GM ally Peugeot of France makes worthy cars, but is under financial, Korean pressure

Peugeot stopped selling cars in the U.S. in 1991, so many Americans will wonder what kinds of vehicles it makes and ask what convinced General Motors to form an alliance with the French company, which also makes Citroens.

Peugeot-Citroen is the second biggest car maker in Western Europe measured by sales. For the first two months of 2012, it had 12.9 per cent of the market and falling, behind Volkswagen of Germany’s 23.5 per cent, and ahead of third placed compatriot Renault’s 8.7 per cent (including 1.8 per cent for its third world brand Dacia). GM Europe – Opel, Vauxhall and Chevrolet – had 7.6 per cent, behind Ford Europe’s 7.9 per cent, according to Automotive Industry Data. Fiat was in sixth place with 7.2 per cent.

The Peugeot brand consists of a worthy range mainly of small cars, minivans and practical utility vehicles designed for work rather than show. At the recent Geneva Car Show it unveiled the new little 208. Top of the range is the handsome 508. Citroen, despite its heritage of cutting-edge technology, is pretty much a mirror of Peugeot. Think Hyundai and Kia. Currently, Citroen is using the old, storied “DS” badge, which used to be the last word in innovation and originality, to try and put a premium edge on its mainstream cars with mainly cheap, blinged-up add-ons. You only have to look at the Peugeot Citroen ranges and compare it with Hyundai and Kia to see why French market share is falling and the Korean’s, with their competitive prices, long warranties and now highly attractive cars, are on the rise – 5.4 per cent and accelerating.

Peugeot has formidable engineering strengths though. Its gasoline and diesel engines are so highly rated that BMW, Ford and Land Rover Jaguar buy hundreds of thousands of them every year. Peugeot is also leading the race to produce diesel hybrids.

Peugeot has been suffering as Western Europe’s car sales slide. Peugeot-Citroen’s auto division lost $650 million in the second half of 2011. Net debt nearly tripled to $4.5 billion. The company announced asset sales to raise about $2 billion this year, while the $1 billion cost-saving programme involving 6,000 job cuts is being raised to $1.3 billion. The company has declined to talk about financial prospects for 2012. Citigroup Global Markets almost doubled its estimate of 2012 automotive negative operating income to a loss of $800 million. That won’t phase GM Europe though, which some analysts expect to lose $1 billion in 2012.

Peugeot-Citroen has been criticized for not using huge European cash-for-clunkers subsidies after the 2008 market meltdown to take painful restructuring decisions, as German companies did. It, and Renault, were also both lent almost $4 billion by the French government, on the private understanding that no French jobs would be cut.

GM paid about $420 million to buy seven per cent of Peugeot-Citroen. Combined purchasing and development should save them $1 billion each by 2016, when they are likely to finalize a jointly produced small car. Both companies have been reluctant to talk about restructuring, a nice word for the need to slash bloated capacity to meet falling demand. If action isn’t taken to shut uneconomic Europe factories soon, experts expect dire financial consequences.

And if the Socialist party’s Francois Hollande wins the French Presidential election in April, that’s likely to stop any plans for cuts in their tracks, and would leave GM shareholders questioning this French connection.

Peugeot 508Citroen DS5Peugeot 208Peugeot 508