PSA Gets It Right In China

PSA logoLike many companies that came to China early, PSA Peugeot Citroen, the large French automaker, has lived through the early pains of operating in China; figured out how to make money here; and is now counting on China for a significant amount of its future growth.

Based in Poissy, just outside Paris, France, PSA is one of Europe’s largest car makers, a $76 billion company (56 billion Euros). Its Peugeot and Citroen brands together account for just under 6 percent of the European market, and are made and sold there, and in Brazil, Argentina and China. In 2006, PSA sold approximately 3.3 million vehicles, of which 200,000 were produced and sold in China.

PSA and its subsidiaries (Peugeot and Citroen merged in 1976 to form the PSA Peugeot Citroen Group) were among the first global car companies to come to China. Along with American Motors, which formed Beijing Jeep in 1984, and Volkswagen, which formed Shanghai Volkswagen in 1985, Peugeot formed Guangzhou Peugeot in 1985. (Unfortunately, Guangzhou Peugeot never really gained traction and was subsequently closed in 1997.)

Meanwhile, Citroen entered into a joint venture with Dongfeng Motors in 1996, and along with Dongfeng, built a new car assembly plant in Wuhan. With expectations running high for the development of China’s passenger car market at the time, the joint venture partners sized the Wuhan plant with an initial capacity of 150,000 units, and planned its construction so that output could be doubled relatively easily to 300,000 units.

Unfortunately, the market for passenger cars in China took a bit longer to develop than most people initially thought, and the joint venture, Dongfeng Peugeot Citroen Automobiles, or DPCA as it is now called, languished in the late 1990s with an oversized plant operating well below capacity. In addition to a slow developing market, the joint venture stumbled trying to find its way in the China. Despite the popularity of PSA’s hatchback models in Europe, DPCA found that Chinese consumers wouldn’t buy them when they were first introduced in China. Without a proper trunk, it seems that hatchbacks didn’t fit the Chinese consumer’s idea of a sedan. Fearing that they would be seen by contemporaries as not being able to afford a real sedan with a trunk, consumers considered it a loss of face to own one. DPCA redesigned the hatchback model to include a trunk, and sales improved. Chinese consumers ultimately overcame their resistance to hatchbacks, and many of the best-selling models today are hatchbacks, which consumers now consider to be “sleek looking.”

Finally, costs at the joint venture were high. Reluctant to take on Chinese suppliers, DPCA was slow to localize its sourcing of components and relied too heavily on imported parts from PSA’s traditional supply base in Europe.

DPCA’s fortunes began to improve with the dawn of the new century. China’s entry into the World Trade Organization in late 2001 sparked the growth of China’s passenger car industry, and in the years since then, the China market has more than fulfilled everyone’s dreams of what it might become. DPCA got its product strategy right. And most impressively, it significantly reduced its cost of making cars by sourcing more of its parts locally. At the end of 2004, DPCA only sourced 55 percent of its parts from China-based suppliers. Today, that figure is 82 percent, an increase of almost 30 percentage points. As a result of its shift in sourcing strategy, DPCA’s cost of making a vehicle in China has declined by 32 percent, and with that significant decline has come price competitiveness and profitability.

With a solid base already established in China, PSA is now looking to its China operations for a significant amount of future growth and contribution to its bottom line. Sales in China are expected to at least double to 400,000 units by 2010, accounting for approximately one-third of PSA’s growth during this period, and to grow to as high as one million vehicles in 2015.

To broaden its product line, PSA is taking on a new partner in China. The company has signed a letter of intent with Hafei, a producer of vans, to form a joint venture to make light commercial vehicles. These products will not compete with DPCA and will bring PSA’s entire vehicle line to the China market.

Finally, encouraged by the success of the localization program at DPCA, PSA has established a Shanghai-based sourcing office with the objective of sourcing $1 billion of components from China for export to its European operations. Overall, PSA expects global sourcing from low-cost countries like China to rise from 23 percent of total purchases currently to 45 percent by 2010, and to be a major contributor to improved profit margins.

As anyone operating in China will tell you, China is one of the most competitive markets in the world and one of the most difficult in which to do business. As the PSA story demonstrates, however, it is possible to be successful here despite the many difficulties. It often just takes patience to wait for the China market to develop and reach its full potential; time to figure out how the China market really works and to get the strategy right; and perseverance to maintain the courage required to see the strategy through to the end. PSA has lived through this process and can now count on its deep experience and a robust China operation to be a significant contributor to the company’s overall growth and profitability.

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