How Peugeot and France ran out of gas

PSA's fate is now intimately wrapped up with China

BY SOPHIE SASSARD, MARK JOHN AND GILLES GUILLAUME

The rush to Paris's Charles-de-Gaulle airport for flights to China began on Friday, October 11. A first set of bankers booked onto the 10-hour overnight Air China Flight; over the next 48 hours, they were followed by top management from PSA Peugeot Citroën and the French Finance Ministry.

Peugeot was ailing - and it had just started talks about selling a stake to state-owned Chinese automaker Dongfeng.

"There's a big exodus to China right now," a bemused trade unionist at the Paris-based company told Reuters that weekend.

For the bankers, it would be just another deal, but for the car-maker, it could be a lifeline. Dongfeng and the French state are contemplating a joint investment to prop up the 200-year-old firm, which is struggling to contain losses that burnt 3 billion euros ($4 billion) of cash last year.

PSA gave the world its first series-manufactured car in 1891 - 22 years before Ford took mass manufacture to a new level with the Model "T". It has survived two world wars and become an emblem of France. After years watching its position eroded by rivals and now hit by the financial crisis, it has reached a critical point.

Its rich history and current difficulties in many ways mirror those of France, a former global power also fighting to define its role in a world of harsher economic and political forces. The parallels between Peugeot's decline and France's economic malaise are startling. Today, both the automaker and the country are struggling to bring down heavy debt and adapt to global markets. In PSA's case, the company is at stake; France's economy is a mounting worry for investors in the euro zone.

Once known worldwide for the reliability and ruggedness of its cars, Peugeot - which has also owned the Citroën brand since the 1970s - has in recent years watched rivals spot global opportunities and snatch them from under its nose.

Both France and PSA must find a way - if there is one - of competing in world marketswhile funding the labor and welfare provisions that make up the country's cherished social model. France's share of euro zone exports has fallen by a third since 2000 to just over 12 percent, while PSA's share of the Western European car market has fallen to just over 11 percent from a peak of 15 percent in 2002.

Earlier this year there were signs America's General Motors, which already has a seven percent stake in PSA, might be interested in a wider tie-up to help put the French firm back on its feet. Those talks cooled. Now China is key.

"It is the only card they have left to play," said Patrick Fridenson, car historian at France's EHESS institute.

PLUS CA CHANGE...

The group is no stranger to crisis - or to escaping it.

In the 1980s, debts accrued after an ill-starred takeover of Chrysler's European operations were about to send the company to the wall when it produced the Peugeot 205 - a first-generation "hot hatch." The car sold millions and helped save the company.

"Every time there is a crisis, people say it's worse than last time," said Jean-Louis Loubet, author of "The House of Peugeot", charting the history of the firm which after its 1810 launch made everything from saws to corsets.

The challenges facing PSA now are bigger than ever. Like many in France, the company must overcome entrenched resistance to change.

The Peugeot family retain a minority shareholding which carries a veto on major decisions, and have fiercely defended the company's independence. Their Protestant ideals have made them social pioneers: Over the decades they provided low-cost housing to workers and free healthcare in a specially built hospital. A pension scheme for workers' widows began as early as 1811.

"The Peugeots are like that," said one source close to the company. "They are genuinely good guys, loyal patriots with the best intentions. But they are horrified by change. And this culture spread to every level of the company."

Current and former employees speak glowingly of an atmosphere of solidarity - a fierce pride and a desire to fight when the company's back is to the wall. But the same people complain that the best of intentions have often come up against turf wars and internal red tape.

Even a largely symbolic move announced last year - when the group sold its prestigious head office a stone's throw from Paris's Arc de Triomphe - foundered on indecision. "It took years to convince them to execute a decision that was pure common sense," said one company insider.

In Peugeot, the CEO is lodged between four Peugeot cousins with senior roles: Thierry Peugeot heads the supervisory board, Robert runs the family holding, Xavier is products chief for the Peugeot brand and Frédéric Banzet, a cousin by marriage, heads the Citroën brand. Neither CEO Philippe Varin nor the Peugeot family would be interviewed for this story.

The company has maintained nearly half its global autos workforce in France - a bigger share than Renault employs - which prompted Industry Minister Arnaud Montebourg this year to hail what he called its patriotism. Yet critics argue its fierce sense of independence has meant PSA missed opportunities for strategic partnerships, such as a tie-up with up-market German group BMW or Japan's Mitsubishi Motors.

The management of Peugeot's rivals has also become more international. Other companies, including Renault, started adopting English and local market languages. Renault is led by Carlos Ghosn, a French-Lebanese born in Brazil. And it has two Japanese officials sitting on a management board that conducts its business in English, as do an increasing number of French companies.

