PSA faces 'make-or-break' year after failing to adapt to changing China

Peter Sigal

Automotive News | 2018-3-27

Four years ago, PSA Group's future in China seemed limitless. China became the automaker's largest market in 2014, with sales of 734,000 vehicles, outpacing France for the first time. PSA's two joint ventures were ramping up manufacturing, and the upscale brand DS had just been spun off from Citroen, aiming to draw affluent Chinese buyers with French elegance.

Since then PSA's sales in China have fallen by almost half, to 387,000 in 2017, while the Chinese passenger-car market surged 25 percent, to 24.7 million from 19.7 million in 2014. The assembly plants are running well below capacity. Several top executives have come and gone. The product range has been hampered by a lack of SUVs and models that are holdovers from earlier platforms or no longer current in Europe.

"Everything regarding their sales volume is because their products are not well adapted for Chinese customers," said Chang Shu, a partner in the Shanghai office of the consulting company Roland Berger.

CEO Carlos Tavares offered PSA shareholders a blunt assessment last year. "Our performance in China does not meet expectations," he said at the annual general meeting. "We've lost market share. We've lost profitability. Our speed of adaptation is insufficient." Tavares has vowed to strengthen PSA's retail network and cut manufacturing costs.

Slower growth
With China's market predicted to grow at a much slower pace and domestic automakers taking market share from international joint ventures, 2018 is shaping up as a critical year for PSA, analysts said. "This is their make-or-break year," said Namrita Chow, principal analyst for the Chinese market at IHS Markit. "They've got to make it work. PSA needs the volume in China if they want to maintain a global presence."

IHS is forecasting that the Chinese private vehicle market (excluding light-commercial vehicles) will grow just 0.6 percent in 2018, to a total of 24.1 million. The market grew by 4.1 percent in 2017 but slowed noticeably in the second half of the year. "Everyone in the auto industry wants a slice of that pie," Chow said. "Even with only 0.6 percent growth, it is still a very big pie to get something from."

PSA has taken steps in the past year to slow the slide. Several new SUVs and crossovers are reaching the market and early sales have been encouraging. A total of 20 new models are to be launched in China through 2021 under the company's Push to Pass business plan. Looking ahead, PSA could sell and produce Opel cars in China, giving the automaker a German presence there.

In June, PSA and Changan Automobile agreed to recapitalize their money-losing joint venture, known as Capsa, which assembles DS models in the southern Chinese city of Shenzhen. Changan agreed at the end of January to invest $418 million to lower the debt burden, shore up operations and fund development of electric vehicles and other new models. PSA has made a similar commitment. PSA has targeted operating margins of 10 percent for Capsa and its other, larger joint venture, with Dongfeng Motor. Dongfeng took a 14 percent stake in PSA in 2014 when the company was near bankruptcy.

PSA has dispatched Carlos Gomes, its former executive vice president for Latin America, to take over operations in China and Southeast Asia. Gomes, who started his new job on Feb. 1, replaced Denis Martin, who held the post for 18 months. Martin replaced Gregoire Olivier, who was once seen as a possible CEO candidate when PSA was riding high in China.

Shu of Roland Berger has met with Gomes and said the PSA executive was well aware of the challenges ahead. "It is not a short-term fix. It will take at least two or three years," he said.

Emphasis on SUVs
The centerpiece of PSA's revival efforts is a wave of new products, most of which are SUVs, a segment that grew by 12 percent last year in China as all other body styles lost ground. The Peugeot 5008 and 4008 (sold as the 3008 in Europe) SUVs reached Chinese buyers first, followed by the Citroen C5 Aircross last autumn. Coming in 2018 are the DS 7 Crossback, the Citroen C3 Aircross, and an expected midsize sedan reported to be a replacement for the Peugeot 508 and Citroen C5.

Citing a quiet period before the release of its 2017 financial results, PSA said it would not comment on new products or operational changes in China. Citroen sold nearly 23,000 units of the C5 Aircross in 2017 after introducing it in September, while the 4008 (launched in autumn 2016) accounted for 52,000 sales last year and the automaker sold 23,000 5008s in 2017 following its May introduction.

Chow said IHS is forecasting that the new models will bring double-digit sales growth, with total PSA sales rebounding to about 500,000 units. Still, that is very far from PSAs sales target in its Push to Pass plan, which aimed for 1 million sales in China and Southeast Asia by 2018.

Tougher competition
Analysts say that PSA's path in China remains long and difficult. The product lineup still has overlapping and outdated models, including an earlier version of the Peugeot 3008 and several Citroen and DS models sold only in China.

"They have a problem in terms of distinguishing internal products from one to another," said John Zeng, general manager for LMC Automotive in Shanghai. "That will take quite a long time for them to sort out."

Buyers have also become more sophisticated in the past decade. "Once upon a time, local consumers would look at international brands and think, 'Oh wow, they've got something we don't have,'" said Chow of IHS. Now, she added, "They are very aware of what is going on C they are surfing the Internet, they're reading the news. If you want to crack the market you need to have products that are appealing to people now, not yesterday's products."

A greater problem might be PSA's competition, which is not standing still. Domestic automakers such as Geely and Trumpchi (GAC) are offering technical features equal to foreign brands, but at a lower price. As a result, they gained more than two percentage points of market share in 2017, to 37 percent overall. Several joint ventures have started local brands, including Venucia (Nissan/Dongfeng) and Baojun (GM/SAIC).

At the same time, foreign powerhouses such as Volkswagen Group, Ford Motor and General Motors are looking to China to drive profits and growth as the U.S. and European markets flatten. "You are fighting tooth and nail against everyone that is in the market," Chow said.

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