PSA Peugeot-Citroën Targets Operating Margin of 5.5-6% by 2010

CEO of Europe's second largest carmaker, Christian Streiff, detailed the group's recovery and growth strategy—CAP 2010—to analysts and journalists yesterday in Paris. The aim of the strategy is to achieve an operating profit margin of 5.5-6% by 2010. To achieve this, Streiff detailed a number of initiatives:

• PSA Group will probably reduce its staff numbers in Western Europe by 7-8000 by the end of 2007 through attrition. "We will probably achieve head count reduction of 7,000 to 8,000," The reduction will be due to not replacing those who leave the company, or who are taking voluntary redundancy.
• The company plans to sell more than 4 million cars worldwide a year by the end of the decade, up nearly 20% from 3.36 million in 2006, with the majority of the increase achieved in East European and global emerging markets.
• A European product offensive designed to rejuvenate Peugeot and accelerate Citroën, with 29 product launches in Europe between 2007 and 2010, totalling 53 new car models.
• A cost-cutting programme to reduce warranty costs by 50%.
• Increase purchasing productivity from 4% to 6% a year.
• Reduce overheads and fixed costs by 30%.
• Cut model programme development time by 30%.
• Reduce supply-chain costs by 10%.

Streiff also said that the company was working on a low-cost car for emerging markets to compete with rival Renault's Logan programme, with a particular eye on Brazil and China: "We are developing a specific low cost car platform," Streiff said.

PSA also set out ambitions for its affiliated divisions, including component supplier Faurecia, Gefco logistics group, and, Banque PSA, the group's financing bank. "Faurecia aims to be among the worldwide leaders in each of its activities, Gefco expects to become the European leader in automotive logistics, and Banque PSA Finance is determined to remain the benchmark in profitability," the company said.

The PSA Group is also aiming for a recognisable improvement in product and service quality, with the aim of pushing the Peugeot and Citroën brands' ranking among the European top five.

Separately, although part of the growth strategy, PSA announced yesterday a US$221.5 million expansion of its Argentine facility through to 2010, increasing capacity at its El Palomar and Jeppener plants, in the Buenos Aires province, adding a third shift and increasing output in the country to 170,000 from 125,000 today. The investments include ramping up production at its transmission joint venture (JV) with Fiat to 140,000 units, 70% of which will be exported, Peugeot said.

Outlook and Implications

CAP 2010 appears to attack most of the issues affecting the PSA Group recently: falling market share, competitive cost base, productivity and product line-up, and yet somehow remains unconvincing in its depth. Cutting the group's West Europe workforce by attrition is undoubtedly a start, but it is unlikely to be enough to put PSA on a competitive footing with the Asian companies with which it has to compete. Furthermore, it does not send a clear message to its workforce that the company has to address its productivity and quality in order to compete with the encroachment of not just the Asians, but other European brands and the top-down erosion of market share from premium brands.

The group's plan to lift sales to 4 million by 2010, a rise of nearly 20% over 3.36 million in 2006 is also highly ambitious. The group will indeed grow volumes considerably in China, South America and East Europe, but achieving nearly 650,000 extra units in the next two years, given the company's model line-up, production base and the fact that virtually every global OEM is targeting similar expansion, appears highly ambitious. The global growth plans of carmakers in emerging markets will inevitably leave winners and losers, and PSA's strategy appears less robust than that of some competitors.

Furthermore, the Argentine move follows several global OEM decisions to invest in the region, as Brazil becomes too expensive to export from, however, economic concerns over the interventionist government and political volatility remain high and relying on this leg of the strategy is again unconvincing.

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