PSA, Dongfeng to Drop Two China Plants, Halve Workforce, Report Says

Date: August 12, 2019
Source: Automotive News

BEIJING/PARIS -- PSA Group and partner Dongfeng Motor have agreed to cut thousands of jobs in China and drop two of their four shared assembly plants, according to a document seen by Reuters, in a last-ditch bid to curb mounting losses as the world's largest auto market loses steam.

Dongfeng Peugeot Citroen Automobiles, the automakers' joint venture based in Wuhan, central China, will halve its workforce to 4,000 as it closes one plant and sells another under plans agreed last month between PSA CEO Carlos Tavares and Dongfeng Chairman Zhu Yanfeng, the document showed.

Both automakers declined to comment on details of their restructuring plans.

"We are working with our partners to improve the overall performance of our business in China in all its dimensions," a PSA spokesman said.

Dongfeng is exploring options for its 2.2 billion-euro ($2.5 billion) stake in PSA including a potential divestment, Bloomberg reported last week. The state-owned automaker held talks in recent weeks with potential advisers about ways to monetize part or all of its 12.2 percent stake in PSA, according to the report.

Cutting jobs and closing plants may avert a threatened withdrawal from China by PSA, according to two Reuters sources at PSA. They said Tavares had signaled that PSA might otherwise exit the 27-year-old partnership with Dongfeng, or even leave China altogether.

"We are just a whisker away from having to withdraw from China," said one person close to the PSA board. "It really is that serious."

PSA is attempting a reboot in adverse conditions. Once an auto industry cash cow, the Chinese market contracted last year for the first time since the 1990s and is expected to decline another five percent in 2019, squeezed by a worsening U.S.-China trade war.

Many Western automakers were already struggling before the downturn, as Chinese consumers abandoned their mid-market brands for increasingly assertive domestic rivals including the global manufacturers' own local partners.

PSA's deep China problems go back even further, spanning four years of plunging sales and 400 million euros ($448 million) written off its DPCA stake, which is now valued at 500 million euros ($560 million).

Its sales in the country have fallen almost threefold to 251,700 vehicles last year from a 2014 peak of 731,000.

"We're not giving up," a PSA spokesman said. "We are still pursuing our action plan to cut fixed costs."

DPCA will now close its original assembly plant, Wuhan 1, and redevelop the site in a commercial partnership with the local government, according to the plans. The factory's tooling and production will be transferred to the Wuhan Three facility.

Headcount across DPCA will fall to 5,000 from 8,000 by the end of 2019 and to 4,000 within another three years, as it also sells off its idling Wuhan Two facility, according to the document -- which noted ongoing discussions with unidentified potential buyers.

Underperforming vehicles will be dropped as the Peugeot and Citroen lineups are streamlined around more profitable models, mirroring the European turnaround strategy now powering record margins in PSA's home markets.

Big hurdles

The automakers' dealings have often been fraught, and PSA executives including Tavares have voiced frustration with DPCA's management.

Questioned by analysts about China operations, Tavares pledged during PSA's July 24 earnings call to "accelerate variable cost reduction, reduce fixed cost" and boost pricing.

"Our partner is in the same mindset," he said of Dongfeng. "They also want to accelerate."

The restructuring faces hurdles, not least the challenge of finding a buyer for the Wuhan Two plant amid mounting uncertainty -- although Chinese government restrictions on greenfield sites may help.

Over the past 18 months, Dongfeng Chairman Zhu tried repeatedly to persuade Honda or Nissan to take over one of the DPCA plants, Reuters reported on Aug 1.

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