Europe Is Watching as France Weighs Options for Peugeot

http://www.nytimes.com/2013/02/09/business/global/peugeot-citroen-takes-5-2-billion-writedown.html

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PARIS — Another French industry is in trouble. And once again the Socialist government of President François Hollande is sending mixed messages — and renewing concerns elsewhere in Europe that France may be returning to old ways where industrial policy is concerned.

On Friday, after more signs of financial stress at PSA Peugeot Citroën, Budget Minister Jérôme Cahuzac said the government was considering its options, including taking a stake in the carmaker through France’s strategic investment fund.

“Let’s be clear, the company cannot and must not disappear,” he told RMC radio and BFM television. “We have to do whatever is necessary to support it.”

But Mr. Cahuzac was later contradicted by officials who outrank him, including Prime Minister Jean-Marc Ayrault, who said that Peugeot was not seeking aid, and Finance Minister Pierre Moscovici, who said that intervention along those lines “is not on the agenda.”

Those hasty correctives may or may not assuage concerns elsewhere, but the issue is sensitive among Europe’s industrial leaders. Any attempt to prop up Peugeot could strain France’s relations with Germany, whose carmakers have not been hit nearly as hard by the downturn in the region’s economy and auto market. And any helping hand from the Élysée Palace could provoke workers in Italy to call for similar actions to help Fiat, the country’s largest employer, which is also under severe pressure.

The officials made their comments after Peugeot, the biggest automaker in Europe after Volkswagen, said late Thursday that it would mark down the value of its car plants and other automotive assets by more than one-fourth — by about €3.9 billion, or $5.2 billion — to reflect “the impact on the group of the deterioration of the European market.”

That charge, and an additional €243 million write-down for what the company called “onerous” contracts — which include a supply deal with Iran — will make a big dent in the bottom line when Peugeot reports its 2012 results Wednesday. But the company and government officials were at pains to note that the noncash charges would not affect its solvency.

Pierre-Olivier Salmon, a PSA Peugeot Citroën spokesman, declined to comment Friday.

Some of the problems facing Peugeot are shared by its competitors. The European Union’s car market shrank 8 percent last year, to just over 12 million units, according to the European Automobile Manufacturers’ Association, reducing demand for new cars to the lowest level since 1995.

But Peugeot did worse than the Union’s overall market, with deliveries falling 13 percent, hurt by its reliance on South European markets where the euro crisis and austerity hurt demand. Its profitability has suffered from its concentration on lower-price models with thinner profit margins, compared with Germany’s automakers.

As its woes have mounted, its market value has slipped to about €2.1 billion, compared with about €80 billion for Volkswagen.

German automakers like Audi and Mercedes-Benz, as well as Volkswagen, have been able to compensate for weakness in Europe by selling cars in the United States, where Peugeot is not present. What is more, the German domestic market has remained relatively stable, falling only 3 percent last year, compared with the 14 percent drop in France.

German automotive companies regard their success as the payoff for years of investment in foreign markets, and would clearly resent any of their European competitors’ receiving government support. A spokesman for the German Association of the Automotive Industry declined on Friday to comment on Peugeot’s situation. But he referred to a speech last week by the president of the group, Matthias Wissmann, who implicitly criticized state aid for weak carmakers.

“It would be better if everyone were to improve their own competitiveness,” Mr. Wissmann said in Berlin. “The principle must apply, also in Europe, that we orient ourselves on the strong, not on the weak.”

German manufacturers sold nearly 1.3 million cars in the United States last year, a 21 percent increase over 2011. Although Fiat has also begun a renewed push into the U.S. market, thanks to its control of Chrysler, right now the German automakers are the only European manufacturers with a strong presence there.

Volvo Cars of Sweden also has a long tradition in the United States, but its sales of 68,000 vehicles last year were far behind the Germans.

But German government support for its auto industry is not unheard of. In 2009, Chancellor Angela Merkel pledged €4.5 billion in aid to General Motors’ Opel unit if it were sold to a components supplier, Magna. The money was never paid because G.M. backed out of the deal.

In addition, the German state of Lower Saxony has long held 20 percent of the voting shares of Volkswagen, which has its headquarters there. The stake gives the state government effective veto power over major decisions. Still, in recent years Volkswagen, which is profitable, has subsidized the state rather than the other way around.

The mixed message sent by officials in Paris on Friday echoed the situation last autumn during a protracted industrial dispute with the Luxembourg-based steel giant ArcelorMittal. The issue then was Arcelor’s plans to close two blast furnaces in Florange, in eastern France.

At one point in that face-off, Industry Minister Arnaud Montebourg threatened to nationalize the entire Florange complex if the steel maker did not reverse its plans. But he made the threat even as the French government was trying to lure foreign investors through an advertising campaign with the tag line “Say oui to France” and otherwise trumpeting its efforts to increase France’s industrial competitiveness.

In the end, Mr. Montebourg was largely excluded from the final negotiations, and Arcelor was able to carry out its program essentially as planned, after some compromises that enabled the Hollande government to save face.

After that politically bruising battle, Mr. Ayrault, the prime minister, sought in January to outline the government’s industrial policy. He said the state would consider investing in companies when they were engaged in projects that, while not immediately profitable, could eventually yield major payoffs, or when the survival of a “strategic” enterprise was at stake.

France has long considered the automotive sector, which directly employs more than 200,000 people, to be strategic. But, of course, so does the United States, which is why the Obama administration was willing to bail out General Motors and Chrysler in 2009.

The French government, which holds a stake of about 15 percent in Renault, is already deeply involved with Peugeot. Last autumn, the state extended credit guarantees worth €7 billion to the company’s finance unit, to ensure that customers could still get loans at competitive rates, despite the company’s own deteriorating balance sheet. That move gave the government a seat on the Peugeot board and the right to review the company’s operations. European competition authorities in Brussels, who are reviewing those guarantees, would scrutinize any additional support.

Peugeot, meanwhile, sold a 7 percent stake last year to General Motors, which is struggling to turn around its own European unit, Adam Opel. Peugeot initially described the deal as a global alliance, but so far analysts have been underwhelmed by the loose affiliation, which is mainly about logistics and a few vehicle projects.

Ian Fletcher, an analyst at IHS Automotive in London, said Peugeot needed to carry out its restructuring plans, which call for the closure of a plant in Aulnay-sous-Bois, near Paris, and a reduction of 11,200 jobs from its French work force of roughly 97,000.

But it is not in dire need of government money, he said, because the company has built up enough of a cash nest egg that it could become profitable again, if it makes it through the restructuring and — a big if — the European market rebounds by early 2015.

In the short term, an infusion of investment capital from the French government “would be great” for Peugeot, Mr. Fletcher said. But over the longer term, he added, “it might create more problems than it solved.”

<em>Jack Ewing reported from Frankfurt.</em>