When the auto industry moved decisively in the direction of ‘bigger is better#; with the consolidations of the late 1990s, many questioned the survivability of the smaller independents – companies like BMW, Honda and PSA. For the long term, those questions haven#;t entirely gone away, but right now PSA seems to be doing very nicely thank you.

A company with heritage

PSA Peugeot-Citroën is a company with a very long history and tradition. It was as long ago as 1810 that Frederic and Jean-Pierre Peugeot made a foundry out of the family textile mill in the Alsace region of France and invented the cold-roll process for producing spring steel. Jean-Pierre’s grandson started bicycle production in 1885 and a steam-powered three-wheeler hit the road in 1889.  The vehicle manufacturing business grew steadily in the inter-war years but the company#;s path took a decisive turn in the mid-1950s when it was decided not to embark on a global expansion that would have placed the company in competition with US carmakers.

The company merged with Citroen under pressure from the French government in 1976 and in 1978 Peugeot bought Chrysler’s aging European plants and unfashionable brands including Simca (France) and Rootes (UK). Peugeot changed the nameplates to Talbot but sales continued to slide. In 1991, Peugeot finally withdrew  – in the face of declining sales – from the US market.

In 1984, Jacques Calvet took over as CEO, cutting jobs and investing in modernising operations. Strong products followed, most notably the 205, and PSA returned to profitability in 1985. Citing an economic slump in 1993, Peugeot suffered its first loss ($239 million) since 1985. A French government incentive to replace cars over 10 years old – ‘scrapping incentive#; – boosted 1994 sales and supported teh French makers. When the flamboyant and controversial Calvet began to talk about running for President of France, the Peugeot family (38% shareholders) edged him out to make way for his understudy, Jean-Martin Folz. He replaced Calvet as chairman and CEO of PSA in 1997.

Too small to survive?

When Folz took over as head of PSA, the auto industry was about to hit a consolidation wave. In 1998, DaimlerChrysler was created and in 2000 Renault#;s alliance with Nissan was born. PSA was being touted, along with Fiat, as too small to survive on its own. Scale economies and global presence, the argument went, were becoming increasingly significant and the largest companies would be able to use their market clout to put those medium-sized companies still in mass-market segments out of business.

Folz#;s new broom

Mr Folz#;s background is not the auto industry – he came to a PSA after a career in commodities – but when he assumed the top position at PSA he set about the task of shaping strategy with some conviction. He noted that the company#;s great rival – Renault – was apparently outperforming PSA, with better models and more innovation.   He also pointed out that PSA#;s global footprint needed to be enlarged.

Redefining the marque in branding terms has gone hand-in-hand with a vast product renewal plan that began in 1994. The marque si

“Critically, the flow of products has been good and PSA has had more than its fair share of hits. “

gnature has been developed too: ‘the drive of your life’. The tagline defines styling and aesthetics, dynamism and know-how, reliability and innovation and has worked well with the new products that Peugeot has introduced. Build quality has improved too.

Perhaps the most significant element of Folz#;s industrial strategy for the PSA group has been to integrate the operations of Peugeot and Citroen much more comprehensively. Common platforms, engines and transmissions are the practical result of the ‘one company, two makes#; strategy.  Critically, the flow of products has been good and PSA has had more than its fair share of hits. On product, Peugeot is moving from seven to three generic platforms; the 2004 objective is to have 85 percent of vehicles in the group produced on the three main platforms. In terms of rollout, it is planned to introduce 25 new models between 2001 and 2004.

Flow of new product keeps capacity utilisation high

Popular models have enabled PSA to substantially grow its output in recent years. On the product side, 1997 saw the 406 coupe and in 1998, the 206 arrived. It has now overtaken the Volkswagen Golf (admittedly at the end of its model cycle and due for replacement next year) as the leading seller in Europe. In 2000, Peugeot brought out the 607 and the 206 coupe cabrio. More lately the 307, has been successful.  Now, the renewal of the Citroen range is boosting that division#;s market performance. The Picasso compact MPV has been well received and sales of Citroen’s C5 saloon reached 139,000 units last year – 9,000 more than the original target. The C3 impacts the market in 2002.

