Published on March 30th, 2016 | by Daniel Sherman Fernandez0
Can Citroen Survive With Dongfeng’s Help
Bloomberg has just reported that PSA/Peugeot-Citroen’s 5% recurring operating margin in 2015 seemed like an improbability just a few years ago. The carmaker lost more than 8 billion euros (USD8.8 billion) between 2012 and 2014, was almost given up for dead and had to be rescued by the sale of stakes to France’s government and China’s Dongfeng Motor.
Carlos Tavares, an ambitious former Renault executive, took over at PSA less than two years ago and set the bar low. PSA was targeting a 2% operating margin by 2018 (roughly in line with its historical average) and a 5% margin sometime before 2023. Tavares has delivered, and then some.
A plant closure, pay freeze and thousands of job cuts, all started under Tavares’s predecessor, have boosted productivity. Savings in production and procurement contributed 40% of operating profit gains last year. Simply put, PSA has cut fixed costs and is spending less on purchasing, thereby lowering its break-even point. The company has also found savings in selling and helloistrative expenses.
PSA’s Asia exposure China and Southeast Asia are about a quarter of sales could also become a bigger drag. And the European market’s recovery isn’t guaranteed either: PSA expects it to increase just 2% in 2016 and in China by 5%.
Finally, Tavares seems determined to turn the historic DS brand, beloved by French presidents, into a premium carmaker. That helps boost profit per vehicle but will need lots of investment if it hopes to keep pace with the German brands. Sales of DS cars fell 13% last year but Tavares says his priority is margin, not volume. Tavares has dragged an impressive performance out of a former basket case. Investors have high expectations for the next act.