Look Who's Getting Ready to Pass Volkswagen

But if Peugeot grabs the lead, how long can it stay ahead?

Move over, Volkswagen (VLKAY ); make way for Peugeot (PEUGY ). The snappy Peugeot 206 last year overtook VW's once-indomitable Golf compact as the best-selling car in Europe. Now Europe's No. 2 auto maker, France's PSA Peugeot Citroën is close to edging out reigning champion VW in unit sales of cars and light commercial vehicles.

Can the French make the final sprint? PSA may well pull ahead of VW in the first months of 2003, analysts say. But it won't be easy to stay in the lead. VW and other rivals now suffering from aging lineups are primed to launch new models later this year, including a restyled Golf, which could erode PSA's gains. Still, the French auto maker's steadily rising market share in Europe -- 16% for passenger cars as of February, up from 11% in 1997 -- is an achievement not easily reversed.

PSA Chief Executive Jean-Martin Folz, who took control in 1997, has built up market muscle with a steady onslaught of fresh, well-designed models. Sporty styling and peppy diesel motors have turbo-charged sales of PSA's two best-sellers, the 206 subcompact, priced at $12,500 and up, and the funky 307 compact, which starts at $15,800. The 56-year-old ex-Pechiney exec has no intention of slowing the pace. "We're going to accelerate the number of cars we introduce," says Folz, who aims to ramp up production to 4 million cars by 2006, from 3.3 million currently.

PSA's factories already are running at full tilt. Sales are up 55% in four years, and PSA's 5% operating margin is a couple of points above those of mass-market rivals. Last year, sales climbed 5.4%, to $58 billion, bolstered by winning models and growth in emerging markets. Operating profit rose 9.8%, to $3.1 billion. Smith Barney Citigroup forecasts PSA's sales will advance 3% this year to $60 billion, despite a 2% decline in the European auto market.

Also driving Europe's new love affair with Peugeot are advances in innovation and quality that have narrowed the once-yawning gap with German rivals. "When it comes to the quality of French vs. German cars, there is very, very little difference in reality," says Neil King, senior market analyst for Global Insight's automotive group in London.

PSA's boss has won praise for building up separate brand identities for Peugeot and Citroën while merging manufacturing, research, model development, and purchasing to lower costs. He also stunned rivals with the launch of the 206CC convertible in 2000, a takeoff on the hot Mercedes SLK design with a metal retractable roof -- and overnight doubled the European market for convertibles. Now Folz is gearing up to introduce 26 models between 2003 and 2006, including the 407 sedan in 2004 and several multipurpose vehicles. "Folz has proved one of the most able managers in the business," says Smith Barney Citigroup analyst John Lawson.

From its solid European base, PSA is now investing heavily in Asia, Eastern Europe, and Latin America. Western Europe still accounts for four-fifths of all sales, but some of the strongest growth is coming from emerging markets such as China, where Citroën is ranked No. 4 and aims to boost sales by nearly one-third this year. Folz recently announced a $120 million outlay to boost capacity in its joint venture with partner DongFeng Motor Corp. Plus he's plowing $750 million into a new plant in Slovakia and $1.6 billion into a venture with Toyota Motor Corp. (TM ) in the Czech Republic.

Folz, an engineer who graduated near the top of his class at France's prestigious Ecole Polytechnique, never tires of fine-tuning his own machine. In January, he announced PSA would spend $1 billion to upgrade plant and equipment. He has already squeezed impressive gains from PSA's European factories, which operate non-stop, including weekends -- and no summer shutdown. That has boosted plant utilization to 117%. If Folz can steer his factories to cutting-edge performance while conquering far-flung markets, VW will have more to worry about than losing its European crown.

By Gail Edmondson in Frankfurt

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