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23.07.2012 Peugeot Lost Decade Sinks Earnings as VW Profits Soar: Cars

When PSA Peugeot Citroen reports earnings tomorrow, it’s likely to show deepening losses as European sales plunge. The French automaker’s declining fortunes will come into sharp relief the following day, when Volkswagen AG is poised to post record profits, the result of years of expansion outside the region and investments in Audi.

The diverging paths of Europe’s two biggest carmakers has been a decade in the making. VW in the last 10 years increased working hours for German employees, added eight Chinese plants, opened a U.S. factory and poured billions into Audi. Peugeot never developed a luxury marque, quit the U.S. in the 1990s and had a slow start in Asia. The company is now fighting the French government over plans to cut 8,000 jobs and close a plant.

“It’s no flash in the pan that the Volkswagen group is so successful,” said Thilo Mueller, managing director of MB Fund Advisory GmbH , which manages more than 100 million euros in investments, including VW options. “Peugeot has slept through some developments and did not succeed in using the success of individual models to stir more interest in the brand.”

Peugeot will report a first-half operating loss of 91 million euros ($110 million), compared with a profit of 1.2 billion euros a year earlier, the median estimate of seven analysts surveyed by Bloomberg shows. VW is likely to post a 5.6 percent gain in operating profit, to a record 6.4 billion euros, according to analyst estimates.

A decade ago, the roles were reversed. After trailing VW in earnings for years, Peugeot in 2003 beat VW’s operating profit by 238 million euros then widened the gap to 783 million euros in 2004.

Longer Hours
To help pull out of the profit slump, VW in 2006 reached a deal to extend the manufacturing work week by six hours to an average of 35 hours. Though workers got no extra pay, they did receive a one-time pension payment and guarantees that all VW’s German factories would remain open. That year, the Volkswagen brand cut 20,000 jobs in western Germany, or 20 percent of its workforce in the region. Operating profit doubled in 2007.

Peugeot, while also cutting thousands of jobs in the past decade, left the work week for its French factory employees at the government-mandated 35 hours.

Volkswagen -- which has 513,000 employees, 44 percent of them in Germany -- last year saw net income of 30,698 euros per worker, according to data compiled by Bloomberg. Peugeot -- with 209,000 employees, 48 percent in France -- earned 2,813 euros per worker in 2011.

“Volkswagen in 2003-2004 was the sick man of the European automotive industry,” said Erich Hauser, a Credit Suisse analyst in London. “VW understood two things that they needed to get right: in Germany you cannot produce a budget product, and if you produce in Germany you need to have a ruthless focus on cost.”

New CEOs
On Nov. 7, 2006, both companies announced they would replace their chief executive officers. VW turned to an insider, giving the nod to Audi CEO Martin Winterkorn, an engineer who has spent his career in the auto industry. Peugeot hired Christian Streiff, a former Airbus SAS executive and previous CEO of Cie. de Saint-Gobain SA, a supplier of building materials.

Just over two years later, Streiff was gone. Reminiscent of the current conflict between Peugeot and the government over the proposed shutdown of its factory in Aulnay, France, Streiff had a falling out in February 2009 with then-French President Nicolas Sarkozy. Streiff said he needed to eliminate thousands of positions. Sarkozy countered the job cuts were inappropriate given that the carmaker had just gotten a 3 billion-euro government loan. The Paris-based automaker fired Streiff a month later.

Audi Billions
Current CEO Philippe Varin, the former head of steelmaker Corus Group Ltd., replaced Streiff. Winterkorn -- a confidant of VW Supervisory Board Chairman Ferdinand Piech, whose family controls the carmaker -- last year received a contract extension to continue running VW through 2016.

Under Winterkorn, first as Audi chief and then as the group’s CEO, VW has poured 20 billion euros into the brand’s research and development. Audi now sells 12 model lines, twice what it had in 2003, including three sport-utility vehicles, the
A1 compact and the R8 sports car. Audi’s deliveries in the last 10 years have doubled, and the luxury brand now accounts for 47 percent of group operating profit.

