At the beginning of the week the head of PSA's second-biggest union announced the automaker would increase its job cuts target in France alone to 8,000-10,000, writes Frost & Sullivan senior consultant, Nicolas Meilhan.

A low 75% utilisation rate of its European production plants as well as the industry drop in sales in Europe (-15% for PSA versus -7% for the European market) are the main drivers for the 2012 EUR1bn saving target announced by CEO Philippe Varin.

The PSA plant in Aulnay, which has been under scrutiny already for some time and has already significantly reduced its headcount from 6,000 about 10 years ago to 3,100 today, is expected to be the first French plant to end production of the new C3, 'delocalised' most likely in eastern Europe.

The production of the C3 equivalent car at Peugeot, the 208, had already been moved five years ago to Trnava in Slovakia anyway, where labour costs are cheaper.

Further plans could also be to produce the Citroen flagship C8 on a GM platform so that PSA might be able to close another plant in Rennes.

All in all, PSA faces a difficult situation in France. Being the second biggest auto industry in Europe after Germany, the French government so far subsidised the consumer with incentives to buy new cars. In Germany, the government moved from consumer incentive schemes, such as the car scrappage scheme, to subsidising R&D programmes, hence innovations which allow them to sell their cars at a premium price and suffer less from worldwide competition.

Labour costs are more or less the same in both countries. The difference is however, that German OEMs, such as BMW and Audi, sell premium cars whereas French carmakers produce more general brands.

If you take GM and PSA as a whole, we expect plant closures on both sides. Although they initially focused more on synergies in purchasing and R&D, they will share vehicle platforms to reduce costs which means ultimately shared plants, hence close those with the lowest utilisation rate as Europe is facing overcapacity.

PSA in comparison to Renault-Nissan is less international. They are more dependent on European markets, especially in Italy, Spain and France, which are suffering from the Euro crises. Hence PSA will have to look for growth opportunities outside Europe which in return requires financial bolstering.

If we look at this situation on a general level, one could say “we’ve been through this before”. In the late 70s, the French steel industry went through a major crisis and four questions were asked to explain what happened:

  1. How could big multinational companies slowly slide into bankruptcy without anything being done?
  2. Why did state initiatives to support the industry not succeed?
  3. Why have we been waiting for so long whereas we knew for more than five years we had an overcapacity issue to be addressed?
  4. Is the state able to support the industry and put those “too big to fail” company back on track?

Those questions were related to a crisis that happened 30 years ago – is history repeating itself?

The new French government might have a solution.

The French minister for “putting the industry back on track” (French: “redressement productif”) is known to be keen on protectionism measures which would improve competitiveness of French sites versus eastern Europe or Asia which both have lower social and environmental norms.

He suggested during the recent presidential election campaign import taxes based on production location be imposed to account for the transport (carbon tax) as well as the condition in which it was produced (in line with international environmental and social norms).

In a country which is at the forefront of environmental and social standards, this could be very welcome, not only for the automotive industry but for all the other sectors which have been delocalising jobs for the last 20 years.

The bottom line

The US recently imposed import taxes of up to 250% on solar cells coming from China and will extend it shortly to wind turbines while they are also working on a North Atlantic free trade zone agreement with the EU.

It will be interesting to observe if France is bold enough to follow the same direction to support its automotive industry.

Editor's note: The comment expresses views of the author, not necessarily those of Frost & Sullivan