European plants to around 110% by 2009. It will also look to reduce research and development costs by 15% for vehicles just entering the development process, and will not increase expenditure for at least the next three years. Folz believes that this will give the firm flexibility to start looking for opportunities outside Europe. In light of this, Peugeot announced that a Letter of Intent has been signed with Proton, the state-controlled Malaysian manufacturer, in which it will study possible cooperation between the two companies in southeast Asia.

The alliance, which comes only a few months after Volkswagen pulled out of a similar deal with Proton, will focus on areas such as product development, quality initiatives, vendor development, contract assembly and distribution. "The company is overmanned and has too many factories in the wrong countries," says Brooks. "Initiatives such as this are good news, although they need more manufacturing alliances." Proton's goal is to leverage technological expertise from a major global automaker, while Peugeot hopes to increase sales of both Peugeot and Citroën vehicles in a region where sales have been growing steadily.
 
Back in France, Peugeot is looking to shake up its design teams by creating internal competition. Following the establishment of its Automotive Design Network (ADN) in 2004, the firm wants to further stimulate creativity by having two competing teams of designers for each of the Peugeot and Citroën marques. Each team will be asked to come up with new designs, which managers hope will strengthen the designers' creative skills. Interestingly, ADN teams have won a large majority of the last 20 competitions against outside design studios. Despite Peugeot's assurance that this new set-up reflects the quality of the work produced by the inhouse studios so far, the necessity of this new plan is not evidently clear. The firm also makes clear that work with outside design studios will continue, which further muddies the waters.

A period of stability?
With so much change in a relatively short space of time, management, staff and shareholders will now surely be looking for a period of stability. However, the news that Christian Streiff has moved to replace Folz is not certain to convince people that this period of upheaval is coming to an end. Streiff leaves the embattled airline manufacturer Airbus after only 100 days in charge, where he is reported to have left because his desire for radical change was seen as lacking in diplomacy.

"Peugeot is a traditional, conservative company," says Brooks. "Streiff's appointment sends a strong signal to employees that the family fully understands just how serious the problems are." Given that he left former employer Saint-Gobain under a cloud following an alleged bust-up with his then boss Jean-Louis Beffa, staff at PSA Peugeot Citroën can only be guaranteed of a no-nonsense style of corporate management.

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