The problem with Peugeot-Citroën

There are some classical components to the problems faced by one of France’s best-known car-makers, Peugeot-Citroën. An economic downturn has hit Peugeot-Citroën’s sales. Its dependence on car-buying in the Southern European markets of Spain, Italy and Greece was higher than some of its rivals and so it has been harder hit by the Eurozone crisis. It hasn’t so successfully relocated production to cheaper parts of Europe, as Germany’s Volkswagen has done for instance, meaning that labour costs remain high. The decision to close its large plant North-East of Paris, at Aulnay-Sous-Bois, was an obvious case of shifting manufacturing activity out of France to places where wages are lower. Overall, margins are tight in an incredibly competitive industry and the downturn has pushed the less competitive players to the edge.

Looking more closely, though, the picture is more complex. This week, the French government intervened in the company’s crisis. Having long spoken about the need to limit the famous “plan sociaux” of big French firms, the government’s intervention was not directly aimed at limiting the number of jobs to be lost through the closure of the Aulnay plant. In fact, the government seems largely to have accepted that Aulnay will close. Instead, the intervention took the form of a bail-out of Peugeot-Citroën’s financial arm, Banque PSA Finance (BPF). Faced with the threat of a credit downgrade of 5.6bn Euros of its debt, owing to the declining fortunes of the car firm, the bail-out is reported to involve a guarantee of around 4bn Euros of debt and the supply of new credit lines of up to 1.5bn Euros.

It is no coincidence that the government intervention is in the form of a bail-out to the financial arm of Peugeot-Citroën. In recent years, the car-maker has made money not just out of making and selling cars but also out of financial activities associated to its car business. Involving itself in the provision of credit to potential car-buyers has been one way the company has managed to stay in the black. In the third semester of 2011, the total revenue of the company rose by 3.5%. However, this growth did not come from car sales as such. It came mainly from the company’s component manufacturing arm (Faurecia), its manufacturing logistics arm (Gefco) and from its bank, BPF. As with other automobile companies, Peugeot- Citroën has had to rely on revenue streams other than just those of car manufacture. As the company began to rely on financial activities, it became increasingly vulnerable to any rise in its borrowing costs. This is what is happening today, hence the government bail-out. Paradoxically, the very success of Gefco means that may be sold by Peugeot-Citroën in an asset fire-sale intended to raise much needed cash (for details on the Gefco sale, see here).

The events at Peugeot-Citroën appear as a classic case of government intervention in an ailing manufacturing sector. In fact, the government is bailing out a bank owned by the car company, set up as a way of profiting from credit provision. This suggests that it is easier for a government to channel funds in ways that keep a financial subsidiary afloat than it is to prevent mass redundancies and factory closures. It also tells us of the extent to which car-makers today rely on more than just selling cars to balance their books.