The founders of Peugeot asked a jeweller to develop their first company logo in 1847. The design was a Lion. Why so? Well, the characteristics of that animal were said to match the saws that the brothers were making at the time: strong teeth, supple blades like a lion’s spine, and a swiftness of cut.
The logo became the Peugeot trademark, serving for more than a century on its car designs. But events this month saw the firm straying from its lion-like lineage as the founding family turned meekly to the French state for financial rescue, as well as seeking further support from Dongfeng, a Chinese carmaker from Hubei province that didn’t even exist until 1969.
By relinquishing outright control, the Peugeot family is announcing “a new page in the history of the company”, says the outgoing chief executive. But investors are wondering quite how transformative the deal will turn out for all the parties involved – as well whether French objectives can rest easily with what will likely be divergent Chinese ones.
What are the basics of the deal?
Wuhan’s Dongfeng Motor Group and the French government are both injecting €800 million ($1.09 billion) into PSA Peugeot Citroen for 14% stakes, with the Peugeot family seeing its own shareholding diluted down to the same percentage. That means that no one party has a large enough stake to veto decisions. Other shareholders will also get warrants entitling them to more stock at the same price – that is €7.50 a share, or a discount of 40% to Peugeot’s market value before the announcement.
Former chairman Thierry Peugeot is stepping down. He is said to have wanted to raise rescue capital without Dongfeng’s involvement but Robert Peugeot, head of the family holding company, mustered support for the proposal. All shareholders will vote next month and company officials say they expect to see the new arrangements approved by regulators by the end of April.
What’s in it for Peugeot?
French Industry Minister Arnaud Montebourg says that the deal with Dongfeng lays the ground for “Peugeot’s renaissance” after a period in which the company “had become isolated”.
Peugeot needs the cash injection. It lost €2.3 billion last year and €5 billion the year before, and its shares have dropped by half over the past three years, largely on moribund demand in its traditional European markets.
“Obviously Dongfeng has nothing to contribute but cash – it has no technology, no brand, no overseas operating experiences,” John Zeng, an analyst with the Shanghai-based consultancy LMC Automotive, told AFP bluntly.
But the Chinese market is a bright spot. Peugeot and Dongfeng already have a joint venture operating three assembly plants in China and sales are expected to grow about 10% this year, well above the 2% forecast for Peugeot’s European business.
In fact, China was already set to become Peugeot’s largest market by next year. But its bosses now want to use the new investment to foster further growth.
And what’s driving Dongfeng?
Despite being number two in China (it has joint ventures with Honda, Kia, Nissan and Renault too, selling 3.53 million vehicles last year) much of Dongfeng’s commercial success is based on sales of foreign-designed models.
Dongfeng is struggling with the same challenge as its Chinese rivals: total car sales grew by 15% to 18 million last year but most of the domestic brands are actually losing share. Seven out of 10 cars sold were either imported or manufactured by the joint ventures.
That figure may even go up, following hints from one of the regulators this month that the sector might be opened up further to attract more foreign technology and expertise. A spokesman for the Ministry of Industry and Information Technology said that the central government is making “fresh calls for opening” which might include allowing larger stakes for foreign investors. The comments left members of the China Association of Automobile Manufacturers aghast. “If China relaxes foreign ownership rules, it would be devastating to indigenous brands. Local brands would be killed in the cradle,” it warned.
Such concerns throw a different light on the balance of power in the industry, explaining why Dongfeng wants more know-how from Peugeot to help make its self-branded cars more appealing to Chinese drivers.
The Chinese also want fuller access to the latest technology. Peugeot’s much-awaited hybrid air transmission system, which allows new energy vehicles to run on compressed air for interim periods, has been getting mentions in media coverage, for instance. Both companies announced a new joint research centre in China to explore shared vehicle platforms as part of this month’s investment too.
“The first step will be to get access to technologies, access to knowledge and experience so they can learn how to deal in the global automotive market,” Klaus Paur, head of automotive research for consultancy Ipsos, told AFP. This is “precisely something Chinese manufacturers might lack at this point in time,” Paur suggested.
Anything that might go wrong?
One danger is the diverging ambitions of the main shareholders. Dongfeng wants to get better at building its own cars and rely less on the sale of foreign brands. But the French state is aiming to protect jobs for its nationals, which means guarding the remaining competitive advantages that Peugeot enjoys.
The Peugeot family will probably be somewhere in between, more than aware of its national heritage but hopeful of restoring its personal fortunes by seeing the business grow on a global basis.
French ministers have been unabashed about preventing one of the country’s industrial jewels from falling into foreign hands. “Why? Because Peugeot is the history of the French car,” Arnaud Montebourg, the industry minister, told reporters. “It is the top creator of patents in France, it is an innovative technology business, it is a patriotic company which has always defended its industrial base on French soil and it is a business that we want to help relaunch itself.”
