PSAPeugeotCitro6n Strategic Alliances Competitive for Advantage?

Casestudy Refercnceno 30634G1

Thiscasewaswritten by Sachin Govind, underthe directionofS SamGeorgg ICFAI CenterforManagement Research.lt intendedto be usedasthe basis is for class discussion ratherthan to illustrate eithereffective ineffective or handlinqof a management situation.The wascompiled case from published sources. @2006.ICFAI Centerfor Management (ICMR). Research No part ofthis publicationmay be copied, stored. transmitted, reproduced or distributedin anyform or medium whatsoever without the permission ofthe copyrightowner.

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"I don't want to boast, but I can say that we are probably the champions in the sphere of the joint projects."t - Jean-Martin Folz, President,Board of Directors, PSA PeugeotCitroen, in 2003. INTRODUCTION In February 2005, ?SA PeugeotCitoen (PSA) enteredinto an agreementwith Mitsubishi Motor Corp. (Mitsubishi)', the ailing Japanese maker. According to the terms of the deal, Mitsubishi car agreedto supply 30,000 udts of a new sports utility vehicle (SUV) every year to PSd which would then be sold under the Peugeot and Ciftoen marques. The deal enabled Mitsubishi to utilize its idle production capacity, and PSA to fill a major gap in its product range. The deal with Mitsubishi was typical of PSA's strategy of entering into alliances with other major automobile makers. Over the years, PSA has entered into long-term relationships with Renault S.A @enault)3,Fiat Auto SpA (FIAT)a, Ford Motor Co. @ord)5,Toyota Motor Corp. (Ioyota)", and BMW AG (BMW)'. Such allianceshave helped PSA share costs,risks and investn:rent.At the same time, PSA was also pursuing R&D independentty with the aim to sharpenits competitive edge. In January2006, PSA announcedthat its profits for the year 2005 would be lessthan previously estimated.This profit warning - the secondin three months - reflected the poor salesperformance of the company's cars in Ewope. The competition in the automobile market in Europe remained htense and this contributed to lower margins. PSA had launched several new models in 2005. Even so, worldwide salesof Peugeot brandedcarsin 2005 fell by 1.5%. However,Citron car saleswere 3.5olo higher in the sameperiod. The Peugeot arm of PSA expected sell two million carsin 2006.The companyhopedto sell, to by the end of 2007, half a million unis of its new model, the 207, a compact car launched in January 2006.

' "Differcnt bmnds, colnmon strategy," www.z.rll, April, 2003. 2 Mitsubishi Motor Co. lauched its frst passenger cars in 1917. Till l9?0, the companywas part of Mtsubishi Heavy Industries 1lvII{I), which was founded by Tsukomo Shokai in 1870. In the 2000s, Germany-based DaimlerChrysler acquired a 370lo shareilr the company. I Renault, the Frcnch automobile maker, was formded by Louis Renault in 1898. As of September2005, the Renault group revenuestouched 30.8 billion (nhe-month period). 4 FIAT or Fabbrica Italiana Automobili Todno, the Italian automaker,was fomded in July 1899by a group of investols. In the 2000s, the company faced a severe financial crisis with losses touching $ 1.2 billion whjch necessitatedmajor restruchrri.ng a exercise. 5 Ford was formded in 1903 by Henry Ford and a group of investols. In 2004, the company reported a loss of $ 155million in its automoiivebusiness. 6 Toyota, the Japanese auto maker, was establishedin 1937. The company has gro\an to becomethe second largest auto manufacturerin the world with net income crossing * 1,171billion in 2002L05. 7 BMW or BayerischeMotoren Werke wis founded ia 1913 as Rapp Motorcn Werke by an engineerKarl Fried.ich Rapp. In 1917, the name was changedto BMW. The compally cate$ to the premium segrnent and in 2004,its net profit had reached 2.2 billion. t

