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Peugeot Considers French Production Cuts to Lower Costs

By Mathieu Rosemain
November 21, 2013 5:31 AM EST
An employee works on the production line of PSA Peugeot Citroen's factory in Mulhouse.
Photographer: Sebastien Bozon/AFP via Getty Images
An employee works on the production line of PSA Peugeot Citroen's factory in Mulhouse.

PSA Peugeot Citroen (UG), Europe’s second-largest carmaker, is considering cutting production capacity at a French factory to reduce fixed costs amid slumping sales on the continent.

Peugeot is looking at removing capacity from a plant in Mulhouse, which has two production lines and built 224,000 vehicles last year, Pierre-Olivier Salmon, a spokesman for the Paris-based company, said by telephone. The factory currently can assemble as many as 452,000 cars annually.

“Our goal is to have a utilization rate of 100 percent in our French factories” by 2016, Salmon said. A recent agreement with unions allows the company to start talks on whether to keep the plant’s second line open if annual production falls below 250,000 vehicles, he said.

Peugeot, which reported a first-half operating loss of 510 million euros ($685 million) in its automotive unit, aims to reduce cash consumption by 50 percent this year to 1.5 billion euros. It has already closed a factory on the outskirts of Paris and is cutting 11,200 jobs in its home country by 2015.

Peugeot has posted the biggest sales drop in Europe this year of all carmakers, with deliveries plunging 10 percent, compared with a decline of 3.1 percent for the overall market, according to data from the ACEA industry group.

Right Direction

Possible production cuts in France are the “natural consequence” of the new labor deal signed last month by four of Peugeot’s six main unions, Salmon said. Unions agreed to reduce overtime pay and freeze salaries in exchange for investment guarantees and a pledge not close any French factories in the next two years. Le Figaro today was first to report the possible capacity cuts.

“This is a really good move in the right direction,” Jose Asumendi, a London-based analyst at JPMorgan, said by phone. “Peugeot is taking the right decisions to restructure its operations in Europe.”

The shares rose as much as 18 cents, or 1.8 percent, to 10.35 euros and were up 1 percent as of 11:30 a.m. in Paris trading. The stock has gained 88 percent this year, valuing the manufacturer at 3.65 billion euros.

Chief Executive Officer Philippe Varin is also looking for new partners to help pay for new models and expand internationally. The manufacturer’s plan to raise funds through a share sale have hit a snag as Chinese carmaker Dongfeng Motor Corp. (489) seeks a smaller stake than first discussed, people familiar with the matter said this week.

Capital Increase

Dongfeng is weighing buying about 10 percent, half the size of the original proposal, said the people, who asked not to be identified discussing private talks. The company is more interested in expanding an existing industrial venture than purchasing a stake, they said.

Peugeot initially proposed a capital increase of at least 3 billion euros, in which Dongfeng and the French state would take equal stakes of about 20 percent, people familiar said last month. A smaller Dongfeng stake would potentially give the state, interested in protecting jobs and retaining the automaker’s base in France, greater say.

Some in the Peugeot family, which owns 25.5 percent, are concerned about the French government’s increased influence and want guaranteed board seats or other protections as a counterweight after a capital increase likely dilutes their holding, the people said.

Another option Peugeot has would be selling its 57 percent Faurecia SA stake, with Canadian parts-maker Magna International Inc. (MG) and other industrial competitors showing interest in the French supplier, people said. Peugeot thus far has said that it intends to keep the holding.

Peugeot is also considering the sale of a stake in its banking unit and continues to hold talks with Banco Santander SA (SAN) in Spain regarding a holding in Banque PSA Finance, people familiar said.

To contact the reporter on this story: Mathieu Rosemain in Paris at mrosemain@bloomberg.net

To contact the editor responsible for this story: Chad Thomas at cthomas16@bloomberg.net

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