July 13 (Bloomberg) -- PSA Peugeot Citroen’s plan to close a factory in France for the first time in two decades represents the biggest challenge to Socialist President Francois Hollande’s promise to prevent a wave of job cuts.
For Hollande, who pledged during his campaign to block what he called an expected “parade of firings,” the cuts by France’s largest carmaker leave him squeezed between businesses seeking measures to spur growth and demands of his union supporters.
Peugeot, whose announcement yesterday brought its job cuts to 14,000, is hardly alone. Air France-KLM Group is eliminating more than 5,000 slots. Drugmaker Sanofi may reduce staff by more than 2,000. Economists say more mass firings are likely as growth grinds to a halt.
“There’s going to be an avalanche of job cuts and the expectations of public opinion are huge,” said Jerome Fouquet, a director of pollster Ifop in Paris, who says that unemployment is the top concern among voters. “This puts the government in a very difficult position.”
Peugeot Chief Executive Officer Philippe Varin said in an interview on RTL radio today that he was ready to “open the books” to the government to show French labor costs are too high. Another round of car-scrapping incentives isn’t the answer, Varin said.
Peugeot plunged as much as 65 cents, or 9.2 percent, to 6.37 euros, the biggest drop since Nov. 1, and was down 7.6 percent to 6.49 euros as of 2:16 p.m. today in Paris trading.
The French economy, Europe’s second biggest, failed to grow in the first three months of the year. The Bank of France estimates that it probably shrank in the second quarter for the first time since 2009. The number of people looking for work in France was 2.92 million in May, more than at any time since 1999. The unemployment rate is 10 percent.
“What’s happening at PSA doesn’t take us by surprise,” Hollande said in an interview published today by French newspaper Le Monde. “It’s not up to me to call a meeting at the Elysee Palace,” his residence and office. “It’s the role of the concerned ministers to be socially involved.”
The job losses expose French voters to the economic hammer that has already fallen on their southern neighbors in Spain -- where almost a quarter of the workforce is unemployed -- as well as bailed-out economies in Greece, Ireland and Portugal.
Support for Hollande, who took office on May 15, has dropped 7 points in the past month to 56 percent, according to an Ifop poll published July 11. The survey of 1,005 voters has a margin of error of about 3 percentage points.
“President Hollande needed this like he needed a hole in the head,” said Nicholas Spiro of Spiro Sovereign Strategy in London. “There’s already mounting pressure on the government to pursue more business-friendly policies. This is not going to help matters.”
The CGT union at the Aulnay factory that Peugeot plans to close has called on the government to intervene. Industry Minister Arnaud Montebourg said the government doesn’t “accept the plan as it is.” Prime Minister Jean-Marc Ayrault called the closing and workforce reductions a “true shock.”
Still, any attempt to block the cuts in the short term may backfire, economists and executives said.
“France has to remember that it’s in a globalized world and it has competitors,” said Frederic Gonand, a professor of economics at Paris Dauphine University and former finance ministry official. “The government shouldn’t do things that will discourage investment.”
Peugeot, Renault SA, France’s No. 2 carmaker, and Italy’s Fiat SpA have posted the biggest sales declines this year in Europe, where Peugeot expects the market to contract 8 percent. Moody’s Investors Service in March was the last of the three main credit-reporting companies to cut Peugeot’s debt rating to junk.
“Peugeot is struggling with the power of Volkswagen, especially on the credit side, as VW benefits from lower costs of financing,” said Kristina Church, a Barclays analyst in London with an “underweight/neutral” rating on its shares. “More importantly, Peugeot still has an issue with overcapacity and is in a worse position than Renault.”
Peugeot’s first-half deliveries slumped 13 percent compared with a 10 percent increase at Volkswagen AG’s namesake brand in the period. VW is Europe’s largest automaker.
The French company will stop production at its 39-year-old factory in Aulnay, on the outskirts of Paris, in 2014 and focus the building of small cars at a nearby plant in Poissy, it said. Peugeot will also curb production at a plant in Rennes to slash operational costs.
The last French auto factory to close was a Renault plant in 1992, according to Francois Roudier, spokesman for the country’s automakers’ association. Renault confirmed the date.
The French company entered into a strategic alliance with General Motors Co. earlier this year in which the American carmaker took a 7 percent stake to become the second-largest shareholder after the founding family. The two plan to cooperate on purchasing and vehicle development to lower costs.
Peugeot’s first-half operating loss in the automotive unit will reach 700 million euros compared with a profit of 405 million euros a year earlier. The measures are part of a plan to cut 1 billion euros in costs in 2012, Peugeot said.
“I am aware of the painful nature of this decision,” Varin told reporters yesterday. “The markets currently are experiencing a brutal, wide and on-going decline.”