How new PSA CEO Carlos Tavares plans to revolutionise the ailing company.

New PSA/Peugeot-Citroen CEO Carlos Tavares takes over an automaker that has lost more than 7 billion euros in the last five years because he says, "making money was not the core value here." That is one of the first things the 55-year-old former No. 2 at Renault plans to change. Other challenges include reducing PSA's bloated car lineups, strengthening the automaker's presence in China, adjusting the company's European production footprint and navigating the potential minefields that come with having to please powerful new shareholders.

Tavares welcomes the long list of tough tasks. "When you have the opportunity to contribute to a turnaround, I think that's exciting," he told Automotive News Europe.

On April 14, Tavares, PSA’s third CEO in five years, will unveil his Back in the Race recovery plan for Europe’s second-largest automaker after Volkswagen Group. The straight-talking Portuguese national shared his views on the problems PSA faces at the Geneva auto show last month. Based on his comments, as well as feedback from industry watchers, the automaker has a number of challenges ahead to end its massive cash burn and position itself for long-term success. Tavares’s key tasks include:

• Increasing operating profit: Tavares says to do this PSA will need to sell its cars “at the right price.” It also must reduce production costs and work efficiently with suppliers.

• Reduce working capital: Tavares says a key here is to streamline PSA’s inventory of unsold vehicles, which he finds much too high.

• Manage cash better: Tavares wants all investments to provide an adequate return. He believes PSA should abandon car segments where its models are unprofitable and that it needs to avoid oversaturating segments.

• Invest in DS: Tavares wants to transform the Citroen upscale subbrand into an internationally recognized stand-alone luxury marque that can compete with Germany’s premium brands.

• Focus on China: PSA needs to build even stronger ties with partner and part owner Dongfeng Motor.

• Reposition in emerging markets: PSA must reduce its product lineups in money-losing countries such as Russia and Brazil.

Sharper focus

Tavares says PSA will stop making unprofitable models and focus on vehicles that generate high volumes and strong margins, something he did successfully while he was chief operating officer at Renault from 2011 until last summer. “His accomplishments at Renault are remarkable and show what is possible,” Sascha Gommel, a Frankfurt-based analyst at Commerzbank, told Automotive News Europe.

One segment where PSA has potential to streamline is compact cars. With the recent addition of the Citroen C4 Cactus, PSA offers five compact hatchbacks for two brands (the others are the Citroen C4 and DS4 and Peugeot 308 and 3008). Only Volkswagen Group offers the same number of compact hatchbacks, but it spreads them over three brands (Audi A3, VW Golf, Golf Plus and Beetle and Seat Leon). There was a huge difference in demand as VW Group’s compact hatchbacks had combined sales of 816,000 in Europe last year compared with PSA’s 287,000, according to data from JATO Dynamics. Analysts say one reason for the big difference is that PSA models lack key features offered by VW Group models.

“The Peugeot 308 competes against the Golf, but it does not have four-wheel drive or an automatic transmission. Tavares clearly needs to change PSA’s product portfolio,” said Florent Couvreur, a Paris-based analyst at CM-CIC Securities.

Not so French

Couvreur sees two other problems that Tavares needs to address: PSA’s lack of scale and its excessive French-ness. “If it can’t share development costs with other partners, then PSA will continue to lose money,” she said. “For example, PSA’s agreement with Ford for diesel engines works well, now Tavares needs to seal other agreements like this.”

Couvreur also believes that PSA needs to focus more on making cars that appeal to customers outside its home market. “Today PSA makes cars for French people, with a focus on diesel engines, manual transmissions and hatchback bodies. Tavares must make sure that PSA puts cars in the pipeline that people will want to buy outside of France and around the world,” she said. That means more gasoline engines, more automatics and fewer hatchbacks.

PSA is set to announce that it will spend more on r&d and that it will develop technologies for a smaller range of cars that will appeal to a wider base of customers worldwide, with less emphasis on France. The money for future investments will come in part from a 3 billion euro capital increase, in which China’s Dongfeng and the French state will initially contribute about half the money in exchange for stakes of 14 percent apiece. Banco Santander also will contribute funds through a partnership with PSA’s lending arm.