One of the implications of defending home soil is that Dongfeng’s offer may have been accepted grudgingly as the best of a bad bunch of options. “I think the partnership with Dongfeng will be beneficial as there is no better solution,” a French journalist sniffed to the China Daily. “We would rather have an alliance with a major Chinese automaker than with some European companies – for example, the German ones.”
But now the three main shareholders have got to find a way of changing the company for the better. Each has committed to not increasing their stakes past 14% in the next 10 years and gets two board seats each (there will be six more independent directors, with the chairmanship role still undefined). But the shareholding structure still looks unwieldy – and the French media was soon going back to Peugeot’s leonine roots to pun about a “lion with three heads”.
The Financial Times expressed doubts in its Lex column as well: “The financial aspects of this deal may be child’s play compared with the future task of managing an ownership structure that is likely to see Dongfeng’s equity interest matched by those of the French government and the about-to-be-diluted Peugeot family.”
How transformative is the deal going to be?
Another potential pitfall is that the new arrangements don’t seem to address one of the most fundamental challenges for Peugeot: its commercial decline in Europe, where sales have been shrinking for years.
Nor do they hold out an immediate vision for restructuring the company, including switching more production away from Europe to lower cost environments. Peugeot agreed with unions last March that it will not close any plants in France for three years, committed to increase production to one million vehicles a year by 2016, and promised to retain three quarters of its R&D efforts on French soil. Industry minister Montebourg reconfirmed last week that further plant closures in Europe are “not on the agenda”.
On that basis, it looks difficult for Peugeot to do things very differently in its home market, where it currently employs about 100,000 people. That means the focus will instead be on making more profits in China, via a beefed-up joint venture with Dongfeng. Of course, all the other international carmakers have the same idea. China is becoming a more crowded marketplace, even if vehicle ownership levels trail those of more developed markets.
Despite this, Peugeot spokesmen say the new company will boost sales capacity in China from 500,000 units currently to at least 1.5 million a year by the early 2020s.
There is also talk of more exports to emerging markets in Africa and especially Southeast Asia. In this respect Dongfeng is extending its collaboration with Peugeot by targeting more sales overseas, and not just planning for more business in China. But there was scepticism from some quarters that Dongfeng has much to gain from the current set-up: “Outside of Western Europe it is only in China, Iran, Brazil and Argentina that Peugeot achieves notable volumes. They have no volumes at all in some key markets like the US and India”, Benjamin Asher, an analyst at LMC Automotive, told the New York Times.
How about the track records for similar purchases?
The hottest issue for the Chinese media is how much technology will be transferred. For instance, Zhu Bin, another analyst at LMC Automotive, told the Global Times in December that the proposed joint R&D centre could be disappointing as it “only conducts some supportive research at present and the Peugeot technology is not that advanced compared to its German peers”. Zhu also predicted that Dongfeng would find it difficult to access the French firm’s technical arsenal. Like previous tie-ups between Chinese carmakers and foreign companies, technology transfer may not be as immediate as hoped.
Other Chinese analysts made similar points, saying that Dongfeng shouldn’t do the deal without clear terms for how technology is going to be shared. But this game of commercial cat-and-mouse has been played for years. The Chinese try to trade market access for technical know-how; their international partners hold back the latest blueprints for as long as they can.
Yet despite everything this is still a bold move by Dongfeng to cement relations on a global basis, not just in China. In this regard, two other attempts by Chinese firms at taking significant stakes in foreign peers are worth highlighting, one in South Korea and one in Sweden.
No doubt Dongfeng will be desperate to avoid a repeat of Shanghai Auto’s experience, when it bought 51% of SsangYong Motor Company in 2004. Commercial ties with the Korean subsidiary deteriorated rapidly, leading to a series of vicious strikes, accusations of stolen blueprints and eventual bankruptcy.
But if Shanghai Auto couldn’t get access to Korean technology after taking a majority stake, why is Dongfeng expecting the French to give up know-how based on its 14% investment, Securities Daily asked?
Geely’s takeover of Volvo three years ago has gone rather better as the best-known case of a Chinese car company buying a Western car brand. Its commercial target is 800,000 car sales annually by 2020, a quarter of which in China. But Reuters was reporting tension in the tie-up in January, following speculation that Volvo executives won’t buckle to the demands of Geely’s founder, Li Shufu, for larger, higher-end vehicles that compete more directly with BMW, Mercedes-Benz and Audi.
Volvo’s chief executive, Håkan Samuelsson, countered any claim of internal unrest, insisting that Li is pleased with Volvo’s upcoming S80 sedan, the biggest yet in the carmaker’s line-up. But citing information from a senior (and unnamed) source, Reuters said Li is frustrated at resistance from his Volvo management team, many of whom are Swedish. He has been diplomatic in his dealings so far but might have to resort to “more forceful ways” to achieve his goals, it was suggested. What these might be is anybody’s guess. Li – who once described cars as nothing more than a “sofa with four wheels” – remains an enigma to many in the auto industry.
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