Autos

Chris Bryant is a Bloomberg Gadfly columnist covering industrial companies. He previously worked for the Financial Times.

Europe could do with some good news. The last place anyone expected to find it was among the continent's emissions-chastened auto-makers. And France? The last time it made a truly loved car was probably the Citroen DS that reputedly saved Charles de Gaulle back in the 1960s.

Yet Peugeot's 6.8 percent first-half operating profit margin had brokers reaching for the superlatives. Peugeot had "crushed," nay "shattered," expectations, they said. "Remarkable," "Impressive," "Superb," crowed analysts (who should consider reviewing Broadway musicals). One almost felt sorry for French compatriot Renault, whose mere 4.7 percent first-half automotive operating margin would have stolen the show usually.

Peugeot appears transformed. Its average margin between 2001-2015 was a pitiful 1 percent and, not that long ago, bankruptcy seemed possible. But having generated 1.8 billion euros ($2 billion) in free cash flow in the past six months, the automotive division now sits on almost 6 billion euros of net cash.

Importantly, this looks like the fruit of old-fashioned hard work on labor costs and productivity, something French carmakers weren't exactly famous for in the past. European car markets are growing, but Peugeot's benefits from that were more than offset by adverse currency movements in the first half of 2016. The profit improvement came chiefly from savings in production and raw materials.

French Resourcefulness
PSA's high profits stemmed chiefly from finding savings in purchasing and production
Source: PSA presentation

Is this sustainable? Peugeot faces a fraught period in a post-Brexit U.K., which probably accounts for about 8 percent of sales. So far British volumes have held up, but a weaker pound will affect euro-denominated revenues and pricing may deteriorate.

The carmaker's hard-won efficiency should make it more resilient, allowing it to survive if the U.K. flops or China sales slow further. An attractive line-up of new models (including the reborn DS) will support profit. There's a lesson here for Volkswagen (and who would ever have imagined lowly Peugeot handing one of those to the mighty Germans?). The first-half operating profit margin at VW's core namesake brand was just one-quarter of Peugeot's.

German Inefficiency
The VW brand's profitability lags far behind its French rivals. VW-owned Skoda is doing even better.
Source: Company reports
*automotive division, where applicable

If VW stopped pandering to trade unions and introduced a modicum of efficiency to its overstaffed factories, profit really could improve. Just look at its success with Skoda. That would restore some pride to German manufacturing, and help pay the massive dieselgate fines coming VW's way.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Chris Bryant in Frankfurt at cbryant32@bloomberg.net

To contact the editor responsible for this story:
James Boxell at jboxell@bloomberg.net