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BACKGROUNDNOTE About Peugeot The history of PSA datesback to the nineteenthcentury. In 1810,Jean-Frederic Peugeot,together with his brother Jean-Pierre Peugeot(JeanPierre), transformedtlre textile mill in Alsace, France into a foundry. The brothers invented a new process of making sprung steel. Using this new technology, they started making saws, watch springs, and other products. In 1858, Peugeot adoptedtile now familiar lion logo as its symbol (Refer Exhibit I A for the logo). In the 1880s, Peugeotwas managedby Armand Peugeot, JeanPiene's grandson. 1885, Peugeotstarted ln producing bicycles. In 1889, Peugeot unveiled its first automobile - a steirm powered threewheeler. However, almost immediately, the steam engine was dropped in favor of the petrol engire patented by Gottlieb Daimler. The first 'customer' car was delivered in 1891. In 1892, Peugeot made29 carsandby 1899,production hadincreased 300 carsa year. to Peugeot made its presence felt in several rallies and competitions in the 1890s. The first appearance a Peugeotin a race was in the 1894 Paris-RouenTrial (which is widely considered of as the world's first motor race).Peugeot tastedits first success the 1895Paris-Bordeaux-Paris in race. In 1896, Peugeot started making its own engines. The same year, Societe Anonyme des Automobiles Peugeot, a separateautomobile company, was set up by Peugeot. In 1900, the company's first small car christened Bebe was launched. In 1902, the company openeda new factory in Lille. Soon, the factory started making motorbikes as well. With the successof its products,yet anotherfactory was openedin 1910 in Sochaux.All this time, the company's cars continuedto do well at motor races. After the First World War, the companybeganto concentrateon making diesel-poweredcars. In 1922,PeugeotQuadrilette,a diesel car replacedthe Bebe. The Quadrilette was a huge success. ln years, Peugeotacquired severalcompanieslike Bellanger Car Company in Neuilly, subsequent and De Dion Bouton factory in Puteaux.In 1929, Peugeotlaunched the 201 model. The 1930s saw the launch of the 202 and402 models.which went on to becomebest-sellers. Therewere no new model launches duringthe Second World Wu.h 1947,the 203 model was launched.The period also saw new acquisitions like Chenard-Watckerand Hotchkiss. In 1955, the company launched 403,which sold 1.2million units in a decade. the About Citroen In 1912, Ardre Citrodn (Andrd) paid a visit to Ford's planr in the USA and learnt the operational details of massproducing cars. ln 1913, Andrd establishedthe Socidtddes Engrenages Citroen headquarteredat Quai de Grenelle in Paris. Soon he made preparations to traffform an plant into an automobilefactory. In 1919,the companylauachedits frst car, the Type armaments A, the first mass-produced model in Europe. Around this time, the chelrono shapeof its gear teeth was adopted as the company logo @efer Exhibit I B for the logo). In 1921, a second model - the 82 - was launched,replacing the Type A. In 1922, a Citron achievedthe unique distinction ofbeing the fust car to crossthe Salnra desert. ln 1924, a new company, Soci6td Anonyme An&d Citroen, was created.The sameyeir, sales subsidiarieswere openedat Brussels,Cologrre,Milan, Amsterdam and other important cities in Europe. In 1924-1925, Citoen became popular for a motor expedition referred as the black cruise'. In 1927, ldte C4 was launched. In 1931-32, Citron organized yet another motor
shapeof the'V' ohamcter,or a triangular shapepointing upwardVdownwards,is referred as che\Ton. e The black quise, described as 'a great route to a great isle', was a 28,000 krns trip rmdertaken by Georges-MarieHaardt and his team. The expedition, s4rich started at Colomb-Bechar in Algeria, passed tbrough Niger, Chad, Oubaagur-Chari (Central African Republic) and the Belgian Congo @emoqatic o The general

