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SHANGHAI — PSA Group and Fiat Chrysler Automobiles, in hatching plans to merge and create the world’s fourth-largest automaker, say they will not close factories.
They can probably keep such a promise in most markets, but not with China.
PSA and FCA each operate joint ventures with local peers in China, but all of the partnerships are in dire need of restructuring and downsizing.
While PSA and FCA haven’t disclosed how they plan to integrate their global operations, one of PSA’s two Chinese partners has decided to break ties with the French automaker.
On Oct. 28, three days before PSA and FAC disclosed the merger, Changan Automobile Co., based in the Southwest China municipality of Chongqing, placed its 50 percent stake in Changan PSA on the market via a local exchange that trades corporate assets and other equity.
Changan, which also runs an unprofitable joint venture with Ford Motor Co., can’t wait to free itself of the financial burden under the PSA partnership.
Changan PSA was established in 2011 in the south China city of Shenzhen to build and market Citroen DS cars. It has been bleeding losses ever since launching output in 2013.
As of September, the joint venture has racked up 4.9 billion yuan ($703 million) in losses over time, according to information disclosed by Changan.
PSA has largely failed to establish Citroen DS as a premium brand in China as it planned to do.
As a result, the joint venture, which can build up to 200,000 vehicles a year, has never sold a meaningful number of vehicles. Annual sales peaked in 2014 at around 23,000. In 2018, the number shrank to less than 4,000.
In the first three quarters of this year, Changan PSA only sold 2,030 vehicles, according to the China Passenger Car Alliance, a Shanghai-based consultancy.
After Changan disclosed plans to offload the stake in the joint venture, PSA’s China office said in a statement last week that the DS brand will “receive significant development” in China instead of exiting the market.
Given the extended downturn in China’s new-vehicle market, who might be interested in taking over the 50 percent stake in Changan PSA from Changan?
The most likely candidate would be Dongfeng Motor Group.
Dongfeng also operates a joint venture with PSA. In addition, it also holds a 12.2 percent stake in the French automaker.
Incorporating DS models in its product mix would allow the joint venture, Dongfeng Peugeot Citroen, to make a better use of factory capacity.
Dongfeng Peugeot Citroen, formed in 1992 in the central China city of Wuhan, produces and distributes Peugeot cars and Citroen’s lineup, except for the DS lineup.
Behind volumes generated by new models, especially crossovers such as the Peugeot 2008 and 3008, Dongfeng Peugeot Citroen’s annual volume reached a record high of 704,000 vehicles in 2015.
But the joint venture’s sales have since shrunk as other global automakers such as General Motors and Nissan Motor Co. add crossover models.
Dongfeng Peugeot Citroen operates four plants capable of annually churning out a combined 840,000 vehicles at full capacity, yet sales fell 33 percent to around 253,000 in 2018. In the first nine months of this year, deliveries plunged 56 percent to 91,049.
As the sales slump accelerated, Dongfeng Peugeot Citroen lost more than 2.5 billion yuan in the first half alone, according to the latest available financial information Dongfeng has revealed on the joint venture.
Like PSA, FCA’s China operations face challenges.
FCA in 2010 established a joint venture with GAC Motor Co. in the central China city of Changsha, which initially built cars for the Fiat brand. The partnership enjoyed robust growth from 2016 to 2017 on volumes generated by three locally produced Jeep models — the Cherokee, Renegade and Compass.
But the sales boom was short-lived for GAC FCA: Their plants in Changsha and the south China city of Guangzhou combined can produce up to 328,000 vehicles annually.
With the market slipping and other global brands such as Volkswagen launching more SUVs in China, sales at the joint venture quickly ran out of steam.
In April 2018, GAC FCA launched the fourth locally assembled Jeep model, the Grand Commander. Yet annual deliveries of the big SUV slumped 39 percent in 2018 to less than 125,200, according to GAC.
Neither FCA nor GAC discloses financial results for the joint venture. But such a small volume made it impossible for the joint venture to be profitable.
GAC FCA is FCA’s main business in Asia Pacific. Largely because of sales decline at the joint venture, FCA’s operations in the region finished 2018 with an operating loss of 296 million euros, versus an operating profit of 172 million euros in 2017.
The joint venture’s sales have dropped another 46 percent to 52,372 in the first three quarters of 2019.
Both PSA and FCA are operating at a small portion of their local production capacity as overall vehicle demand in China remains subdued amid a weakening economy.
The two automakers, looking to revive the operations, probably have no way out but to shut down some of the underutilized plants they run with local partners.