Peugeot: From Crushing Losses to a Meteoric Turnaround
Once at a crossroads between failure and radical change, Groupe PSA has transformed from a loss making entity to a top industry contender within a short period of six years. Euronext Paris listed stock was worth $3.94 a share on November 9, 2012: $1,000 invested in it at the time would grow to $6,667 by 17 August 2018 when shares went up highest in price to $26.27 a piece. Between 2014 and 2018, operating income rose 529% from €905m to €5.6b.
The year was 2011, and the world was reeling under the ramifications of the Great Financial Crisis. The automobile industry, although bearing no direct linkage to the financial debacle, was not left unscathed. Demand decreased substantially which called in massive government bailouts to keep some of the automakers afloat. ‘Cash for Clunkers’, for example, encouraged purchases of new vehicles through trade-in options. The stimulus efforts, however, failed to address the industry’s long-existing structural problems. An aggravating factor was the deteriorating European economy, where record high unemployment rates and the looming debt crisis threatened the very existence of the Union.
As the magnate of PSA Group (PSA) — the second-largest carmaker on the continent — at the time, CEO Philippe Varin had a huge burden to carry. The European car industry was in free fall with car registrations at an all-time low. The hardest hit were Portugal down 30% in 2012, France -18%, Spain -17%, Italy -15%, and the UK -4.4% — justifying Europe’s newly assigned moniker as “the sick man of the car industry”. And yet, PSA was excessively reliant on the latter: the region accounted for almost 60% of total sales, two-thirds of it coming from France, Spain and Italy. Globalisation, evidently, had not been on the carmaker’s agenda.
In 2011, PSA recorded losses of €497m and burned through €1.6 billion in cash. The following year, it was spending €200m of cash a month. In desperation, Mr Varin sold the company’s profitable logistics business and some real estate (worth €1.5b), initiated cost-cutting measures, shrank R&D expenditure, and signed a joint procurement partnership with GM to bring down operating costs. But this was not enough to allay public concern; subsequently, Moody’s downgraded PSA debt to junk status.
PSA found itself in a lose-lose situation, crippled with problems on all fronts:
- Chronic underutilisation of manufacturing plant capacity at 60% (below the minimum recommended threshold of 75%);
- Rising labour costs in France where wages grew 31% over a 10-year period from 2002 to 2012 (versus 19% in Germany);
- High borrowing cost that was three times that of Volkswagen;
- Cash burn of €3b for 2011 and 2012;
- Finally, a much older and less attractive car range than that of competitors.
Back in the race
Enter Carlos Tavares, a former executive at Renault, who ended up at the helm of ailing PSA in late 2013, after a dramatic fallout with a titan of the global auto industry Carlos Ghosn. The arrival of Tavares marked the beginning of a great turnaround for PSA.
The new CEO inherited a company that was right in the eye of the storm. For PSA to survive, it needed cash, a new business model and a new image to boot. These were essential to bury the legacy of high cost, government interventions, products that were enslaved to offering customers incentives, and a choking reliance on “the sick man of the car industry”.
As the first order of business, Mr Tavares introduced his “Back in the Race” strategy, which upon successful completion was replaced with “Push to Pass” in 2016. These have taken PSA from a seemingly irremediable loss maker (down €5.7b in 2012) to a strong profitable company (earning €3.2b in net profit in 2018) that it is at present. Tavares’ winning formula has been three-pronged:
- Simplicity of management style and directives;
- Focus on winners to increase competitive value; and
- Customer-centric incremental innovations to transform into a total mobility provider.
This prescriptive toolkit has proven extremely effective not just for PSA, but also for Opel Vauxhall, a company that had been in the red for 20 years before it was acquired by PSA. And if Tavares has his way, it will also pave the way for a highly synergistic merger between PSA and Fiat.
Strategy 1: Simplicity through clear direction
Bold aspirations and a charismatic CEO are good to have but inadequate ingredients to a successful turnaround. Pundits would agree that human capital is the most critical ingredient in any company. Steering a workforce of more than 180,000 people (reported around year 2014) promised to be no small feat for Carlos Tavares.
At the time when the company hit rock bottom, the employee morale and productivity were too at an all-time low. Conscious of it as well as of France’s strong labour union traditions, Tavares set the stage right by acknowledging the employees’ hard work all throughout PSA’s troubled times and then emphasising their critical role in building change for a new era.
