China’s Dongfeng Motor Corporation Ltd, the Peugeot family and the French government are poised to control France’s largest vehicle business, and the second largest in European car sales.
But how well will China's Dongfeng Motor Corporation be able to drive a company, that if past history is anything to go by, has been difficult to steer in the right direction – the right direction being the ability to make profits and grow the business on a world-wide scale?
And how well will Dongfeng Motor be able to navigate its passage with PSA Peugeot Citroen at the same time it is building a 50/50 joint venture in China with PSA’s competitor, Renault/Nissan?
To have one ‘merger’ on its books is one thing; to have two at the same time is surely madness; something massive, uncontrollable, even?
Again, if past history is anything to go by, the new Dongfeng/PSA Peugeot Citroën deal looks unlikely to succeed. Surely, it will require all three parties to steer in concert, and in the same direction with a common objective. They must not pull the wheel in different directions.
Now, for the first time in its history, in the latest twist in the long-running saga of PSA Peugeot Citroën, three separate groups will have their hands on the steering wheel. Two of the three speak a different language to the third, who potentially has more muscle.
Add to this huge cultural differences; even management, engineering and manufacturing differences. Will three drivers prove better than two? Or will it finally be refined to one driver?
And how will the end results be affected by Dongfeng’s agreement with Renault, struck only late last year? Could the whole arrangement prove just too challenging for Dongfeng Motor Corporation’s management?
A number of automakers around the world will watch PSA Peugeot Citroën’s experience with more than passing interest, if only in terms of implications for their own businesses. A few will watch for other reasons: under the long-awaited rescue deal, PSA Peugeot Citroën has sealed a deal that sees its founding family cede control, albeit still in equal measure. But ceded nevertheless.
It is now a week since the board of PSA Peugeot Citroën of approved a capital injection of some €3 billion ($4.09 billion) that will turn state-owned Dongfeng Motor Corporation into one of the French car maker’s largest shareholders
Dongfeng Motor Corporation and the French government will each invest about €800m (£660m) in return for 14% stakes. A further €1.4bn will be raised from existing investors in Peugeot.
The deal is still subject to a shareholder vote but will provide much-needed cash to keep Peugeot afloat after government guarantees expire.
Should the deal be approved, the Peugeot family's 25.4% stake will be diluted to 14%, matching that of the French government and the Chinese carmaker. The deal also marks the erosion of power of the Peugeot family who has controlled the company since the early days of the motor industry in the 19th Century.
Only two car families in Europe hold the reins on their business – Quant with BMW and Agnelli with Fiat/Chrysler. In the case of Peugeot, the family was split as to the way forward – as invariably is the case with families.
Europe's second-largest carmaker has also announced its latest financial results, warning it may face losses until 2016. PSA Peugeot Citroën said its net loss narrowed to €2.32bn last year, compared to a €5bn loss in 2012. Sales also fell by 2.4 per cent from a year earlier to €54.1bn, due to slow demand for new cars in Europe.
But, with China as a nation burdened by so much debt, will this prove a long-lasting relationship? Will China’s debt haemorrhage into Europe?
Peugeot itself has been haemorrhaging cash for some years; it has now been given a further capital injection and, possibly, a business plan for the future. But will it be a long-term future?
According to Dongfeng Motor Corporation the deal is intended to "expand and deepen its current cooperation" with PSA Peugeot Citroën, adding that the venture would "strengthen overseas cooperation to achieve the objective of selling 1.5 million vehicles under the Dongfeng, Peugeot SA and Citroën brands a year from 2020".
Peugeot already has a joint venture with Dongfeng, one of China's newer car brands and known mostly for its heavy trucks and "Fengshen" line of vehicles.
The new arrangement, expected to be formally signed next month, is expected to bring an increase in production, a new technical centre and pave the way for Peugeot/Citroen brands to be promoted in growing car markets in South East Asia.
Dongfeng is also the latest Chinese carmaker to buy into a Western competitor. Last year, Zhejiang Geely Holding Ltd. bought London black cab-maker Manganese Bronze Holdings for £11.4m after the company went into administration. Geely Automobile Holdings Ltd. (its main shareholder is Zhejiang Geely Holding Ltd.) also made a more substantial acquisition with the purchase in 2010 of Volvo Cars from what was formerly the Premier Automotive Group (PAG) of Ford Motor Company.
The latest deal ends more than a century of effective control by the Peugeot family, a conservative French family whose successors have hung on through two world wars. Finally, the family proved unable to adapt quickly enough to a fast-globalizing auto business.
Competitors such as Volkswagen AG have powered ahead to global economies of scale, PSA Peugeot Citroën seemingly being left behind. Despite being the second-largest car maker by volume in Europe, it is too small to compete globally.
Controlled by feuding family interests intent on retaining voting control, Peugeot has taken its eye off the ball, avoiding substantive alliances with companies such as BMW.
Dongfeng Motor Corporation on the other hand is an auto industry newcomer, known outside China largely for its heavy trucks. But as China's second-biggest domestic automotive business, it has ambitions to expand globally.
The Peugeot brand and higher-end technology, including gasoline and diesel engines as well as its transmissions technology could give Dongfeng added muscle to expand in Asia.
Running a company with three equal shareholders will pose difficulties, given language barriers and shareholders tied to Chinese and French governments.
Add to this the issue of PSA Peugeot Citroën’s under-used production capacity in Europe and the road ahead is rocky. It is not clear at this stage what Dongfeng Motor will bring to the party to strengthen the French company in Europe.
