ANALYSIS: PSA’s closing window to 2010
PSA Peugeot-Citroen is a company working in a tough environment, with ambitious plans and it is a company led by an undeniably charismatic CEO. The charismatic CEO is Christian Streiff and he talks a very good game, says the right things. And that's important. He's a man with a plan and he has to carry a lot of people with him, be convincing. Right now and ahead of PSA's 2007 financial results in February, he's being extra careful what he says.
There's a strategy for the company in place that makes sense on lots of levels, but making it happen and delivering on the promises is not so easy. This year will be a year in which it will become clear whether progress towards the business objectives set for 2010 is moving at the right pace.
Mr Streiff was in Vigo, on the Atlantic cost in northwest Spain, last week to help bolster the media ra-ra for the latest small flexi-vans that PSA is well known for.
The Citroen Berlingo and Peugeot Partner can sell as light vans for business users, but they also double up as passenger vehicles for those who want MPV-style flexibility for less outlay. Those canny customers get a practical high-roofed five-seater that is just a little less refined and spacious than the regular MPVs the company offers. And the latest models are certainly a step-up and less van-like than their predecessors.
Last week, the latest revised Berlingo and Partner models were rolled out to the media, along with an upbeat tale of steadily growing sales for the B/P range since introduction in 1996 as well as a big slap on the back for the Vigo plant's recent achievements: output up, costs down, fewer defects, better (more flexible) and higher capacity, plus agreeably cooperative suppliers.
The Vigo plant is PSA's biggest in terms of units produced. It made 547,000 vehicles in 2007 (made up of Citroen Xsara Picasso, Citroen C4 Picasso, Citroen Berlingo and Peugeot Partner). It is dedicated to the company's 'Platform 2' and has the capacity to make up to 640,000 vehicles a year on three shifts.
How does the Vigo plant rate within the PSA organisation in terms of efficiency and productivity? Streiff chose his words carefully. "It is one of our top plants and we are very happy with its reduced costs and increased production," he said. Costs at the plant declined by 10% and output was up by 20% in 2007.
Streiff highlights the supportive role of major suppliers in helping Vigo's costs come down. "We have developed a particularly close relationship with 100 suppliers to Vigo [there are some 770 in total] and they have helped the plant to become more competitive, develop greater flexibility and increase capacity as well as improve quality."
The recent output gain and cost reduction must have made the Vigo plant, also situated right next door to a deepwater port, outstanding in terms of PSA's internal efficiency/productivity measures. Streiff must know that and know where it's cheaper and better for the company to make things, even if it's not always possible to react quickly and seamlessly to relative cost movements. PSA is currently busy expanding vehicle production in central Europe and Russia. At the other end of the spectrum, Ryton (UK) was shut because it was deemed uneconomic on the basis of transfer prices, logistics and prevailing exchange rates (and associated uncertainties). There are people doing the sums. Relative efficiencies at plant level are under the microscope at PSA, just as at other OEMs, continually informing the company's sourcing and output plans.
Is it cheaper to make vehicles in Vigo than at PSA's plants in France? The curved ball is met with a very straight bat. "It depends what models and what plants you are looking at," is Streiff's characteristically diplomatic and difficult-to-argue-with response.
He was also reluctant to say anything at all about group financial projections or profitability - PSA's end-year '07 results will surface in the middle of February and we'll have to wait till then.
As part of PSA's ambitious-looking 'CAP 2010' strategy, the firm is supposed to treble operating margin by then to 6% (it was 2% in 2006) and move to over 4m sales globally (3.43m in 2007). European (excluding Russia) sales in 2010 are targeted at just under 3.3m units (versus 3m in 2007).
PSA is hoping to grow global unit sales in 2008 from 3.43m in 2007 to between 3.55 and 3.65m units. That might look modest, and it is when you consider that PSA should see a good volume gain in emerging markets. Volume growth in Europe won't be huge. Making more money on sales - in order to be on route to that 6% operating margin - is the really big challenge. And the challenge doesn't get any bigger than in Europe where the market overall is forecast to contract in 2008. The French market might be a relatively bright spot, but competitive conditions will be tough everywhere in Europe in 2008.
With its new Berlingo/Partner ranges, PSA is still seeking to cover all the bases in terms of product fit to market needs. The current Berlingo/Partner ranges are being kept on in the belief that there is still a market for a lower cost and lower spec light van/passenger flexi-vehicle. Smaller light vans (Nemo/Bipper) are also coming in to Europe from Turkey. Window van passenger versions of the Berlingo/Partner face competition from Xsara Picasso. Even the more highly specced C4 Picasso isn't a million miles away (there's a stretched Grand C4 Picasso, too). And then there are also the slightly larger Sevelnord vans and passenger vehicles made at Valenciennes in northern France.
In short, there is plenty of PSA product bundled together in the small/lower-medium van/MPV area. It suggests a degree of overlap in terms of prospective customer sets. And we're talking about the low-end of the vehicle market: margins can't be huge (collaborating with another maker - ie Fiat - on light commercial vehicles helps, but Berlingo/Partner are sole PSA). Large premiums are hard to command on volume brands products that are heavily tarred with the commercial vehicle brush (though LCV margins in themselves are not to be sneered at). Intra-group and intra-platform component sharing is commensurately high, but are all of these product offerings justified in terms of associated overheads or manufacturing and marketing costs? All's fine if each model has a distinct market appeal and gets the volume to justify existence, but the portfolio does look a bit crowded and may well confuse some dealers for starters.
What else does PSA have in the locker product-wise for this year? More 308 variants, the C5 and that's about it. PSA's traditional strength in diesels is still there, but Europe's light vehicle market is close to natural gravity on diesel now and many other OEMs have largely caught up, too.
Diesel-hybrid could well be a competitive winner, but that's work in progress for 2009 at the earliest. Some investment analysts maintain that PSA is 'strategically challenged' and that is perhaps something for Streiff to reflect upon.
Emerging markets are compulsory for all volume OEMs and great for growing volume long-term, but installing local plant requires massive investment (PSA has made clear that it is open to suggestions if anyone wants to share its yet-to-be-built Russian plant capacity).
It all comes down to those mid-February results. PSA's 2007 results will be a vital indicator on how well the company is doing in terms of those 2010 targets. If it turns out that things aren't going too well in some areas, hard decisions may be unavoidable given the shortening window and timescale to 2010.
But Streiff has already made very good progress on cutting costs and PSA grew volume sales in 2007 (up 3.8%). Unlike some others, PSA is not exposed to the weak dollar in the US (and Streiff made it very clear that there is zero interest in entering the US at present). The PSA operating margin for 2007 may well come in as a pleasant surprise. However, maintaining momentum in 2008 will not be easy.
And there will be a shed-load of stuff coming out of Vigo that needs to be sold at a decent profit in a sluggish and highly competitive European market.