Dongfeng Deliberates on Peugeot Stake

The Wall Street Journal, October 17, 2013

Dongfeng Motor and Peugeot Citroën jointly manufacture cars in China. Shown, the Élysée model produced at their factory in Wuhan, China Agence France-Presse/Getty Images

WUHAN, China—A top executive at Dongfeng Motor Corp. said on Thursday that the Chinese auto maker continues to debate the "rationality" of buying a stake in ailing PSA Peugeot CitroënUG.FR +0.70% after months of slow-going talks between the two.

The comments—by Dongfeng President Zhu Fushou on the sidelines of the Global Automotive Forum here—underscore the obstacles that remain ahead of a potential deal that would reshape the unprofitable French auto maker and project state-owned Dongfeng more fully on to the world stage.

Speaking to reporters, Mr. Zhu said "it's too early" to talk about a potential investment. Asked why the company is still in talks, Mr. Zhu said "because it's about the rationality" of a deal.

Mr. Zhu's comments come after months of talks between the two companies that could see Dongfeng take a stake of just under 30% in Peugeot, according to a person familiar with the matter. The French auto maker is exploring a capital increase to ensure sufficient resources to develop new cars amid a slumping European market.

The talks, however, have moved slowly, hampered at times by a language divide, and the cautious nature of Dongfeng, a person familiar with the matter said. On the Peugeot side, the company's controlling family isn't entirely on board with a deal that could also significantly dilute its control, that person added.

It also remains unclear whether a Dongfeng deal would conflict with the relationship Peugeot partner General Motors Co. GM -0.28% currently has with Dongfeng rival SAIC Motor Corp. 600104.SH -0.07% GM owns 7% of Peugeot.

Peugeot's board is expected to meet early next week to consider a potential capital injection from Dongfeng, a person familiar with the matter has said. After that meeting, the French government could consider investing in Peugeot alongside Dongfeng, another person familiar with the matter said.

Dongfeng is the state-controlled parent of Hong Kong-listed Dongfeng Motor Group Corp.
Mr. Zhu's comments Thursday echo those of some industry experts, who say it isn't clear whether an alliance with Peugeot would help Dongfeng realize its global ambitions, build its own brand or give it effective access to new technologies.

"For sure Dongfeng wants access to Peugeot's research and development, technology and sales network—the more they can get of these the better," said Zhang Xin, a senior analyst at Guotai Junan Securities in Beijing. "The problem is whether Peugeot wants to share them with Dongfeng," said Mr. Zhang.

"It would be a deal that [Dongfeng executives] would hope could put them into the premier league," said Sanford C. Bernstein analyst Max Warburton, who added that it would allow Dongfeng to move from being a contract assembler to full-fledged manufacturer.

Dongfeng is China's second-biggest car maker by volume if its sizable commercial-vehicle sales are included. But the overwhelming majority of Dongfeng's cars are produced with the company's joint-venture partners, which include Japanese auto makers' Nissan Motor Co. 7201.TO -0.79% and Honda Motor Co.7267.TO +0.26% , and Peugeot.

Dongfeng's own-brand cars account for about one-eighth of its total passenger-car sales, according to a Bernstein analysis based on data from the China Association of Automobile Manufacturers, an industry body.

"But if they are wise, they'll be spending a lot of time pondering whether they have the expertise to manage this and if a minority stake in PSA would really give them proper influence," Mr. Warburton said.

Mei Songlin, vice president and managing director with advisory firm J.D. Power China, said owning a substantial share of Peugeot could allow Dongfeng to access the French auto maker's know-how, including product platforms, technologies and quality-management systems.

Dongfeng's technology shopping list could include advanced powertrains, transmission systems, safety measures and emission systems, said Bill Russo, president of auto consulting firm Synergistics Ltd.

He said fostering such a technology pipeline could otherwise take Dongfeng years to develop by itself. "And there's no guarantee they can do it alone," Mr. Russo said.

Other factors possibly influencing Dongfeng's decision include a desire to survive in China's highly competitive auto industry and to ensure its joint venture in China with Peugeot, known as Dongfeng PSA, continues to run smoothly.

John Zeng, a managing director at consulting firm LMC Automotive, said Dongfeng is lagging behind even other Chinese state-owned car makers. "They are under pressure to grow, to be comparable to other automotive groups," he said.

"Dongfeng PSA is becoming increasingly crucial and a big cash cow to Dongfeng Motor overall. If Peugeot experiences a financial crisis, it will cause a big negative impact on its operations and brand image in the Chinese market," said J.D. Power's Mr. Mei.

He said Dongfeng PSA is now "growing in the fast lane." This year's sales volume is forecast to increase more than 20%, he added.

The Chinese auto maker's Dongfeng Motor unit posted a net profit of 5.5 billion yuan ($902 million) in the first half of this year, up 3% from a year earlier. According to CAAM data, the company sold about 2.2 million vehicles in the January-to-August period this year.

—Rose Yu in Wuhan, China, and Sam Schechner and Noémie Bisserbe in Paris contributed to this article.

Write to Colum Murphy at colum.murphy@wsj.com

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