Christian Streiff has undoubtedly made waves since joining the car-maker from Airbus Industrie in early 2007. As a surprise appointment, coming from outside the auto-sector, and having to follow in the footsteps of much liked Jean-Martin Folz, he had a reputation for tackling the thorny issues involved in business turnaround scenarios and succeeding; even if it meant ruffling management and staff feathers in the process. But then radical action rarely comes without a price.
This week’s Economist critiques his man-management abilities, stating that what was once a compulsive ‘task-orientation’ has, through a period of reflection, expanded to include the softer people skills that are required when dealing with the likes of the Peugeot family (as Chair and V-C) and their substantial stake-holding and, of course, influence.
2006 saw the second-year faltering of PSA compared to what had been nigh-on glorious previous years as it maintained essentially flat revenue as a Group. Thus, FY06 results were painful for management and analysts alike; the non-core divisions providing decent results to support the PSA mass. Sales (like Revenue) stayed virtually flat with a 2.7% drop in W.Europe and 20% drop in ROW CKDs balanced by 15% rise in ROW fully assembled vehicles. Of course beyond primary operating issues such as Fixed (Plant) Costs and Variable (Labour) Costs, 2006 saw PSA’s vehicle average-age rise to 4.5 years and even with discounting to reduce inventory and maintain capacity, car-buyers were reacting, knowing new models (esp 207, C4 Picasso & LCVs) were to follow shortly.
Critical to expanding the product pipeline through 2007 has been JV operations with FIAT in LCVs and Mitsubishi for the C-Crossover/4007 AWD. And noticeable is PSA leverage of Spanish production facilities in Vigo (its biggest plant) and Madrid for MPV and niche products, taking advantage of the recent Spanish economic downturn.
Unsurprisingly, the good news of 2006 was the volume ramp-up in China up 44% over FY05 (141K units to 202.5K). This Dongfeng JV (amongst all of its co-operative agreements: Sevel, TPCA, BMW/Ford PT) is undoubtedly the operation to watch so as to gauge the level of continued local market reaction and subsequent success PSA can expect in China’s very competitive compact and mid-size car segments.
Soon we see the FY07 results and the achievements against targets outlined a year before. Streiff will have been keen to super-charge the pace of change within the Group and its 5 main divisions (Peugeot-Citroen Autos, Banque PSA Finance, Gefco, Faurecia & Others). Promises of a much improved 2007 were made across many fronts, specifically:
A. Plant cost reduction with closure of Ryton (+€90m on fixed costs) and ramp-up of Trnava (+€60m start-up costs) and announced Kaluga, Russian plant (+€300m CapEx)
B. Improving vehicle quality assisting warranty costs
C. Targeting €600m of manufacturing cost reduction.
D. Major improvement of the product pipeline & model mix
The last of which was to provide a massive leap in Auto Division Operating Margin. Since H205 PSA has produced very distressing Op Margin results, major falls ‘bottoming out’ in H206, with promise of a €105m ‘pull-up’ in H107 and a €100m rise in H207, leaving end of year Op Margin at a (long-last) positive €50m.
The 2007 expected negatives were the ever topical rises in raw material costs (esp aluminium & platinum) and a PSA relatively lowly 94% Capacity Utilization (though actually regarded as good in industry terms, especially when seen against the major plant changes taking place).
Undoubtedly the new products that appeared through 2007 (esp delayed 207, the 308, Tepee/Berlingo etc) will have a major effect on earnings. But one cannot help but question to what degree the late arrival of the all important 207 was internally ‘managed’ to create what would theoretically be a blockbuster 2007 with new B and B/C segment cars arriving as a near duo? Not necessarily a bad thing given that an earlier launch would not have had such an impact and presumably the delay assisting in quality engineering and future warranty cost reduction.
Whilst PSA has been ‘streamlining’ the engineering and marketing of its core vehicle portfolio, we like the fact that it has endeavoured to produce and follow-up more innovative products such as the successful compact family vans (Berlingo/Tepee) and the – we think- underrated 1007.
The 1007 may appear at first odd, as a shorted regular car, but we suspect that it is the result of seeking not only new product directions but platform possibilities too. If we are correct, PSA has essentially build a highly modular base car that can be easily stretched to provide either 2+2, 4 or 6 seater variants, the latter essentially a light, small people carrier so familiar to the emerging market demands of hi-capacity seating and flexible, practical interiors. Thus investment professionals should question PSA more deeply about this vehicle and look far closer at the permutations and possibilities this car may give, providing we think, many may consumer and commercial variants, and could be used as a lynch-pin as a highly cost/parts efficient element of future product strategies. We think learning from this car (and further similar R&D) is the basis for what the PSA Board has described as a “highly innovative concept that’s focused on time to market”.
PSA has, through plant re-locations, re-newed domestic labour agreements, maintained capacity (through the extended run-out of older cars), JV exploitation, Asian parts sourcing etc etc, managed to set a new path forward. Exactly what the first FY07 results of that new path look like, we’ll have to wait.
The H107 Interim Report demonstrated slightly reduced worldwide volume sales YoY, but improved revenue by €1,725m. This provided a Net Income of €182m.
CapEx YoY was reduced whilst generated Working Capital from Operations improved.
Relative to investors, Streiff has been somewhat canny is as much as equally focusing on the longer-term with his 2010-2015 Ambition, thereby asking stakeholders to look beyond the under-competitive present to a far brighter tomorrow. In the mean time he has to get there with CAP2010 - reaching a desired 3% margin through a 10% rise in European sales and 100% rise in BRIC+ sales. Altogther reaching a 'magic' 4m volume total (adding 300K to 2006 volumes). Done so with 18 model renewals and 5 additional line-up extensions. And undoubtedly their C02 credentials assisting as the (presently) leading Green VM. But PSA is noticeably late to Russia and India, though an additional Chinese JV currently being negotiated does off-set this apparent disadvantage. However, the question remains "has PSA lost critical early ground in what are lucrative, though feasibly slowing, emerging regions?"
Product appeal, and the efficacy of its development and manufacture, is of course the key in moulding a sustainable, fast-reacting, low-cost high-margin company. PSA demonstrated its abilities when further integrating Peugeot & Citroen during the 1990s – infact it’s lean, dynamic engineering development operations were set as global benchmarks at the time in extracting the most product and brand value from the least component variability. CAP2010 must strenghthen such fundamentals to the once strong PSA of innovative independence so as to deliver a sound business base with technical and market longevity.