Just one non-Frenchman - UK-born director of communications Jonathan Goodman - sits on PSA's 13-man executive committee, which still carries out its business in French.

A company spokesman said that when Varin joined in 2009, he said "we are too European, too middle-range, too small," and then embarked on a strategy to change that. But as Europe's debt crisis poisoned the wider economy, the European car market fell off a cliff.

"The strategy has not changed - indeed it is more relevant than ever," the spokesman said. The crisis has "provided the impetus to help us learn to work differently and more efficiently."

THE EMBODIMENT OF THE STATE

That weekend dash to China was not the first mission to rescue the company. In the 1940s, its founding family had to salvage what they could from the ruins of post-war Germany.

In 1946, the Peugeot factory in the town of Sochaux in the Jura Mountains was in ruins, largely destroyed by Nazi forces and its machinery pillaged to help Hitler's war effort. The Peugeots brought the equipment back. A train bearing the French flag and 600 tons of machine tools returned.

The cars turned out by the re-built Sochaux plant included legends such as the sleek 203, which saw off BMWs and Jaguars to win the 1950 Liege-Rome-Liege rally - a foretaste of the great African rallies Peugeot would dominate in the 1950s and 1960s.

At the same time, France itself was on the move. Its post-war leaders embarked on an era of reconstruction that was to transform it into a modern economy with infrastructure and public services that would be the envy of the world. The French discovered a taste for leisure and motoring. In the post-war recovery known as the "Glorious Thirty" years, French car ownership rocketed from 1.7 million vehicles in 1950 to 14 million in 1973.

French moviemakers, writers and designers wooed the world. On the road, the 1955 Citroën DS offered a completely new driving experience - hydraulic suspension and directional headlights that adjusted their beam to match the turn of the steering wheel. It was one of the most instantly recognizable symbols of France's post-war Fifth Republic. General Charles de Gaulle chose it as the presidential car, and Citroën produced a special version for senior civil servants in the provinces.

"A cortege of black DSs is the embodiment of the French state," said Marc-Andre Biehler, director of the Citroën Conservatory in a hangar by the group's Aulnay site north of Paris.

SEEDS OF DIFFICULTY

But the post-war rise of the state was also sowing seeds of later problems. France's leaders dictated the reconstruction according to centralized plans, and built one of the world's most generous welfare systems.

Public spending as a share of overall output rose from just over 30 percent in 1950 to its current level of 57 percent - the highest of the G7 nations. It also rose in other developed countries - U.S. public spending doubled to its current level just short of 40 percent - but none as high as in France.

The state still owns controlling stakes in some firms and significant holdings in others including France Telecom, airline Air France-KLM and PSA rival Renault. The hand of the state ultimately made the country a world leader in high-speed trains and nuclear technology, but it served France's car makers less well.

Encouraged by state planners to focus on mass production, Peugeot sacrificed its presence at the luxury end of the market. In Germany, not only did the auto-makers maintain their top-of-the-range models, but the state built the autobahns on which their owners could let their powerful engines rip.

"The French state has to take its share of responsibility in that choice," said car historian Fridenson.

Citroën's range was also looking limited. Aside from the DS, Citroën had the rudimentary soft-top 2CV - described way back in its original 1935 specification as "four wheels under an umbrella" - but no really compelling mid-range car.

None of that seemed too serious at the time. France's unbounded growth meant the Peugeot plant in Sochaux was barely able to match domestic demand, let alone chase foreign markets. In Europe, France felt it had won back the pre-eminent political role that befitted its pre-Occupation standing.

But Europe was heading towards a common market - a project with goals that were increasingly liberal and designed to foster competition. The 1957 Treaty of Rome created a market between the six founding EU members: France, West Germany, the Netherlands, Belgium, Italy and Luxembourg.

"They (PSA) used to consider the French market as their private domain. But after the Treaty of Rome that was no longer possible," said Fridenson.

MISSED OPPORTUNITIES

In the 1960s, auto firms launched cross-border deals and expanded globally to penetrate the markets of foreign peers. For the most part, the Peugeot family kept aloof, agreeing in 1966 just to cooperate with Renault on engines.

PSA models have been driven by everyone from former Iranian President Mahmoud Ahmadinejad to New York cabbies and TV detective Columbo. In southern Nigeria, the speedy 404 gave its name to dogmeat - a local favorite eaten in stews or grilled. Armies of battered, decades-old 504 estates still ply the taxi trade in many African countries.