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expedition called the yellow cruisero.In 1934,the company launchedthe 7A, which incorporated several innovative features like fiont wheel drive, torsion bar suspension,aerodynamic body, hydraulic brakes,etc. However, during the period the companywas facing financial problems. ln 1934-35, Michelin, the French tire maker, acquired a major stake in Citroen and started a restructudng exercisewhich included layoffs. Michelin was able to wipe off Citrodn's debts and improve its efFrciency. 1935,Andre passedaway. In During the SecondWorld War, the Citroen factory was bornbed, which led to a drastic fall in production. However, the compary soonrebuilt the plant. In 1948,the 2CV van was launched.In 1953, the company entered into an agreementwitl Panhard, an annored vehicle maker, to partially merge the two companies' salesnetworks. In 1958,the company set up a new plart at Vigo, Spar4 to manufacture its 2CV vans. ln 1965, Cifion acquired Panhard. In 1967, the company acquired a majority stake in Berliet, another automobile compmy. In 1968, a parent company - Citroen SA, which owned Cifroen, Panhard and Berliet - was formed. In 1974, Peugeot acquired 38.2%stakein CitroenSA. a PSA Peugeot Citro6n In May 1976, Peugeottook completecontrol of Cifoen SA and PSA PeugeotCitoen was formed. PSA, the holding company, was the full owner of both the companies (Automobiles Peugeot S.A and Automobiles year,the 10 millionth Peugeot rolled CifroenS.A). In the same car out of the factory premises(Refer Exhibit II for new model launches during 1977-2005). In 1977, Socidtd Mdcanique Automobile de I'Est (SMAE) was establishedto manufacture gear boxes and engines.In the sameyear, SAMM, an aeronauticsc-o.mponent manufacturer,was also acquired by the group. In 1978, the Europeanarm of Chrysler" (Chrysler France, Chrysler UK, and Chrysler Spain) was acquired by PSA. PSA sold the models of the former Chrysler's European subsidiaries, iacluding Simcar2and Sunbeaml3ulder the Talbot marque. In 1980, Peugeotand Talbot were merged and a single dealershipfor both marqueswas established.The marketing for both product rangeswas handledby Peugeot. In 1982, Citrodn shifted its headquarten to Neuilly, France. In &e same year, a new plant to manufacture gear boxes was inaugurated at Valenciennes. In 1986, the Talbot models were discontinued. 1990,Peugeotcelebrated 100'year as an auto maker. In 1991, Peugeot ln its establishedits subsidiary, Peugeot do Brasil, in Brazll. In 1992, the goup entercd China and Egypt through parmershipagreements.

Republic of Congo). At Kampala, the team split into four groups and reachedTananarive in Madagascar, eachtaking a different rcute (Mombasa,Dar-es-salam,Mozambique, and the Cape). r0 The yeUow cruise was meant to open up the old 'Silk Route' (an ancient hade route \rtfch connected Chin4 Persia, Arabia and Euope) to cars. The 30,000 km trip started in Beirut, Lebanon and passed through the Pamir region (Central Asia). Another group, \.4rich startedin Tien Tsin (-IianjnL China),joined the Pamir group at Aksu (Xinjiang Uygur, China) and together proceededto Peking @eijing). tr Cbrysler Motor Corpomtion was establishedin 1925 by Walter P Cluysler. The company merged with Daimler Benz in 1998 to form DaimlerChrysler. 2O04,DaimlerChrysler's It rcvenuescrossedUS$ 192 billion. u SocieteIndushielle de Mecanique et CarrosserieArdomobile or SIMCA was founded by Henri Pigozi in Nartrle, France in 1934. Initially, the company produced FIAT models rmder a license agreement. Subsequendy,with the successof its 'A.ronde' models, the company's dependenc FIAT decrcased.In on the 1950s,the company acquired automobile companieslike Unic, Automobiles Talbot and the French arm of Ford.In 1963,Chryslerboughta majority stakein Simca. 13Sunbeam Motorcar Company Ltd. (Smbeam) was establishedin 1905 by John Marston. In 1920, it merged with Daracq, a French automobile company. Darracq had earlier acquired ClemenlTalbot Ltd, a London-based automobile company. STD Moto6 Ltd (where STD stood for Smbeam-Talbot-Darracq) was created as the holding company. In j935, due to financial pmblems, Clement-Talbot Ltd was sold to the Rootes Group. Soon, Rootes also pr[chased Srubeam. in 1967, Chrysler took complete contol of ttre Rootes Group.

