Dongfeng Motor Co. is negotiating the purchase of a stake in PSA/Peugeot-Citreon, Europe’s second largest automaker, in what would be the most important foreign acquisition by a Chinese carmaker. In 2012, PSA sold 2.82 million vehicles around the world, 62 percent of them in Europe, reaping revenue of 55.4 billion euros. It had a 12.7 percent share of the European market, second only to Volkswagen. The group employs 202,108 people in 160 countries around the world.
Last year, it posted a record loss of 5 billion euros, with global sales down 8.8 percent. The main reason was a fall in auto sales in southern Europe – a drop of 13.3 percent in France, 14.9 percent in Spain and 20.9 percent in Italy. The group is too dependent on the weak European market; it has set a target of 50 percent of sales outside Europe in 2015. Its two best foreign markets last year were Russia and China. In China, sales rose 9.2 percent to 442,000 units, a market share of 3.5 percent.
For the first half of 2013, the group reported an operating loss of 510 million euros on its automotive operations.
This financial crisis at one of France’s largest companies has become an issue of national importance. With the approval of the European Commission, the French government earlier this year provided the firm with a financial guarantee of 7 billion euros.
The company proposed a capital increase of at least 3 billion euros and opened talks with the government and Dongfeng about each taking a stake of up to 20 percent. “The first question is not that of the state buying capital but that of good industrial partners for the development of PSA,” said Pierre Moscovici, French Minister of Economy, on October 12. Its most important partner now is General Motors, which bought 7 percent of the company in February 2012.
So, are PSA and Dongfeng the right partners? The two have worked well in China, where they operate three factories together; their annual production capacity is due to reach 750,000 vehicles by the end of 2015.
The attraction for PSA is that Dongfeng is cash-rich and earns the bulk of its income from the world’s biggest and fastest-growing auto market. Its earning prospects for the next five years are excellent. What PSA needs most now is capital, of which Dongfeng has plenty.
From the point of view of Dengfeng, the deal has pluses and minuses. Beijing wants its large state car firms to become global companies and replicate the success of Japanese and South Korean manufacturers. PSA is such a global company, with sales in Africa, Latin America, Russia and Ukraine, as well as Europe and China. It is the same logic that persuaded Geely Auto to acquire Volvo in March 2010 for US$1.8 billion. Rarely could Dongfeng secure a large share of a global automaker for so low a price.
The downside for Dongfeng is that PSA is so dependent on the European market that will remain weak for the foreseeable future. In addition, the Chinese elite has a negative view of France.“In recent years, the French economy has performed poorly, leading to many social and political crises,” Wu Yikang, deputy chairman of the China-EU Association said on December 5, during a visit of French Prime Minister Jean-Marc Ayrault. “Of course they want closer ties with us. They want a dividend from China’s reform.”
The business elite sees France as too ‘Socialist’, with powerful unions and people too ready to strike, apart from high taxes and welfare costs and labor laws that hinder the entrepreneur. When will PSA turn a profit and give Dongfeng a return on its potential investment?
One thing PSA has that Dongfeng needs is technology, especially in hybrids, electric cars and other environmental segments. But will it wish to share it with a firm that is its partner today – and possible competitor tomorrow? To date, the Geely takeover of Volvo has been a failure; a major reason is a clash of corporate cultures between conservative Europeans and Chinese nouveau riche.
Things are further complicated by the demands of the French government and the Peugeot family that founded the company in 1810 to make coffee mills and bicycles in Sochaux, eastern France and currently own a 25.5 percent stake.
The government is determined to keep the company a French one, with the major share of production at home.
Les Echos, the main French financial daily, said the family has given its consent to negotiate an alliance with Dongfeng. But the family members are divided over what form this should take. Some want to keep their controlling stake in the firm and propose selling other assets to raise capital. Others are willing to lose this control for the sake of saving the company.
So, this is far from a done deal.