From the FT's Lex blog
Childish states of denial are always depressing. Luckily, however, they cannot last forever. Full-year results from French carmaker PSA Peugeot Citroën underscored - with much red ink - the overcapacity of Europe’s new car market and the urgent need for industry-wide cuts.
That, in turn, is an indictment of the political short-termism that lavished government aid on European auto makers three years ago to avoid plant closures.
Now, shareholders in Peugeot - which derives nearly 60 per cent of its vehicle sales from Europe, and has only limited (more resilient) premium vehicles to fall back on - are paying the price. Hammered by pricing competition and some loss of market share, Peugeot’s core auto business made an operating loss of almost €500-million in the second half of 2011, on sales of €20-billion. That wiped out first-half profits. Inventories are rising and, with a cash outflow of €1.6-billion, net debt rose to €3.4-billion by year-end (up from €1.2-billon in 2010), or 23 per cent of total equity. No wonder Moody’s is considering a downgrade to junk status.
Shareholders should not expect much short-term relief. Peugeot expects light vehicle sales in Europe to fall by 5 per cent in 2012 and investors anticipate only very modest growth in 2013. In France and Italy - big markets for Peugeot - Goldman Sachs estimates that sales this year could fall by as much as 8 per cent and 5 per cent, respectively.
True, Peugeot’s management is not sitting by idly. It says that asset disposals, including a stake in the Gefco logistics business, could raise up to €1.5-billion. Projected cost-savings in 2012 are being increased to €1-billion, and capital expenditure pruned. Peugeot aims to have half of its auto sales outside Europe by 2015. Trouble is, things are desperate now. On the bright side, Opel, General Motors’ European brand, could announce capacity cuts on Thursday, having already closed one Belgian plant. Peugeot should follow suit. Failing that, it could be time to revive long-touted Fiat alliance possibilities.