Peugeot agrees main terms of tie-up with China’s Dongfeng

The Financial Times, December 11, 2013

  • 1810: The Peugeot family business begins to put down its engineering roots as brothers Jean-Pierre Peugeot II and Jean-Frédéric turn their father’s grain mill into a steel foundry, making everything from coffee grinders to umbrella frames
  • 1882: The company turns to transport, making bicycles. The first was Armand Peugeot’s ‘Le Grand Bi’, or penny farthing bike
  • 1893: The Peugeot Type 5, which was powered by a two-horsepower engine, was produced from 1893 to 1896
  • 1913: The Peugeot 153, whose 2.6-litre, four-cylinder engine produced 12 horsepower, was made in various forms until 1925
  • 1929: Peugeot unveils its first mass-produced car, the 201, but sales were are hit by the Depression
  • 1934: The top-of-the-range Peugeot 601 rolled off production lines in 1934
  • 1940: After the Peugeot 402, produced from 1935 to 1942, the company is forced to build cars and weapons for the German war effort
  • 1962: The stylish Peugeot 404 cabriolet became a 1960s icon
  • 2010: Peugeot starts production of the fully electric iOn city car
  • Today: Robert Peugeot is chairman of FFP, an investment company through which the Peugeot family controls a 25 per cent stake in the car company ©Reuters

PSA Peugeot Citroën and China’s state-owned carmaker Dongfeng Motor have agreed the main terms of an industrial and commercial partnership that will include a large capital injection into the French group in return for technology sharing.

The two carmakers are still hammering out the details but the agreement is expected to involve a €3bn-€4bn capital raising by Peugeot and an agreement for the two groups jointly to develop and produce low-cost small cars for southeast Asian markets.

Peugeot hopes to be able to have the deal announced in the first quarter of next year, according to two people briefed on the discussions.

The French group is desperate to lower its over-dependence on the moribund European car market and is rapidly burning through its capital reserves. Both Peugeot and Dongfeng declined to comment.

Peugeot closed down the first large car factory in France for 30 years this year and reduced its workforce as it seeks to reduce the €3bn cash burn it suffered in the full year 2012. It recently hired a former Renault executive to lead a more globalised push.

The company already has a successful joint venture with Dongfeng building cars in China, but trails rivals such as Fiat and Volkswagen in markets such as South America, and Renault-Nissan in tapping growth in southeast Asian markets.

Carmakers have increasingly turned to alliances and joint ventures to increase their scale and cost efficiencies, but a deal between Peugeot and General Motors to share some products and suppliers has failed to live up to the French carmaker’s hopes.

There are expected to be 5.5m cars and light vehicles sold in southeast Asia this year, roughly half the size of western Europe. But the region’s market is expected to grow by more than half by the end of the decade, versus flat or marginal growth in Europe.

Negotiations are continuing between Dongfeng and Peugeot about exactly how much the Chinese group will pay for what percentage of Peugeot.

The people briefed on the discussions, who declined to be named as the talks were private, added that it could still all fall apart, although this was looking less and less likely.

The French state is contemplating matching any investment made by the Chinese group to maintain French influence over the company.

The most likely investment by Dongfeng and the French state would give the Chinese carmaker and Paris 17.6 per cent each, according to research by Macquarie, with the Peugeot family holding 16.5 per cent and GM 4.5 per cent.

An injection of that size would result in the Peugeot family losing control of the business it founded in 1882.

Based in Wuhan, in central China, Dongfeng is one of China’s largest car manufacturers with annual revenues of $63bn. It already operates a manufacturing joint venture with Peugeot alongside three others – HondaKia and Nissan – and last week signed a fifth joint venture agreement with Peugeot’s French rival Renault.

If completed and approved by Beijing, Dongfeng’s tie-up with Peugeot could catapult it on to the global stage – something that no Chinese state-owned carmaker has yet been able to achieve. Hangzhou-based Geely, which purchased Volvo Cars from Ford in 2010, is privately owned.

“Whatever they pay for the shareholding, they’re probably going to get justification in knowhow,” said Bill Russo, a Beijing-based automotive consultant. “Peugeot’s global distribution capacity would also be an advantage for Dongfeng.”

Peugeot accounts for 60 per cent of France’s car production and employs close to 100,000 people locally.

Additional reporting by Tom Mitchell in Beijing