PSA eyes new start in Chengdu

Workers on the production line of a plant operated by Dongfeng Peugeot-Citroen Automobile Ltd in Wuhan, Hubei province. [Photo/Agencies]

Turnaround is part of a bailout by Dongfeng two years ago

PSA Group, caught in a China sales slump despite an expanding market, will inaugurate a seventh factory in the world's biggest car market this week, focused on producing sport utility and multipurpose vehicles for its Peugeot and Citroen brands.

The plant in Chengdu in southwestern China will have an annual capacity to manufacture 300,000 Citroen and Peugeot vehicles, as well as the local Fengshen nameplate, as part of its joint venture with shareholder Dongfeng Motor Co. Production will start at the end of the year.

PSA's joint venture sales in China dropped more than 19 percent in the first half to 297,000 units despite a tax cut boosting overall industry demand. The company is now planning to introduce 18 new models by 2020 in the country - including five SUVs by 2018 - to plug a gap in its lineup of mainly sedans at a time when increasingly affluent Chinese consumers are favoring larger vehicles.

It has also replaced the executives leading the Asia region and DPCA joint venture and is focusing on keeping production costs in check.

Chief executive officer Carlos Tavares needs to jump-start growth in China in order to complete the turnaround that begun with Dongfeng's bailout of PSA two years ago. As part of a plan called "Blue Upper", the company aims to sell 1 million cars in China by 2021 while lowering production costs by 20 percent from 2015 levels. Last year, 63 percent of PSA's vehicles were sold in Europe, versus 25 percent in China.

"The main factor impacting their sales is the lack of new models, the second one is a mismatch between what is in demand and what the company is offering" in China, said Benjamin Cavender, a Shanghai-based analyst at China Market Research Group.

"The new models are going to help them right away, but it's also a multi-year process of supporting the brands and investing in their presence here."

The Chengdu factory will boost DPCA's total capacity from 750,000 units a year. The partners already operate three plants in Wuhan, in central China's Hubei province.

Bloomberg