Direction and collective leadership had been missing in pre-Tavares PSA; this was remedied in two ways:
Inspiring a cultural shift through open accountability
The CEO laid out a clear recovery plan in terms of the direction the company was going to pursue and the deliverables that needed to be produced over the next 3–5 years. Tavares made these plans public, available for all employees to learn and follow, which inspired accountability and a strong individual drive to achieve the goals. In the words of analyst Philippe Houchois Jefferies, “[Tavares] has turned the organisation around in terms of excitement, willingness to work, the ability to believe that PSA can win. This didn’t exist for the past 20 years.”
Setting clear directives and benchmarks
Having inspired the workforce into action, Tavares needed to signpost the path to victory for the teams to take. This was achieved through clear benchmarks which realistically reflected the performance of the best automakers. Some of the benchmarks designed were objective in nature, such as worker productivity goals, R&D efficiency goals, reductions of fixed costs, sales targets, and free cash flow targets. Others were more aspirational, including being number one in terms of customer service, after-sales and maintenance.
A shared vision and transparency in communication made all the difference on a foundational level, motivating the PSA people to go the extra mile. And go the extra mile they did, surpassing the “Back in the Race” benchmarks in half the time (two years instead of four) and achieving some of the goals of “Push to Pass” a good three years before the stated timeline.
Exceeding expectations
- *In proportion to revenue
- **From 2015
Source: PSA Annual Reports
Strategy 2: Focus on the winners to go global
When Mr Tavares took the reins in early 2014, PSA was “not seen as a player that had global clout” and its cars were largely considered at best second-rate to more prominent European brands. Such unpropitious public perception had a considerable negative impact on pricing, necessitating buyer incentives. These were eating into gross profits and operating margins, hence reducing the overall competitiveness of PSA.
The CEO’s solution was to consolidate resources to improve product quality. This was executed by way of product line thinning, concentrated manufacturing platforms and a mindset shift in car design.
Thinning product line
In 2014, PSA had 45 auto models; by 2022, Tavares targeted to reduce the number down to 26. This ambitious plan covered mainly passenger cars, introducing a positive reduction from 25 to 13, with Citroën specifically going from 15 to 7. Greater focus on fewer models ultimately allowed for better R&D allocation, design and marketing efforts. Admittedly, this was a risky move as eliminating car models could portend lower sales. And revenue was indeed affected at first; but over time, as the quality of vehicles improved, the sales have gone up considerably.
Focused production raised quality and margins
Source: Seeking Alpha
Concentrated manufacturing
If cutting down models was a bold move, this was seemingly an even more outrageous idea. At the time, PSA was operating over seven different types of car manufacturing platforms. (For a layman, a manufacturing platform is where the backbone of the car gets produced, including the underbody, suspension, engine frame, and skeletal structure — essentially, a common set of design, engineering and production methods that can be shared across different car models.) While a greater number of platforms brings variety to different types of cars, it increases production costs due to elimination of synergies. Tavares decided to scale down to just two manufacturing platforms: an ambitious car rollout plan was introduced with current models being replaced with new ones, and each model designed either under the EMP platform for compact cars or the CMP platform for larger vehicles. Through the migration of platforms, the company was able to improve the economies of scale and reduce its breakeven point from 2.6m cars sold in 2014 to 1.6m by 2016.
Car manufacturing platforms across makers
Source: 10x Research
Mindset shift to building “global” cars
It is useful to take in that car manufacturers make use of two distinct strategies to product development: premium brands such as BMW and Mercedes work toward building global cars, whilst lower-tier manufacturers adopt a more localised approach. PSA, however, had been sitting somewhere in the middle of this spectrum for a long time and perhaps was suffering from an identity crisis. As the incoming CEO, Tavares sought to move the brand up the value chain, favouring quality over the number of vehicles sold. Customisation to unique geographies was replaced with a wide selection of classes or upgrades for specific car models. The sheer variety of extra features on the offer helped PSA command better pricing, increasing the returns on each vehicle sold. However, while this “global” strategy seemed to be driving higher sales in Europe, other markets were taking a dip. Between 2015 and 2018, sales in Europe grew from €38b to €58b but declined in Asia (including China) from €9b to €7b.
Car sales and market share in Europe, 2012–2018
Source: Seeking Alpha
The strategy of focus was meant to essentially fix two things:
Pricing. The Tavares formula, if there is one, prescribes focus on improving pricing and achieving a product-market fit even at the cost of volume. A positive change in the company’s margins is telling: gross profit margins hit an all-time low in 2012 with 13.47% (indicating a low value from car sales) which was then followed by a steady advance, as Tavares came in, to more than 19% in 2018 (surpassing the comparative indicators of German luxury automakers).
