Nov. 26 (Bloomberg) -- PSA Peugeot Citroen’s move to name former Renault SA operations chief Carlos Tavares as its future chief executive officer stands to help secure an alliance with Dongfeng Motor Corp., which may be the carmaker’s last chance to end its reliance on Europe’s slumping car market.
Tavares will join Peugeot’s management board on Jan. 1 and will replace CEO Philippe Varin, 61, later in the year, Peugeot said yesterday. Before stepping down, Varin will focus on discussions with partners.
While the Paris-based manufacturer didn’t mention specific companies, deepening cooperation with Dongfeng -- Peugeot’s joint venture partner in China -- represents its best opportunity of gaining a foothold outside Europe. With other automotive options scarce, the most likely alternative to Dongfeng is to go it alone and hope the French government steps in if finances get tight.
“It does seem as if the Chinese are the only lifeboat left for Peugeot,” said Garel Rhys, head of the Center for Automotive Industry Research in Cardiff, Wales. “In a sense, PSA is lucky to have a Chinese company wanting to get involved because there are huge issues.”
The shares gained as much as 25 cents, or 2.3 percent, to 11 euros and were up 2.1 percent as of 12:53 p.m. in Paris trading. The stock has doubled this year, valuing the French manufacturer at 3.89 billion euros ($5.27 billion).
Peugeot forecasts burning through about 1.5 billion euros in cash this year and reported a first-half operating loss of 510 million euros in its automotive unit. The company has been searching for new partners to end its dependence on mid-market cars in Europe, where auto demand is at a two-decade low and Peugeot is losing market share.
A previous deal with General Motors Co. that was focused on cutting costs in Europe has failed to provide relief and offers limited potential because the two carmakers largely compete for the same customers. Peugeot said in October that it’s reviewing backing away from part of the cooperation.
“Going back to GM is not an option,” said Ferdinand Dudenhoeffer, director of the Center for Automotive Research at the University of Duisburg-Essen. “Dongfeng is the only option and the best option.”
Dongfeng offers Europe’s second-largest carmaker a stronger footing in China, the world’s biggest auto market, and above all a life line of fresh cash, while the Chinese manufacturer could gain access to modern technology.
Peugeot has proposed a capital increase of at least 3 billion euros, with Dongfeng and the French state taking equal holdings of about 20 percent, people familiar said last month.
That plan has hit a snag as Dongfeng seeks a smaller stake than first discussed, people familiar with the matter said last week. Dongfeng is weighing buying about 10 percent, half the size of the original proposal, said the people, who asked not to be identified discussing private talks.
Dongfeng was not involved in Peugeot’s decision to hire Tavares and the change won’t affect the outcome of talks between the two automakers, people familiar with the matter said. The French manufacturer’s negotiations with its Chinese counterpart are far from complete, the people said, who asked not to be identified because the discussions are private.
The Peugeot-Dongfeng talks are not exclusive and the French company is still seeking other partners, one of the people said. Pierre-Olivier Salmon, a Peugeot spokesman, declined to comment.
The Dongfeng negotiations will focus on industrial projects before the companies address financial matters, Varin said Nov. 23 at a conference in Berlin. In the future, “there will be more and more cross links” between carmakers, he said.
Tavares, who previously worked at Renault’s Nissan affiliate and races cars in his spare time, may also be part of winning over Dongfeng. The 55-year-old executive has experience with European-Asian auto alliances and that could give Dongfeng reassurance that a cooperation will survive after Varin steps down as planned next year.
“He knows the sector well, and he’s fast-moving,” said Gaetan Toulemonde, a Paris-based analyst at Deutsche Bank AG. “He’s a car guy. He has the knowledge, the discipline.”
The French company, which sells more than half of its vehicles in its home region, is getting squeezed as Bayerische Motoren Werke AG and other luxury-car makers shift into the lower end of the market with new compacts and as budget brands like Renault’s Dacia and Korea’s Kia Motors Corp. expand.
Peugeot’s sales in Europe fell 10 percent through October, more than any other carmaker in the region. The French manufacturer’s market share this year is 11 percent, down from 11.8 percent a year ago.
Tavares has experience restructuring struggling operations. When he oversaw North America for Nissan, he helped the unit earn 209 billion yen ($2.05 billion) in the region in the year ended March 2010, compared with a 46.7 billion-yen loss in 2009. While Renault COO, the carmaker reported unexpected growth in first-half profit as labor-cost reductions and higher vehicle prices offset weak demand in Europe.
Tavares left Renault at the end of August, two weeks after Bloomberg published an interview with him saying he’d like to run another automaker because CEO Carlos Ghosn, 59, planned to stay for the foreseeable future. Tavares didn’t respond to requests from Bloomberg for comment.
“He’s a very ambitious man,” said Christian Lafaye, FO union leader at Peugeot. “I guess that if he wants to come to Peugeot, he will want to show that he’s able to turn around the company. This could be a good thing.”
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