How Carlos Tavares turned PSA into an ATM

Carlos Tavares has once again done the impossible: he has remained profitable despite the Covid-19 crisis that has decimated the global automotive industry with sales down by up to -85% in some of the biggest markets (Europe, China). PSA Group announced a 34.5% drop in turnover for the first six months of the year to 25.1 billion euros. The group’s current profit fell by 84.5% and the profit of the automotive division by 72.5%, but remained positive, with 517 million and 731 million euros. This brings the group’s current operating margin to 2.1%. We are not far from the 8.5% achieved in 2020, but given the context, this performance is a miracle.

Of course, the group was helped to a large extent by measures in partial unemployment (and thus taxpayer subsidies)… Nevertheless: PSA was subject to the same risks and did not reach for a state-guaranteed loan, unlike its compatriot Renault, or awkwardly, its future merger partner, Fiat Chrysler Automobiles (FCA).

A culture of thrift

For Carlos Tavares, this above-average performance is the fruit of the managerial culture he instilled upon his arrival in June 2014, which he summed up in one word: frugality. Lower costs, lower production areas, platform sharing, economies of scale with the acquisition of Opel or shared production (with Toyota, e.g. on light commercial vehicles, or micro-city cars, etc.), Carlos Tavares’ method still seems to be proven. It is the third time he has impressed the markets: in 2015 by completing his Back to the Race industrial recovery plan a year early, in 2018 he made money with Opel just a year after its takeover and after 15 years of losses, and therefore, today after half a year of crisis, the scale of which is unprecedented in history. Carlos Tavares also promised to continue cost-cutting efforts, reflected in the famous “break-even point” (breakeven point), which stood at 2.8 million cars in 2013, falling to 1.6 million in 2019.

Paradoxically, PSA owes this performance to its biggest weakness: exposure to the European market. More than 80% of its sales are located in the old continent, which has always been considered excessive for the group to diversify its income. But the European market is also the most profitable for PSA, which has launched a strategy to move upmarket under the unyielding leadership of Carlos Tavares under his popular concept of “pricing power”: the end of tactical sales, a more premium product strategy…

Moreover, the first measure taken in the acquisition of Opel was to close the so-called toxic distribution channels, which is a real vicious circle in the automotive industry. These are distribution methods (demonstration cars, sales to short-term rentals, excessive discounts) that have made it possible to generate volumes, but without profit, and above all, they change the price at resale, which discourages buyers even more.

A winning relocation strategy

This recipe has been widely proven in the renewal of the Peugeot range, whose 3008 and 5008 models have met with success not only in terms of volumes, but also in terms of options and levels of finishes. The lion brand seems to reproduce this recipe with the new 208 designed with much more premium specifications than the previous one, but also for the 2008.

Citroën’s relocation strategy continues to evolve. The new C4 should thus strengthen the movement after the success of the C3 and C5 Aircross. Opel just unveiled its new Corsa and just lifted the veil on the new Mokce, two models designed on the PSA EMP2 platform. The German brand, which has just suffered a decline in its market share in Europe, hopes to bounce back with these two very bulky models and better workmanship than the previous generation. Finally, there’s the DS, which continues on its merry way and continues to slowly but surely roll out its product roadmap. Although volumes still remain insufficient and too French-French, the group’s premium brand continues to establish itself in the European automotive landscape and contribute to the group’s profits. In other words, there is still room for improvement in terms of commercial performance in the coming years as brands deploy their product repositioning strategies.

Thus, PSA gained real firepower in terms of commercial efficiency and in terms of industrial efficiency. The operating margin of the automotive industry alone is thus close to 4%. Management even estimates that 4.5% across the group for the full year is possible, with a second-half recovery expected. Carlos Tavares was pleased that the current order book is up 15% while inventory is at an all-time low (-24% in one year).

Questions about the merger with Fiat

While this outperformance is excellent news for the French group and its employees, it raises questions about the balance of the merger agreement signed last December with FCA. Already at the time, market analysts noted that the 50/50 merger gave FCA shareholders a 40% premium. Since then, the gap has only widened, even more so since the Italian-American group was forced to resort to a loan guaranteed by the Italian state of more than 6 billion euros. However, for Carlos Tavares, the Stellantis agenda, the name the new entity will bear, has not changed a bit, estimating that it will take place in the first quarter of 2021, subject to the approval of the European Commission, despite its reservations that led it to launch the second phase of the investigation compliance with competition law. For the head of PSA, nothing has changed about the positive effects of the merger with FCA, both in terms of geographic complementarity and industrial synergies.

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