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In 1994, Citroen celebrated 75* anniversary. 1998, the group unveiled its new highits In pressure direct injection (tlDi) enginelrhich was incorporated all its models.In 2001, the in group receivedISO 14001certificationfor severalof its facilities. In the sameyear, the goup enteredinto an agreementwith two French technologyresearchinstitufions - Scientific Research (CEA) for joint research fuel cells.In 2005, Center(CNRS)and Atomic EnergyCommission on the group sold Panhard. In 2005, PSA worldwide sales reached3,389,900units, with sales of the Peugeotmarque touching 1,995,450 units and the Citroen miuque another 1,394,450(Refer Exhibit Itr for region-wisesalesof PSA). As of 2006,the groupwas sellingover 22 models(Refer Exhibit IV for List of Models of Peugeot& CitroEn as of 2006). FORGING ALLIANCES PSA could be considered pioneerof stmtegicalliancesin the automobileindustry.Its first the alliance with Renault started way back in 1966. Over the years, the company has gained considerably from its strategic alliances with several automobile and autocomponent companies. Subsequently,other automobile companies have taken the cue from PSA, and entered into alliances andpartnerships their own, with their competitors of @efer Exhibit V for Alliances in the Auto Industry). PSA and Renault S.A PSA and Renaulthad a seriesof agreements involved severalindustrialand technological that projects.Peugeot into a and Renaultfirst collaborated 1966,when the two companies in entered cooperation for In agreement the joint productionof mechanical subassemblies. 1969,the two companies further strengthened partnership establishing joint vennre - La Frangaise a their by de (LFM) - to producelong-series M6canique and components engineswhich were to be usedin Peugeot Renaultcars.The 50:50joint ventu.re locatedin Dourrin, in northernFrance. br and was (STA), orned the sameyear a limited companycalled Socitd Transmissions de Automatiques 80% by Renault and 20Yoby Peugeot,ll'as founded. STA lr,as establishedprimarily to produce automatictransmissions Renaultand rear-axleassemblies Peugeot. for for The STA plant was locatedin Ruitz in northern France. In 1971. Peugeot.Renault and Volvora came togetherto design a V6 enginers.The three automobilemakersformed an equally-orned companycalled PeugeotRenaultVolvo @RV;. The enginesu'ere manufacturedby LFM and by 1974,they were being usedin the Peugeot504 and 604-andthe Renault30. However,in 1989,Volvo pulled out from PRV. As a result,Peugeot 50% partners the company. in andRenaultbecame In 1992,PSA entered into a freshtechnological indusfial agreement with Renault develop and to a new series of automatictransmissions, Meanwhile, LFM continuedto develop improved r,ersions the V6 engines. 1996,LFM introduced new V6 ES 9 enginefor mid-range of In the and high-endRenaultcars,the Peugeot 406, andthe Citoen Xantia andXM models. Again ir 1997, the self-acting automatic by transmission BVA - wasjointly developed PSA and Renault,with The transmission manufactued eachcompany bearingFRF 2.8 billion as development costs. was plant in Valenciennes. at the STA plantin Ruifz andPeugeot's In 2000,PSA and Renaultlaunched improvedthree-liter versionof the V6 ES 9 engine.The an new engine was installed in mid-rangeand high-endRenault,Peugeotand Citron cars and multipurpose in vehicles. The LFM plantmanufactured around27,000V6 ES 9 engines 2000.
'' Tiil 1998,Volvo Carswas part AG Volvo. of AG Volvo ras foundedin August 1926in Gothenbug, S,weden. Volvo Carswas acquired Ford in 1998. by '' V6 engine a V engine is l,vith six cylinden. A V engine is a common configuration for an intemal combustion engine whercin the pistons are aligned so that they appearto be il a V when viewed along the line of the cranlishaft. (Source: www.wikipedia.org)

