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Business

Peugeot hoping to duplicate Asia-funded turnarounds seen at Jaguar, Volvo

FRANKFURT -- PSA Peugeot Citroen is looking to emulate the turnarounds of two other European carmakers that have been fueled by the injection of Asian cash. 

     The money-losing French automaker on Feb. 19 announced a capital tie-up that will increase its coffers by 3 billion euros ($4.12 billion). China's Dongfeng Motor Group and the French government each will acquire a roughly 14% stake for 800 million euros, and the founding Peugeot family's stake will drop to around 14% from its current 25.4%.

     The news has not generated much excitement in France, where there is ambivalence toward the power of "red capital," as Chinese financing has been called.

     "Peugeot and red don't go well together," one consumer there quipped.

     Even some industry analysts in France argue that the move will do more harm than good. Peugeot, however, has decided that a formula in the mold of the ones that have healed Jaguar Land Rover and Volvo Car has a good chance of working for it as well.

Clawing back

Peugeot desperately needs new capital, Chinese or not. It is facing its biggest crisis since its founding in the 19th century. Its new car sales in 2013 totaled about 2.82 million vehicles, down more than 20% from three years earlier.

     Jaguar Land Rover staged a spectacular comeback after Ford Motor in 2008 sold the brand to Tata Motors of India for $2.3 billion. At that time, Tata's move was considered a gamble. But the British automaker's sputtering sales have since come back to life and are generating handsome profits.

     Jaguar Land Rover has stepped up its marketing and sales in emerging countries while also cutting costs. The luxury carmaker engineered a staggering fiftyfold jump in net profit over the four years to the end of March 2013. This profit recovery has been driven mainly by strong sales of Range Rover SUVs in emerging countries. 

     Despite sluggish sales of the Tata Nano, the strategic subcompact launched to great fanfare, group net profit for the October-December quarter tripled from a year earlier to 48 billion rupees ($773 million), four times more than Tata's parent-only profit. In other words, Jaguar Land Rover was responsible for the great majority of the Indian carmaker's profits.

     Europeans continue to manage the British automaker. CEO Ralf Speth, who spent more than 20 years at the likes of BMW and Ford, said Jaguar Land Rover's strong earnings performance is "a testament to the quality" of the company's product offerings. 

Knowing where to go

Then there is Volvo of Sweden, which received capital from Zhejiang Geely Holding Group of China after Ford sold its ownership of Volvo in 2010. Because of its heavy dependence on European markets for sales and profits, Volvo fell into financial trouble amid Europe's debt crisis. Its unit sales and profits plunged in 2012. Volvo is expected to report a net profit for 2013.

     Geely has not meddled in the company's management, and Sweden has continued to be its research and development center. CEO Hakan Samuelsson stresses that Volvo is managed as an independent company to maintain its high brand value. 

     Though Geely gives Volvo a long leash, there are plans to cooperate more. They have agreed to jointly develop a next-generation compact and share chassis. Volvo will lead the development of the new vehicle, which will be sold under a different brand.

     In China, Geely's marketing emphasizes the reputed safety and eco-friendliness of Volvo cars. Geely has been steadily expanding Volvo's China dealership network. In July, Volvo's first assembly plant in the country came onstream, in the southwestern city of Chengdu. The new plant has the capacity to make 125,000 vehicles a year.

     Geely has set a global sales target of 800,000 units for 2020. The ratio of China sales to overall sales is to rise 11 percentage points from now to 25%, according to the Chinese company's road map.

     There is no guarantee that Peugeot's tie-up with a Chinese automaker will succeed. The company also announced the same day it revealed the deal that it had a net loss of 2.317 billion euros in 2013, marking the second year in a row of loss. The automaker is heavily dependent on European markets, and its profit outlook remains murky.

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