PARIS--Investors abandoned PSA Peugeot-Citroen SA shares in droves
Friday, driving their price down almost 9% at one point, as a
potential credit downgrade and a worsening outlook for the European
car market overshadowed PSA's plans to shed 8% of its French
workforce.
Moody's Investors Service Inc. warned Friday that it had begun a
review for a possible downgrade of PSA's debt rating, following the
car maker's announcement Thursday that it was cutting 8,000 jobs out
of roughly 100,000 in France, amid increasing losses at its automotive
division.
At the same time, No. 1 European car maker Volkswagen AG (VLKAY,
VOW.XE) said Friday that, despite seeing growing sales, it expects the
European car market--which fell more than expected in the first half
--to see greater challenges in the second.
"The economic situation, particularly in Western Europe, remains tense
and difficult," Volkswagen sales chief Christian Klingler said.
PSA was trading at EUR6.49 at 1256 GMT, down 7.5% from its Thursday close.
The broader problem is that PSA's cost cuts are just a drop in the
bucket as it burns cash, analysts said. The company faces long road to
turnaround following years of strategic missteps and a shrinking share
of the European car market, which has continued a downward spiral.
Closing a major plant--while provoking outcry in France--will only
save EUR100 million to EUR200 million a year, and will involve
significant restructuring costs first, analysts said. By contrast, the
company said it its automotive business lost roughly EUR700 million in
the first half.
"You've made a very small cut, for what appears to be a very large
problem," said Michael Tyndall, an analyst at Barclays Capital. "It's
difficult to see how in the current environment they can turn things
around."
Earlier Friday, PSA's chief executive called for a massive cut in the
labor charges companies in France have to pay, as the
family-controlled auto maker tries to influence pending government
proposals to support the sputtering auto industry.
Socialist President Francois Hollande came to power in May pledging to
rethink the county's industrial policy and stem job losses. He
appointed Arnaud Montebourg, from the left wing of the Socialist
party, as industry minister, a post which he renamed as "the minister
for the productive recovery."
But as France and the rest of the euro zone grapples with debt woes
and a sagging economy, car makers are confronting their own crisis.
Auto sales have fallen in each of the last four years and are on track
to post a fifth consecutive decline in 2012. The situation has left
many auto makers with far more assembly plants and workers than they
need. Powerful labor unions and most European governments have long
fought any efforts to close factories.
In the battle for survival, Peugeot Chief Executive Philippe Varin
said labor costs must be cut. Peugeot has been consuming EUR200
million in cash a month over the past year.
"We have the most expensive labor costs in Europe," Mr. Varin said in
an interview with French radio station RTL. "In France, we need to
lower costs weighing on labor in a massive way."
At EUR34.20, hourly labor costs in France are 14% higher than in
Germany and nearly a fifth higher than the euro-zone average,
according to Eurostat data published earlier this year.
The French government, which has pledged to restore French
competitiveness, is not convinced the solution is cheaper labor. Labor
costs make up only 13% of the overall cost of making mass-market cars
in Europe, according to data from Credit Suisse.
"What will save the auto sector isn't just producing cheaper cars to
the detriment of employees and their spending power," government
spokeswoman Najat Vallaud-Belkacem said Friday in an interview on
French TV channel i-Tele. "It's a question of producing better quality
cars that sell better -- that's French competitiveness."
The losses that mass-market car makers like Peugeot, the Opel/Vauxhall
unit of General Motors (GM), Ford Motor Co. (F), and Italy's Fiat SpA
(FIATY, F.MI) are racking up in Europe contrast sharply with record
sales and fat profits at Germany's luxury auto makers like BMW AG
(BMW.XE) and the Audi unit of Volkswagen.
The French government has begun to respond to concerns over high labor
costs by launching a likely lengthy negotiating process with union and
business leaders. The government is looking to distinguish itself from
former President Nicolas Sarkozy, who officials claim blocked progress
and angered unions by imposing decisions without sufficient
negotiation.
As well as extending emergency loans to French auto makers on
condition they didn't close factories, Mr. Sarkozy responded to the
economic downturn by introducing subsidies to encourage drivers to
trade in old cars for new, more efficient models, something Peugeot's
cross-town rival Renault SA (RNO.FR) has suggested the government
should reconsider.
But new subsidies look unlikely at a time when France is racing to
rein in its budget deficit and lower its debt. Mr. Varin said a new
round of scrapping incentives are only a temporary fix.
Ms. Vallaud-Belkacem said it was a bad idea in the first place that
had created damaging distortions in the market.
"We need to find a solution for all employees, and stop acting like a
firefighter all the time and make a plan for the automobile sector,"
Ms. Vallaud-Belkacem said.
Volkswagen's robust first-half sales performance, showed again the
benefit of its large footprint in more dynamic markets abroad and
owning Audi, its booming luxury-car brand.
Volkswagen, second only to GM in sales, said it delivered 8.9% more
vehicles at 4.45 million units worldwide as gains in North America and
China offset weaker demand in parts of western Europe. Sales in June
were up 11% in 798,500 units.
Write to Sam Schechner at sam.schechner@wsj.com and Inti Landauro at
inti.landauro@wsj.com
-William Horobin and Christoph Rauwald contributed to this report.
(END) Dow Jones Newswires
July 13, 2012 02:55 ET (06:55 GMT)
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