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Fiat Auto SpA PSA's strategic relationship wift Fiat started 1978when the two companies in signedtheir fint cooperation agreementto design and manufactue a light commercial vehicle. A joint venhrre, Europdenne VdhiculesLdgers(SevelSpA), ou'ned50% by Fiat, 25% by Automobiles Socidte de Peugeot for The productionof and 25% by AutomobilesCitrodn,was established this purpose. the vehicles(Fiat Ducato,PeugeotJ5 and Citroen C25) beganat Val di Sangrofacility, near Pescara, Italy in 1981.In 1988,the scopeof thejoint ventue with Fiat was e\Tandedto include the designandproduction ofmulti-purpose vehicles(MPVs). In 1993,the Val di Sangroplant startedthe productionof the PeugeotBoxer, and the Citroen Dispatch- both light comnercial vehicles.The plant continuedto manufacture Fiat Ducatosas well. In 1994, a new plant at Sevelnord,Valenciennes, France began operationsfor the productionof the Peugeot806, the Citroen Synergie, and tlle Fiat Ulyssesand LanciaZ (Zeta). partnersto managethe plants located in their The agreementbetweenPSA and Fiat required the plant was plant was managed Fiat andthe Sevelnord countryof origin, i.e., the Val di Sangro by plant and sharedthe productioncapacity managed PSA. PSA and Fiat ormed 50olo each by ir productionof the Peugeot Expert,the Citoen Relay equally.In 1995,the Sevehordplant started anddreFiat Scudolight commercial vehicles. In 2002, PSA declaredthat its collaboration with Fiat in the development light commercial of vehiclestould be extendedthrough2017 making it one of the most endurhg alliancesin the automobile hdustry- PSA ald Fiat signeda major frame*,orkagreement which speltout various aspects the collaboration. PSA and Fiat wereto investaround 1.7billion to manufacture two of linesof light commercial vehicles. In 2005, Tofas, a Turkey-based with PSA automobilemanufactuer,enteredinto an agreement and Fiat making it a three-way collaboration. The agreementinvolved the development and productionof small,entry-levellight commercial vehicles.The new modelswere to expandthe product ranges of Peugeot,Citoen and Fiat. They were to be manufacturedat Tofas' plant ir Bursa,Turkey andwereto be launched 2008. in As of2005, the PSA-Fiatpartnership hadjointly produced, since 1978,a total of 3.3 million light commercial vehiclesand400,000multipurpose vehicles. Ford Motor Co. PSA's cooperation with Ford beganin September 1998.The t$'o automakers announced largea scaleagreement joindy developfour families of small diesel to enginesincorporating latest the put technologies, including CommonRail Direct irjection (CRDi)'".The initial amouncement the development time for the new engines two and a halfyears. In i999, the initial agreement at was erpanded includean extended to rangeof small aluminumdirect injectiondieselengines for carsand light commercial vehicles. The new agreement includedtechnological also upgrades ofa mid-sizedsecondgeneration engineand a range of V-dieselenginesfor the luxury vehiclesof both companies. PSA and Ford shared total cost of the projectequally.The parnrership with the Ford developed four phases. in In 2001, in the first phase,PSA and Ford unveiled the fust direct._injection diesel engine developed under dre cooperation agreements, u.hich replacedthe TUD" rangeof engines.The 'HDi 'DuratorqTDCi 1.4'by Ford.The 1,398cc engines were sold as 1.4' by PSA and engines rveremountedon the Peugeot 206 & 307, the Cifioen C2 & C3 urd the Ford Fiestaald FusionBoth companies identified 23 applications the new enginefamily. The productionof the for
'" CRDi is a modemvadant of direct fuel injection systemfor dieselengines. featues a high-pressure It (1000+bar) valvesas opposed mechanical to valves. fuel rail feedingindividual solenoid ' ' The PSA TU elgines were usedin Peugeot and Citoen cars.The a family of smallfour cl.linderengines first TU engine uas introduced in 1987. They came in petrol and diesel variants. The diesel variant vas referred as TUD.

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enginesat the Doulrin plant saw high productivity levels with daily production touching 6,000 engines. part of the first phase, new l.6liter (1,590cc) commonrail dieselenginewas also As a laulched. In early 2003,PSA and Ford introduced 2liter CRDi dieselengine(1,988cc) developed the a in secondphaseof their cooperativeventure. These engineswere manufacturedat PSA's Trdmery plant. The high-performanceand low-noise engines were, reportedly, more fuel-effrcient and cleaner than those available in the market. The aggregateinvestmentfor the developmentof the enginescameto nearly I billion. While the first two phasesof the cooperation were carried out under the leadershipof PSd the third and fourth phases were led by Ford. In June2003, as part ofthe third phase,a new 2.7-liter V6 six-cylinder 24-valve engine was unveiled. Production of the engine began in the foltowing months. The engine was fust mounted on the Jaguar S-Type. Subsequently,it was used in the Peugeot607, the Land Rover Discovery, the RangeRover Sport, the JaguarXJ, the Peugeot407 Coupe,andtlre CitroenC6. In October 2005, under the fourth phase of their cooperation, PSA and Ford started the production of a new series of 2.2liter CRDi diesel enginesfor light and medium commercial vehicles. In addition, they intoduced a new 2.2Jiter HDi/TDCi diesel enginethat was eventually mounted on several Peugeot, Citogn and Ford upper/medium and executive passengercat plaforms. The engineswere produced at the Trdmery plant. The HDi/TDCi engine showcased the companies' ability to work together in developing high-performance diesel engines (See TableD. Table I A Comparison of Different Manttracturers' Diesel Engines

Manufacturer
PSA/Ford

Engine
2.7-LV6

Max. Power

(Ps)
Isuzu
Volkswagen

Max. Torque Vehicles (Nm)

207@4000 rpm 440@1900 rpm Jaguar S-Type,Peugeot 607

Opel: Vectra & Signum

3.0-L V6 180@4000 rpm 370@1900 rpm Saab: 9. Renault: Vel Satis.