“At the beginning of the 2000s, while Audi was a premium brand, it was quite some way behind BMW and Mercedes,” said David Rubin, a fund manager at Pictet & Cie, which owns both VW and Peugeot shares. “It has now completely closed that gap.
It’s the ‘in’ brand as far as German luxury carmakers are concerned.”

Premium Push
VW, which also owns Lamborghini, Bugatti and Bentley, intends to continue the premium push, announcing a deal this month to pay 4.5 billion euros for the half of sports-car maker Porsche that it doesn’t own. Peugeot, by contrast, has never developed a premium nameplate, relying on its Citroen DS line for high-end offerings.

VW, based in Wolfsburg, Germany, in 2011 reported record operating profit of 11 billion euros, compared with Peugeot’s 1.3 billion euros. Peugeot, which says it has been burning through 200 million euros in cash per month, on July 12 said its automotive unit had lost 700 million euros in the first half.

Investors have taken notice. VW stock is up 16 percent in 2012, valuing the company at 60.8 billion euros. Peugeot has plunged 39 percent this year and now has a market capitalization of just 2.28 billion euros.

‘Negative Spiral’
“There are so many advantages VW has compared to Peugeot,” said Stefan Bauknecht, a fund manager at DWS Investment in Frankfurt. “I don’t see how Peugeot will get out of this negative spiral.”

VW’s revenue last year hit 159 billion euros, an 80 percent surge from 2003, according to data compiled by Bloomberg.
Peugeot’s sales increased 10 percent during that period to 60 billion euros. Last year, 65 percent of VW’s revenue came from Europe, down from 71 percent in 2003, a result of expansion in China, the U.S. and Brazil. Peugeot’s home region still accounted for 76 percent of its sales.

VW is benefiting from its big bet on China, which surpassed the U.S. as the world’s largest auto market in 2009. Deliveries in the country accounted for 28 percent of the 8.16 million cars VW sold in 2011, and the automaker realized 2.62 billion euros in operating profit in China last year.

Volkswagen, which entered China in 1985, has 10 factories there and plans to add another four. Production capacity in the country will rise to 4 million vehicles by 2018, when VW aims to pass Toyota Motor Corp. and General Motors Co. as the world’s largest carmaker.

Slow Start
Peugeot has been in China since 1992 and now has three factories there. Last year it sold 404,400 vehicles in the country -- about 11 percent of the company’s overall deliveries and it received 150 million euros in net income from China.

By 2015, it aims to open four more factories in the country, increasing total production capacity there to 950,000 vehicles.

Peugeot got off to a slow start in China because it didn’t offer the right vehicle mix, said Sascha Gommel, a Commerzbank AG analyst in Frankfurt with a hold recommendation on Peugeot shares. “They started with hatchback cars, which were not successful at all,” Gommel said. “Chinese customers prefer sedans.”

In the U.S., the companies have both had a rough road.
Peugeot abandoned the market in 1992 after failing to gain much traction there. VW’s U.S. operations lost 1 billion euros in 2004 as cars imported from Europe couldn’t compete with domestically produced models from rivals.

U.S. Efforts
VW stuck it out. To complement its plant in Mexico, the company last year opened a $1 billion factory in Chattanooga, Tennessee, that makes a Passat tailored to American tastes. The VW brand’s first-half sales in the U.S. surged 35 percent to 154,100 and Audi’s deliveries climbed 17 percent. In April Audi announced plans to build a factory in Mexico to manufacture an SUV. VW says that by next year its U.S. operations will break even for the first time since 2003.

While VW is riding high, Juergen Pieper, a Bankhaus Metzler analyst with a buy rating on both stocks, warns that it’s best not to forget how things looked just a few years ago.

“The world is blaming Peugeot for everything nowadays; we are probably at a low point,” Pieper said. “When I met the CEO of VW seven years ago, people kept asking him why he didn’t do the things Peugeot was then doing.”