French government supports struggling Peugeot

As being heavily reliant on the hardest-hit car markets of France, Spain and Italy, PSA Peugeot Citroen’s European sales have fallen by more than 13% in 2013, the largest of any car-maker number and double the rate of decline across the continent. Its factories are running at about 60% of total capacity, and in February it was forced to write down the value of its assets by 4.1 billion euros.

The company, which releases half-year results on Wednesday, warned that it will halve its negative cash flow this year, but sustained losses will make a capital injection unavoidable by the end of 2015 at the latest, analysts say.

Complicating the pitch for potential investors that have held talks with PSA, such as General Motors and China’s Dongfeng, is the role played by Paris, which has stepped in to guarantee Banque PSA in return for a seat on its board.

“PSA is a company to which France, the French and the French government are extremely attached,” industry minister Arnaud Montebourg told a group of foreign correspondents this month. “Why? Because Peugeot is the history of the French car, 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.” he added.

However, Mr Montebourg’s support might not be helping the chances of a financial relaunch, especially given the widely accepted need to further restructure Peugeot’s production capacity.
Peugeot announced last year it would cut 6,500 jobs, including the first closure of a big French car factory for 20 years, amid a prolonged crash in European car sales that has resulted in systematic overcapacity across the continent. It is engaged in new talks with its unions aimed at making all its plants break even by 2016.

Paris’s 7 billion euros guarantee for Banque PSA, which provides finance to consumers, still needs approval from the European Commission, but company and government officials say privately that they are confident it will get the nod from Brussels. PSA accounts for 60% of the country’s car production and employs close to 100,000 people in France. Including all its suppliers, the company is indirectly responsible for several hundred thousand more jobs.

General Motors and Peugeot are helping each other as both are losing market share in Europe. The idea of the agreement between companies to pool their purchasing power, has been positive for both sides and is expected to be the main driver in cost reduction in its half-year results on Tuesday while shared development of future models is seen easing long-term capital expenditure spending.