Market penetration. An intended corollary to trimming product lines is a decline in sales. PSA’s market share numbers during the early years of Tavares’ strategy reveal that a slight decline in topline figures was indeed present: global sales declined overall between 2012 and 2015. What kept the company afloat during the transition was a sharp reduction in the breakeven point for cars sold. Today, PSA is selling more cars than ever, despite having fewer models to offer. Market share in Europe has also climbed 63% in just two short years (from 9.7% in 2016 to 15.85% in 2018).
Strategy 3: Customer-centric incremental innovations
Although primarily a car manufacturer, PSA started channelling savings from automotive R&D to purposes meant to transform the company into an ecosystem builder. While most automakers would choose to focus on improving the after-sales and service experience, PSA embarked on a remarkably different campaign. Within two short years between 2013 and 2015, the group’s intention shifted from simple cost savings to a position of dominancy in the mobility space. PSA now helps people move around, buy spare parts, use IoT to diagnose problems, trade up cars, and even optimise ownership through rental.
There are three areas that PSA targets as a mobility provider:
Customer 360
Beyond sales and maintenance that are typical of an OEM, PSA aspired to offer a holistic service, eliminating as much friction as possible related to car ownership — whether that be through creating a sharing community for car enthusiasts, or launching connected services capable of diagnosing vehicle condition remotely, or helping drivers call roadside assistance in case of breakdown. The company has pursued a number of acquisitions to build a comprehensive ecosystem of service providers. Among them are Mister Auto, a leading e-commerce provider of replacement parts, and Aramis Auto that helps customers dispose of their cars. (The used car and spare part markets happen to be more lucrative than the business of selling new cars due to more flexible pricing options). All in all, PSA’s fixation on customers has paid off, for they are appreciative and willing to pay good money for solutions to their pain points.
Building bridges with potential customers
PSA has found an interesting way to engage with people who do not yet own their cars. The company has launched ‘Free to Move’, an application based in North America and Europe, facilitating car rental for individuals and fleet management for rental companies. In its first year of operation in 2017, the platform attracted over 500,000 active users for whom more than 430,000 cars were available for rent. At present, it commands a revenue of €124m on an annual basis. One tangible benefit for PSA has been its forging of gainful ties with potential buyers to enable targeted advertising based on user data.
Transforming the sales process
One of the biggest challenges faced by car manufacturers is the lack of initial touchpoints with their customers as dealer networks tend to cut them out. Not only does this impact margins, but it also prevents profitable cross-selling/upselling opportunities. More importantly, it makes it harder for the manufacturer to collect valuable feedback which precludes customer driven innovations.
As an answer, PSA has started selling cars online, for two reasons. Firstly, the realisation that 9 out of 10 customers will search for information online before approaching a dealer. Secondly, the possibility of better margins through a partial reduction of fees charged by the dealers.
While dealer intermediation has not been eliminated just yet (they still get paid for carrying inventory and delivering cars to customers, thus maintaining customary human touch), what’s impressive is how PSA’s e-commerce offering is completely transforming the customer journey — from being able to get quotes on their old car, to choosing specific modifications for their new cars, to analysing different financing options available. In contrast to other carmakers that offer options to buy online, PSA has been the first to offer a fully integrated end-to-end experience.
PSA’s customer-centricity has resulted in major positives:
Lower customer acquisition cost. A greater number of enhanced services on the offer has made it possible for PSA to expend less sales effort. As a result, operating expenses dropped from 11.53% of revenue in 2012 to 8.95% by 2018. Given the early stage of realisation, this investment is likely to return a much higher value moving forward. Per car, the company’s overhead cost reduced from €2,156 in 2012 to €1,707 in 2018.
Improving revenue mix. By providing customer services across the value chain, PSA has been able to capture greater lifetime value per customer. Hence, its service revenue has risen consistently since 2013. This also has had a significant impact on PSA’s cash position; it commanded one of the highest free cash flow margins among major global car makers in both 2017 and 2018.
What of the lessons?
Here are some suggestions on how you could apply the lessons learned here in your own venture:
Create and communicate clear benchmarks: Rally your team toward a common purpose, supported by clear goals which will keep conversation focused on what matters most to your business. Over a span of just six years, Carlos Tavares created three benchmarked plans for PSA to follow.
Focus on one or just a few products to drive competitive value: Identify your company’s core function and focus on that. PSA’s transformation is a practical lesson on the value of staying lean, even during periods of business growth.
Work on creating customer-centric incremental innovations: Customers are the key to fuelling your referral business. Find ways to create more customer touchpoints and exploit them to derive greater value. In this pursuit, PSA has developed the most innovative ecommerce site of all major car companies.
