Peugeot Citroen leaves options open on possible tie-up

Reuters (Paris) - PSA Peugeot Citroën on Thursday left the door open to a possible alliance with a competitor to help the French car maker combat a fall in sales and tough market conditions in Europe.

Speculation has been mounting that PSA could tie up with another car company such as Fiat to deal with overcapacity in the auto industry.

The group's head of brands, Frederic Saint-Geours, said at a news conference on Thursday: "We do not exclude the possibility of accelerating what we're doing now through a bigger alliance, it's just that this alliance would need to meet a certain number of conditions - it should be in line with our strategy ... it should yield real synergies ... and the group should remain independent," he said.

Fiat Chief Executive Sergio Marchionne said earlier this week that Europe's auto industry needed to consolidate to reverse poor operating conditions and uncertainty in a market burdened by overcapacity and little or no sales growth potential this year.

A few years ago, alliance talks between PSA and Japan's Mitsubishi failed.

Some analysts remained to be convinced of the benefits of any tie-up.

"We wonder just what the merits of a tie-up with PSA might be, as both companies largely share the same set of problems and combining the two businesses will do nothing to address them," Credit Suisse analyst David Arnold wrote in a note on Tuesday.

PSA Peugeot Citroen's strategy is to focus on emerging markets and premium brands to cope with the overcapacity and a further expected decline this year in car sales in the mature European market.

Europe's second-biggest car maker after Germany's Volkswagen said the number of cars it sold last year fell 1.5 percent to 3.5 million as expansion in emerging markets failed to offset a decline in its market share in crisis-hit Europe.

Overall, PSA expects the European car market to fall 3 percent this year, dropping more in the first half. But 5 to 10 percent growth in emerging markets such as China, Latin America and Russia would help the global auto market grow 3-5 percent.

PSA group unit sales fell 6.1 percent in Europe, shaving off 0.9 points of market share, but grew 10.6 percent in Latin America, 7.6 percent in China and 34.8 percent in Russia.

But prices had come under severe pressure in Europe by September, and performance varied widely across the region, PSA said. The company blamed its loss in market share - down to 13.3 percent - entirely on the subcompact segment.

Saint-Geours said PSA would refrain from luring new customers in Europe by cutting prices for its vehicles and still believed the focus on higher-priced segments that had shown resilience last year would continue to pay off.

"Our challenge will be to control costs," Saint-Geours said. "We're not going to look for market share in Europe at any cost."

PSA shares rose 6 percent to 13.71 euros by 1258 GMT, beating a 2.4 percent rise in the car index.

Analysts said the stock, trading at 4 times its expected 2012 earnings per share, was catching up after losing 29 percent in three months. One London-based analyst, who declined to be named, cited as a positive an improvement in the group's premium vehicles.

PRICE VS VOLUME

PSA has been expanding in fast-growing emerging markets by launching several new car models. It is replacing ageing models in the key subcompact B category, like the Peugeot 207, and has shifted its focus to up-market models such as the C4 Aircross.

"This is the core of the debate: volumes are necessary when you're a mass manufacturer but PSA also has to keep prices coherent with its aim to position itself above competitors," said Philippe Barrier, an analyst at Societe Generale.

Cars from Fiat and France's Renault, which has made a foray into low-cost cars with the Dacia brand, are generally lower priced.

The group had already warned in October that its core automotive division would likely post a loss in 2011 and, in a move to focus on its rebranding, appointed former finance director Saint-Geours as head of brands.

The proportion of PSA's car sales outside Europe expanded to 42 percent from 39 percent in 2010 as it goes for growth in emerging markets and aims to make its brands more global.

PSA kept its target of achieving 50 percent of sales outside Europe in 2015 and two-thirds in 2020.

PSA pointed out that growth of car sales in China, the world's top market, had slowed to cruising speed from fast growth in previous years.

The China Association of Automobile Manufacturers (CAAM) showed that car sales in the country climbed 5.2 percent in 2011, the slowest pace since the nation's car culture took off about 10 years ago, as consumers shunned local brands after Beijing scrapped tax incentives for small cars.

But solid demand for foreign brands led to total car sales of 14.5 million, about 2 million more than in the United States last year.