Two years after his impressively quick turnround of Peugeot’s struggling European operations, PSA Group chief executive Carlos Tavares says he is attempting the same tricky manoeuvre — but this time in China.

PSA’s Chinese car sales fell 19 per cent in the first half of this year, despite a 9.5 per growth in the wider domestic market, exacerbating a price war between global car brands and putting pressure on their margins.


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Mr Tavares says PSA’s China business — which last year accounted for a quarter of group sales — needs to be whipped into shape, and he has sent his former Europe chief, Denis Martin, to do it. “The guys over there are going to learn what it is to have a boss,” warns Mr Tavares from his office in Paris.

He claims the situation in China is now so bad that it resembles the European car market in the aftermath of the financial crisis. “We are facing conditions that are now similar to [what we saw in] Europe,” he says — and argues cost cutting is the only answer.

“In summer 2015, when the Chinese brands started to gain share, all of the western companies started to panic and throw money at the problem,” he says. “That destroyed the pricing power of the western brands.”

For PSA, this represents a complete reversal of fortunes. When Mr Tavares took over in 2014, China was the bright spot, with plans to triple vehicle sales by 2020, and Europe was the financial disaster. Six years of declining car sales on the continent and a high cost base had led to five years of operating losses — which ultimately forced the group into a €3bn bailout from the French state and China’s Dongfeng.

In the two years since then, however, Mr Tavares’s reforms have breathed life back into the group. He reduced the number of models in Europe, squeezed suppliers, cut labour costs and raised prices — winning the plaudits of investors and analysts.

Helped by a recovering European car market, he brought the group back into the black. PSA made a €1.2bn profit in 2015, compared with a €555m loss in 2014. Max Warburton — at the time a Bernstein analyst, now at Morgan Stanley — was so impressed by the turnround that he likened PSA’s efforts to “splitting the atom, walking on the moon and mapping the human genome”.

Today, however, Mr Tavares says he needs to repeat the performance in China. Cost cutting there, he argues, needs to be fundamental and structural, just as it was in Europe.

“You need the whole company to accept the new environment, including pricing, purchasing, and the human resources team,” he explains. “[Everyone] needs to adapt in an area where you are losing net revenue per unit.”

If PSA is to achieve its cost cutting targets in China — a 10 per cent reduction every year for three years — Mr Tavares says the operation must change its culture, which is not sufficiently cost-orientated.

He believes employees who experienced China’s boom years — “where any car you throw at the market grows” — have not been able to adjust to the new environment. “It’s difficult to accept that the growth is now slower and you have to operate differently,” he says.

A change of culture was also Mr Tavares’ main challenge when first tackling PSA’s European operations. In 2014, he told the Financial Times that “making money” had for too long not been the ethos of the family-owned company, and that had to change.

In addition, he believes PSA’s turnround ambitions in China will be boosted by the “bit of luck” of having three new product launches scheduled for this year.

These launches are for larger crossover models, which are increasingly favoured in the local market, but have been lacking from PSA’s product range.

“One of PSA’s key problems in China is they are relatively overexposed to the smaller sedan segment, whereas all the growth has been in SUVs, explains Dominic O’Brien, analyst at Exane BNP Paribas. “The SUVs they do have, are not in a good point of their product cycle.

Mr Tavares was in China last week to inaugurate a new plant in Chengdu in southwestern China, which is intended to fix this problem. It will have the annual capacity to manufacture 300,000 Citroen and Peugeot vehicles. In total, the group plans to introduce 18 new models in China by 2020, including five SUVs by 2018.

However, the price war between foreign carmakers in China is not over, Mr Tavares admits. “It will be fierce,” he says. His strategy will be to resist cutting prices as much as possible — even if it means losing some market share — while continuing to cut costs.

“In Europe . . . we came up with a reasonable balance, even though we sometimes lost some [market] share,” he says. “This is the wisest thing that we can do today.”

But he says that, most of all, PSA needs to “ensure that we are hard on costs, so that we protect the margins even when the price war gets tougher. At the end of the day you need to protect the margins”.

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