The cars show Peugeot's vehicles stand the test of time, but they also highlight the limitations of its international strategy. Fiat has the Latin American market, General Motors and Volkswagen are present in China and the United States. Until recently, PSA's biggest market after France was Iran.

Peugeot built a portfolio of often competing models that was only streamlined from the late 1990s. There followed a series of missed opportunities, strategic setbacks and stop-start efforts to forge a greater international presence.

In 1977, Peugeot passed over a chance to partner with American Motors Corp (AMC). AMC's Jeep would have carried Peugeot into the four-wheel-drive market, one it entered later than others. It even turned up its nose at the Espace design, which later would become Renault's world-beating people carrier.

A year later Peugeot bought Chrysler's European units to increase its presence in West Europe and act as a launchpad for sales across the Atlantic. But the deal soured when it emerged that Chrysler's European factories were in poor condition. "The biggest lame duck in the entire history of the automobile," Le Monde newspaper called it at the time.

In Africa, Nigeria and Libya asked Peugeot as early as the mid-1970s to set up local assembly plants. But it has been gradually supplanted by first Japanese and now Korean brands.

PSA even made a pioneering move into China. In 1985, it and Volkswagen won early access through deals with local car-makers. PSA took an approach that had worked in Africa, assembling the 504. Chinese buyers wanted something more modern. Its factory closed in 1998.

"Is it what you'd call a global multinational? No, for a long time ... it did not concern itself with the tastes of its customers in foreign countries," said Fridenson.

By last year, even the Iranian market collapsed under international sanctions over its nuclear program. When Peugeot suspended sales in 2012 it lost nearly 10 percent of global deliveries. That same year, France would get a new government run by Francois Hollande and see economic growth slump to zero.

LE CAPITALISME "MADE IN FRANCE"

In the 1980s and 1990s Britain and the United States began to cap state spending and limit wage increases.

France chose a different course.

The Socialists under Francois Mitterrand picked policies aimed at stimulating consumption, cutting work hours and increasing holidays. For PSA, that was a double whammy: It added labor costs, and French consumers chose to flex their new purchasing muscle by buying white goods, Italian shoes and ... German cars.

In 2000, France capped the working week at 35 hours and a subsequent decade of generous wage deals bolstered the costs to industry. The OECD calculates that by 2007, average salary and welfare benefits available to manufacturing workers in France were higher than America, Germany or Britain.

"With its production still largely based in France, the group is squeezed between other mass market manufacturers producing at low cost in eastern Europe and premium German manufacturers (Audi, BMW, Mercedes) attacking the mid-range," said a 2012 report by industrial expert Emmanuel Sartorius that was commissioned by the government.

Hollande is trying to restore competitiveness to industry, be it textiles or white goods. But the effort needed to compete at the top end of a given market is only possible for firms with healthy profit margins. French companies have the weakest in Europe, according to tax data France provides to EU statistics agency Eurostat - around 29 percent compared with a euro zone average of 38 percent.

Peugeot has in recent years opened factories in Slovakia and Russia; in February 2012, a link-up with General Motors was billed as "a long-term and broad-scale global strategic alliance." But by November that year, ambitions for the tie-up were being scaled back amid concerns over Peugeot's finances. The family turned to GM in mid-2013 for help. In the weeks that followed it became clear GM's CEO Dan Akerson, already preparing to hand over the company and head into retirement, was reluctant.

CHINA OR BUST

In late September, a former Bond girl stepped in. French actress Sophie Marceau landed in Shanghai to help sell the group's luxury DS range to a new generation of wealthy young Chinese - a new bid to revive Peugeot's fortunes.

Her role was to embody French elegance: She smiled demurely in a red ballgown as she posed in front of a gleaming white DS5, to the delight of Chinese autograph-seekers. Arnaud Ribault, head of the brand in China, called the campaign "Innovative spirit from Paris."

The DS project - which is not with Dongfeng, but another Chinese partner - shows PSA has learned to differentiate its brands, the company says. The DS in China is aimed at the "modern independent business elite", average age 35, who "work hard and play hard" and have a household income just below 40,000 euros - high by Chinese standards.

Whether by selling cars or winning finance, PSA's fate is now intimately wrapped up with China, and whatever happens with Dongfeng, that will mean change. Peugeot said in November CEO Varin will be replaced by former Renault No.2, Carlos Tavares, who built a relationship with Dongfeng in a former role.

But historian Loubet, who had exclusive access to family files for his research, still believes Peugeot will not be rushed.

"My analysis is that when you have got 200 years of history behind you, you don't quite see time with the same eye as if you only had 50," he said.