The technology transfer is likely to be one way – out of France and into China and the Far East. That, after all, is the founding purpose behind Dongfeng Motor Corporation’s purchase. That is, if purchase is the right word, assuming China’s national debt issues.
Peugeot’s automotive business was founded in the 19th century near the Swiss border when Armand Peugeot, in 1896 split from being the maker of pepper mills and bicycles to create automobiles under the same name. His cousin Eugene was hostile to the idea and it was not until 1910 that the two companies remerged.
After World War 2, during which time various stories emerged of the company’s role, Peugeot remained independent, while competitor Renault was nationalised.
Peugeot continued to grow, taking control of French car maker Citroën in 1976. But a similar acquisition of Chrysler's European business soon proved more difficult. The resulting losses caused the Peugeot family's control to become depleted. Popularity of the Peugeot 205 helped save the business in the 1980s.
Until recently, the Peugeot family has succeeded in keeping industrial partners at bay, even though it has pursued various technology alliances with the likes of BMW, Ford, Toyota and more recently General Motors.
But PSA Peugeot Citroën's small size and focus on Europe became untenable as European automobile sales plummeted following the 2008 economic crisis, and again in the euro zone crisis that followed.
The company signed a wide-ranging alliance with General Motors in 2012. With family misgivings the deal was scaled back, and last year it is understood “The General” rejected a Peugeot plea to invest more cash. In December, The General sold its seven per cent stake in PSA Peugeot Citroën.
There have been many discussions between Dongfeng, Peugeot and various investment banks of late. The mood has swung from hot to cold, not helped by a language divide and a slowing Chinese economy that tempered appetites to invest in Europe.
With secrecy a premium, and meetings conducted with translators and often interrupted by long conversations in Mandarin among Dongfeng staff, Peugeot executives and advisers may have wondered where it would all end.
Finally, Dongfeng appears to have been won over by the opportunity to use Peugeot technology to expand its passenger-car exports around the world. How much technology Dongfeng will actually gain access to remains in the fine print. The presence of technology has to be known to be declared in the fine print. If it is not disclosed it cannot be there!
Of interest could be PSA Peugeot Citroën’s innovative hybrid drivetrain system using compressed air that Dongfeng investment could help bring to fruition.
Whatever the short-term future, with three disparate groups sat round the boardroom table, the problems are likely to be magnified rather than eased.
"They might have diverging expectations," noted Nicolas Meilhan, a principal consultant with market researcher Frost & Sullivan based in Paris. "A ménage à trois can be a challenge in decision making."
PSA Peugeot Citroën was an early entrant in the Chinese auto market. In 1985 it established a Chinese company Guangzhou Peugeot Automobile Company as a joint venture (JV) with the government of Guangzhou. It became defunct.
While PSA Peugeot Citroën's original effort was still operating, the French company initiated a second business activity. Responding to a request for a foreign partner from vehicle maker Dongfeng Motor Corporation (a deal already rejected by Toyota) to build smaller vehicles, PSA Peugeot Citroën fed in plans for Chinese production of the Citroën ZX.
Delayed by two years due to French government resistance following events in Tiananmen Square, it was not until 1992 that the project only came off the ground. The joint venture company was located in Wuhan, a city that has seen massive investment in property. The JV became Dongfeng Citroën Automobile Company (DCAC) and is the forerunner to the current Dongfeng Peugeot-Citroën Automobile (DPCA).
The business produced vehicles from semi-CKD and by 1996 production capacity had reached 150,000 units a year. A second line, the Fukang 988 sedan, arrived in 1998, again produced from semi-CKD parts. Its first product was a hatchback built from semi-complete knock-down kits, the ZX Fukang. At least one car, called the Citroën C2, was specifically designed for China.
In 2002, DPCA introduced the first Peugeot-branded model, marking a resumption of Peugeot production in China but using a separate joint venture company, the Guangzhou Peugeot Automobile Company. It manufactured Peugeot models until 1997 and has two production bases in Wuhan, Hubei province.
In May, 2011, DPCA started construction of a third production base, also in Hubei province. With an annual production capacity of 300,000 units, it will add to the existing capacity of 450,000 units a year.
Meanwhile, last December Carlos Ghosn, chairman and chief executive officer of Renault, and Xu Ping, chairman of Dongfeng Motor Corporation, signed a contract to set up a new joint venture company for localised manufacture in China to be known as Dongfeng Renault Automotive Company (DRAC). Final approval by the National Development and Reform Commission of China (NDRC) was granted on 2 December 2013. The 50/50 joint venture represented an investment of €870m.
The Dongfeng-Renault joint venture aims to create a new manufacturing plant that will begin manufacture of vehicles in 2016. The new plant will have an initial production capacity of 150,000 vehicles a year, with the potential for double that “in the near future”.
This plant is yet another to be located in Wuhan and will cover an area of 95 hectares. It will create at least 2,000 new direct jobs.
The partners claim each will bring unique advantages for “win-win cooperation” and “deep synergies”.
DRAC’s product plan will begin with a new range of crossover vehicles under the Renault brand. At a later stage, the new joint venture will introduce a range of products under a local brand.
The Renault brand has been present in the Chinese market with the imported cars such as Koleos and Fluence. The JV suggests Renault is now changing gear in China with its plans for local production. The Chinese new car market, now the world’s largest, provides a significant new growth opportunity for the company, Renault said at the time.
Last year, Renault imported more than 30,000 vehicles into China, largely on the basis of success with Koleos. The group is aiming to move from 92 dealers at present to 120 by 2016.∎
Post a Comment