PSA#;s European plants factories are now running at 100% capacity and on three shifts, a uniquely strong position among European volume makers. Globally, PSA plans to sell 3,250,000 units in 2002, an increase of 116,000 units from last year. The target looks modest with Citroen’s mass-market C3 making an impact, but the French market and European market will both be in decline in 2002. The objective is to reach 3.5 million units by 2004.

In 2002, PSA launches station wagon (SW) variants of the Peugeot 307 and 206. Early in 2003, Citroen is planning to introduce the ‘Pluriel#; as well as a new version of the Evasion/Synergie MPV.

Market push to diesel helps PSA too

As the diesel share of the European market has increased to 40% (and are forecast to continue to do so – to 50% by 2007), that trend has benefited PSA as the company has a wide range of diesel engines and a long record in their development. In the next three years, PSA will invest 600 million euros in refining the common-rail HDI, or high-pressure direct injection, diesel engines it introduced in 1998. These engines are at the heart of PSA’s diesel output and its diesel collaboration with Ford. Much of the investment will go to boost production at the Tremery engine plant here in northeastern France, where all PSA diesel engines are produced. Last year, PSA built 1 million diesels at Tremery for the first time.

Profits up

PSA reported a healthy gain of 28.9% to 2001 net income. Net income for the year was 1,691 million euros. The company said that growth was ‘led by sales volume gains, an improvement in the sales mix and the sustained reduction in production costs’. It has won shareholder awards (such as last year#;s PwC shareholder return award for European auto vehicle manufacturers).
 
The company cited a number of positive factors affecting sales performance including: ‘the successful launches of the Citroën C5 in sedan and station wagon versions and the Peugeot 307, sustained sales of the Citroën Picasso and Peugeot 206, especially the 206CC version, and the growing popularity of the common rail high-pressure direct injection (HDI) diesel engine’.

Outside western Europe, sales of Peugeot and Citroën cars and CKD units rose 22.5% to 587,300 units. In all, worldwide sales of Peugeot and Citroën cars, light commercial vehicles and CKD units rose by 11.3% to 3,13 million units in 2001.

Looking ahead, the company said that it is assuming that demand in western Europe will be ‘stable to slightly lower in 2002’. Several significant new models have been prepared to help the company achieve its target 3.25 million unit sales in 2002.

PSA#;s cooperations with other makers

While PSA apparently eschews losing its independence, the company has been prepared to cooperate with other makers. It has worked with Renault on engines – most notably the V6 engine they jointly introduced in 1996. It works with Fiat on jointly producing light commercial vans and MPVs at two plants in France and Italy under the Sevel accord. Most dramatically, PSA is collaborating with Toyota in a joint venture to build a new small car in the Czech Republic (300,000 unit annual production targeted). Through these efforts to share costs with others, it believes it can overcome the scale problem and compete successfully with larger manufacturers.

Strategic issues ahead

But in spite of all the current success, there are strategic issues ahead for the group. The big question for PSA is still that of global reach. It has made investments in South America and China but has a low share in SE Asia and Eastern Europe and remains absent from North America. Is it still too small to build on its positive attributes? Would it be better to be part of a larger entity? Could the relationship with Toyota deepen?

“If Fiat is absorbed into GM, what pressures would that create for PSA? “

If Fiat is absorbed into GM, what pressures would that create for PSA?

North America may also be an increasingly pressing issue. The success of the Korean and Japanese makers there, including recent new entrants, points to re-entering. Timing could be off for a few years though. The market is very competitive, turning down and margins are slim.

In Europe, PSA share and performance will likely come under pressure – particularly as the French market turns down. Protecting the gains of recent years could be difficult.

One thing#;s for sure though: the Peugeot family isn#;t going to easily allow events to run outside of its control. The Peugeot family will allow its minority stake in PSA Peugeot Citroen SA to grow into a majority holding in the coming years. The Peugeot family won’t amass more shares but will rely on the company’s regular purchases and cancellations of its own shares — a move that automatically lifts the percentage of capital held by residual shareholders. The Peugeot family#;s existing holding carries 39.5% of the company’s voting rights (with 33.3% required to block board decisions).