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.
History
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.
Renault
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.
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