Sept. 11 (Bloomberg) -- For French President Francois Hollande’s government, PSA Peugeot Citroen’s decision to close a factory and eliminate jobs has gone from “unacceptable” two months ago to “inevitable.”
Peugeot’s plan to cut 8,000 jobs and shut its Aulnay plant near Paris, “is not acceptable in its current form,” Hollande said in a televised interview July 14. Today, a report commissioned by his Industry Ministry said that given the moribund European car market and Peugeot’s overcapacity, “the group must absolutely cut costs” and “the closing of an assembly line is inevitable.”
The shift marks an about-face for Hollande, who was elected in May on a pledge to prevent a “parade of firings.” Since then, the number of unemployed people in France has crossed 3 million to a 13-year high as companies from Air France-KLM Group to retailer Carrefour SA have announced lay-offs.
“From a shareholder point of view, it’s a good thing that the government acknowledges Peugeot is facing a fixed-cost problem,” said Sascha Gommel, an analyst at Commerzbank AG with a hold recommendation on the shares. “Their initial reaction was typical. You can see that in any country, when you close a plant, you immediately have a political backlash.”
Industry Minister Arnaud Montebourg said in a meeting with Peugeot union officials today that the company was “facing severe difficulties and needed to restructure,” according to Franck Don, a CFTC Peugeot union official.
Peugeot fell as much as 3.1 percent in Paris trading and was down 0.05 percent at 6.46 euros as of 3:14 p.m.
The Paris-based company’s automotive division has been burning through 200 million euros in cash a month for the last year, Varin said in July as the company reported an 819 million-euro ($1.05 billion) first-half net loss.
The government-commissioned report, written by engineer Emmanuel Sartorius, criticized Peugeot on many points. It said the group was late in squeezing out savings between its Peugeot and Citroen brands, slow to develop international alliances and is too reliant on the European car market, which accounts for 58 percent of its sales.
“The internationalization strategy started too late,” Pierre-Olivier Salmon, a Peugeot spokesman, said by phone. “That’s what Philippe Varin reckoned as soon as he became CEO: he said the group was too European and too middle-range. That’s why we’re upgrading and becoming more global.”
Peugeot invested 250 million euros since 2009 in a Madrid plant that might have been a better candidate for closure than Aulnay, according to the report.
“Looking back, the management of PSA lacked realism in setting its targets,” according to the report. “Until the middle of the last decade, it was targeting an annual production of 4 million cars, whereas it never managed more than 3.6 million.”
The Aulnay plant ran at 56.7 percent of its capacity in 2011, with anything under 65 percent considered under-utilization, according to the report.
The need for Peugeot “to re-organize its industrial activities and to reduce its workforce is, sadly, not contestable,” the report concluded.
Peugeot employed 81,324 people in France at the end of 2011, out of a worldwide workforce of 122,879.
The company last week was elbowed out of France’s benchmark CAC 40 stock index after its shares declined more than 60 percent in 12 months, giving it a market value of 2.3 billion euros.
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