Peugeot Citroen is doing really well. It has almost halted its losses in China which was the €100m howler last year; and it has reached another level with its manufacturing efficiency. And in addition to all that, it has pulled up the Citroen brand to the point where it is level pegging with Peugeot on profitability.

When PSA reported its financial results for the first half year this morning it was the first European to do so and the first in the world to do what it said it was going to do. That is to say that only Ford and GM have reported so far this results season. Their results were not only dire. They were below their own forecasts. Little wonder that they have stopped forecasting.

The other European makers Renault, DaimlerChrysler, Fiat and VW will all be reporting (and in that order) this week. Rely on just-auto for commentary.

PSA forecast that its profit margins would be somewhere between 4% and 4.5%. They are running at 4.1%. Actually they would have been better than that had it not been for the fact that there is a build up of new models to finance while they sit in stock ahead of launch. That's all good news for the end of year figures.

They promised that they could limit the effect of rising commodity prices (especially steel) to a negative swing of €300 million this year. That's the figure that still looks favourite. Prices seem to have stabilised.

China is better because the market has recovered a bit. Much of the damage to confidence in the first quarter was caused by destocking. Most of the players now see a resumption of demand and a rebuilding of inventory which means far more stable pricing. First half losses were down to €35 million for PSA and most of that was in the first quarter. The second quarter was near enough breakeven. Sales in China - buoyed by the introduction of the Peugeot 307 and the 206 - are up 55% on last year's 90,000.

The disclosure on Citroen's performance was quite a surprise. In the UK in particular it is regarded as a discount brand where all advertising is price-led. That behaviour was a consequence of a rather old and neglected product line-up. But thanks to the C1, C4 and imminent C6, that line-up is now fresh and the discounts to move metal can be less aggressive. PSA points out that its retail offer is very public. What is less obvious is that Citroen is not a player in the fleet market and that is where the discount margins are really severe.

As for manufacturing, the improvement in efficiency just goes on. PSA introduced a programme in 2002 to run for five years and to carve a real 6.5% out of cost every year after allowance for a 3.5% wage increase. Not only is that still on track but also this year the improvement might be beaten.

Ford, Renault and some parts of GM in Europe do well and PSA aims to get alongside them on manufacturing efficiency. And one of the new elements that will help them is what has been learned from Toyota as a result of the JV on the Aygo.

For the moment then, margins of 4.1% from PSA look pretty good relative to the peers in Europe. But with the new insights available, Toyota-esque profitability must begin to become an objective. That means 7% and should keep PSA's efficiency team busy for some little time to come.

PSA H1 net off 21%

Rob Golding

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