2 . 5 - L Y 6 180@6200 rpm 370@1500 rpm Audi A'6

DaimlerChrysler 3.2-L t6
SouceI wwwautorgport.com.

204@4200 rpm 500@1800 E rpm Mercedes & S-class

In all, PSA and Ford jointly producedfour families of CRDi diesel enginesnamely L4-liter/1.6liter engines, a second-generation 2-liter engine, a z.7-llter V6 engine, and a new family of engines for light commercial vehicles. The cooperation made PSA,Ford the world's leading diesel engine manufacturer.By 2005, they werejointly manufacturingmore than 9,000 enginesa day. Toyota Motor Corp. In July 2001, PSA and Toyota signeda cooperationagreement Brussels,Belgium to establisha in joint ventue company. Toyota PeugeotCitroen Automobile (IPCA) Czech was establishedfor the joint developmentand production of small cars designedmainly for the Europeanmarket. The companiesalso announcedthat the small cars developedby thejoint venhue would be priced below the entryJevel cars of the two partners.This meant that the factory for the production of these cars had to be establishedir a low-cost country and meet stringent requirements.After an extensive search,Kolin in the Czech Republic was identifred as the location for the plant. The plant startedproduction ofToyota, Peugeotand Citroen brandedcarsin 2005. The capacity of the

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plant was 300,000vehiclesper year,wift 100,000 carsfor eachof the brands- Peugeot, Citoen and Toyota. Toyota was in charge of developmentand production, while PSA was responsiblefor purchase ald logistics. The total investment, primarily for research and development and indushial erpenditure, ofaround 1.5 billion, was sharedbetweenthe two automalers. BMWAG In 2002, PSA enteredinto a cooperationagreement with BMW to joindy develop and producean all-new family of small 4-cylinder pehol engines incorporating the latest technologies.In June 2005, PSA and BMW presentedthe industrial plan for p-roductionof the engines. The engines were later used in Peugeotarid Citroen cars and by Minl" (wholly-owned by BMW). While the main engine was manufactured solely at PSA's Doulrin plant in Northern France, the engine assemblywas done at Doulrin for PSA and Hams Hall in the UK for the Mini. PSA and BMW implemented a coordinated process to enable complete transparencybetween the two engine plants in order to deal effectively with any quality issues. PSA's Chadeville and Mulhouse Metallurgy Division plants were assimilatedinto the industrial plan as suppliersofraw castings. The design and development of the engine was done largely by BMW. PSA provided the logistics support for production of the engines. A complete production nodule was brought on line in late 2005 at dre Francaisede Mecaniqueplant in Douwin. The module was basedon the developmentof a highly integnted, independentproduction unit that could easily be replicated on other sites. The plant was designedto produce 2,500 units a day. The frst module, with an invesunent of 330 million, produced an engine every 26 seconds.At its maximum production capacif, overall annual production was el?ected to reach one million units. At full capacity, the moduleemployed1,120employees, working in four strifts. The cooperation resulted in a number of innovationsre. The engines set new standards in performance,driving comfort, fuel economyand CO2emissions. Mitsubishi Motor Corp. In February 2005, PSA and Mitsubishi announceda cooperationagreement a new SUV, with for 30,000 vehicles to be producedevery year il Japanand to be sold under the Peugeotand Citroen marques.The SUV model, which was eryected to roll out by 2007, was to be styled differently for the Peugeotand the Cinon versions.However, the two versionswere to be equippedwith the latest HDi diesel engines.Initially, the SUVs were to be marketedonly in Europe. However, the two companieswere expectedto enter other marketsin the future. THE RATIONALE BEHIND THE ALLIANCES In the 1990sand 2000s, intensecompetition in the auto industry led to a wave of consolidation. Severalauto companiesbought stakesin their competitors.For example,DaimlerChrysler bought a 370/ostakein Mitsubishi, Ford bought a 33Y" st*e in Mazda, GM held a 20% stake in Fiat Auto, ard Renaultacquireda zl4%stale irr Nissan. PSA did not make any effort to buy or acquire stakes in other auto companies. "We can definitely get by on our o*rg"'o Folz said. PSA, however, concentratedon entering into strategic alliances to counter the challengesposedby its competitors.A major advantageof such strategic alliances over a merger or acquisition was that PSA did not have to look for massive debt financing and years of inefrciencies due to
18 Mini is a wholly owned subsidiary of BMW since2001.It manufactues the MM, a small car, which is ao're1ro' redesign the 'classicMini' - a carmadeby British Motor Corporation of from 1959to 2000. 'The innovations which came out of the alliance were - the lost foam process for cylinder heads, pressurisedaluminium casings with castjiron jackets inserted into the casting, steel crankshaftswith rmmachined counterweights,corurectingrods forged using the double impressionrnethod, etc. 20 RaduBoghici,"France'sPeugeot look-outforjoint ventures," on w\r'\v.vectorbd.com, April 15, 1999.