In terms of brand positioning, Tavares says the 308 compact, the 2014 European Car of the Year, epitomizes what he sees as Peugeot’s strengths: a convergence of the rigor, seriousness and robustness typical of a German car with the emotion of a Latin brand. He also considers the C4 Cactus a benchmark for future Citroens because of its comfortable design, ease of use and intelligent innovations.

Better pricing in Europe

Analysts say that to get PSA to break even by 2016 or sooner Tavares must reduce PSA’s cash burn by increasing the efficiency of its European production network and closing the pricing gap with competitors. “If Tavares can close the price gap with Volkswagen by 10 percent … that alone could fix the bottom line,” said Paris-based Deutsche Bank analyst Gaetan Toulemonde.

Commerzbank’s Gommel said Tavares proved at Renault that he knows how to turn around a brand’s pricing. “He can improve pricing more easily than when he was at Renault because PSA has a stronger brand reputation than Renault has.”

PSA shut its plant in Aulnay, France, last year and is looking at ways to lower production costs further in its home region. One way is to add models to the underutilized plants, but Tavares also wants to maximize the efficiency of PSA’s European factories, French newspaper Le Figaro reported. Tavares said in February that margins for the Citroen C-Elysee and the Peugeot 301, which are made in Vigo, Spain, are marginal and did not reflect an efficient use of capacity. “Tavares must improve PSA’s European footprint. Capacity is clearly an issue and existing capacity needs to be better utilized,” Gommel said.

Streamline Russia, Brazil

Tavares is expected to announce that PSA will streamline its offerings in South America and Russia. It is losing money in both regions, analysts say. PSA has a production capacity of 100,000 units in Kaluga, Russia, but the plant only produced 20,000 vehicles in 2013, French newspaper Le Mondereported. The automaker also offers more than 25 different vehicles in Russia, which Deutsche Bank’s Toulemonde says is too many, especially in a market that has been in decline since last year. “Tavares needs to sell fewer than 10 models there,” he said.

Added Commerzbank’s Gommel: “In South America and in other emerging markets where it already has local production, PSA must do better. It needs to improve its localization at its plants in emerging markets, where it continues to import too many parts.” Doing this would better protect PSA from exchange rate fluctuations, the analysts said.

Meanwhile, CM-CIC’s Couvreur pointed out that Tavares was instrumental in making Renault successful in eastern Europe and South America by offering limited ranges that sold in high volumes. “I think that PSA can be profitable in Brazil and in Russia in two to three years by adopting a more localized strategy. These two countries currently are Tavares’ problem markets,” she said.

Tavares enters PSA as the automaker is starting to gain traction in China. His job will be to strengthen the automaker’s ties with Dongfeng while avoiding potential conflicts over technology sharing. “Tavares must clearly make the boundary between PSA’s and Dongfeng’s technologies,” CM-CIC’s Couvreur said. She thinks that PSA needs to protect its expertise but fears that this will be difficult. “Dongfeng’s two representatives on PSA’s supervisory board will try to accelerate this technology transfer,” she said. Couvreur also fears that one day Dongfeng will leave the alliance with enough knowledge and technology to compete against its former partner. She says this has happened in China to companies such as Alstom and Airbus. “This is going to be a very touchy subject for Tavares,” she said.

More to do in China

Commerzbank’s Gommel said PSA’s challenge today, however, is expanding its presence in China and to do that it is relying heavily on Dongfeng. “PSA has fixed a lot of its problems in China, but it has more do. Clearly, the partnership with Dongfeng will help, but China still needs to become a more important part of its business,” he said.

Established in 1969 and based in the central Chinese city of Wuhan, Dongfeng already operates three factories with PSA in the world’s largest auto market. The partners plan to raise joint production to 750,000 vehicles by the end of 2015 from a record 550,000 units sold last year. Dongfeng wants to sell a combined 1.5 million Dongfeng and PSA vehicles a year in China by 2020.

Despite the big challenges that Tavares faces, the consensus is that he has the right experience, the right tenacity and the right amount of supervisory board support to fix PSA. “The Peugeot family has blocked certain decisions in the past that would have been good for the company,” Commerzbank’s Gommel said. “Tavares has a more independent board now that will not put the family’s interests first.”

Toulemonde also is optimistic about the new CEO’s chances. “Tavares’ track record speaks for itself,” he said. “You just have to look at what he has done at Renault, what he has done at Nissan and the perception the market has of him.”

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