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duplications in manufacturing. PSA enteredjoint ventures mostly with strong players - Ford, Renault, Toyota, and BMW. And the purpose of these alliances was to share costs and investmentsand createsvnercies. PSA believed that an important factor for successwas the ability to bring out a variety of models with minimum costs. Folz said, "The key to succeedingin this car market is to rapidly produce cars as varied and attractive as possible and to do that at a competitive cost,"'' PSA's alliances with Toyota and Fiat helpedit to expandits product range. At the sametime, by sharingthe costs and risks, it was able to provide more choice to its customers widl minimum investnent. PSA's strategic alliances were also meant to achieve economiesof scale, which h turn helped lower per unit costsand risks. The company brought out severalmodels of cars basedon a single platform, using its superior styling and desiga skills to differentiate the models. Folz said, "The key to survival in the car industry today is not to producethree, four or five million cars.The real questionis one's ability to producea maximum number of carson a limited number of pladorms. That's what we're trying to do."" The alliances with Toyota for small cars and with Fiat for light commercial vehicles served to create new olaforms- which would be used to launch several futuremodels. PSA's alliances with Renaulq Ford and BMW helped it develop engines with the latest technology, somethingwhich it might have found it difficult to managealone. The allianceswere successfulin creating synergiesbetween PSA and its partners. Owing to its alliances with the major players,PSA managedto remain at the forefront of enginetechnology. The shared costs and risks helped PSA not only to price its cars competitively but also enjoy higher margins. While Volkswagen, the market leader and PSA's rival in the Euopean market, had a profit margin of less than 1y"'z3 2004. PSA enjoyed a margin as high as 4oloin the same n period. Apart from sharing costs, risks, and invesfnents, strategic alliances also helped PSA to acquire and develop new techlologies. In the joint venture with Toyota, though the production was conholled by Toyota, 10 managersfrom PSA were stationedat the plant providing them with the opportunity to learn about the world-renowned production systemfollowed by Toyota. This was ex?ectedto improve the production systemat PSA in the future. PSA also seemedto be reaping unexpectedrewards from its joint ventures.A casein point was again its joint ventue with Toyota for the Peugeot 107, Cifoen Cl and Toyota Ayga city cars. Toyota was known the world over for the superior quality and dependabilityof its cars. The high quality was the direct result of the famed Toyota Production System(TPS). On the other hand, PSA cars didnl figure very high on dependability, as evidenced by their poor customer satisfaction scores and low resalevalues.(SeeTableII for the 2005 J.D. Powerand Associates' customer satisfaction index). Analysts however expected the 107 and Cl ca$ to have higher resalevaluesowing to Toyota's involvement in their production.

" Christine Tiemey, "Can Peugeotgo it alone," www.businessweek.com, April 17, 2000. 22 RaduBoghici,"France'sPeugeot look-outfor joint venhnes,"www.vectorbd.con, on April 15, 1999. " "Volkswagen brakesfor epic change," www.businessweek.com, 25,2005. July

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Table II 2005J.D, Power & Associates Customer SatisfactionIndex Rank I

Brand Lexus
Toyota

Score
84.8

NDUSTRYAVERAGE 26 Cifroen 30 Peugeot

Source: www.motor.org.uk

83.5 78.6
76.6 74.6

The successof any alliance dependsto a large degreeon the parhers having similar goals and commoninterests. @efer Exhibit VI for a short note on making alliancesworD. In the case of PSA's joint ventures, the alliances were as beneflrcialto the other partner as to PSA. For example,the former Presidentof Toyota Motor Euope, ShuheiToyoda who was qart of the negotiations with PSA said,"We needed parfter to get the right volumefor costs."'"And the a volumes were achievedby entering into ajoint venture with PSA. GOING IT ALONE PSA was well aware that in an increasingly competitive market, it could sell more only if its vehicles were superior, distinct and offered unique advantages.Therefore, in spite of its many alliances,PSA was investing in excessof 2 billion in exclusiveresearch& development facilities and projects. PascalHenaulq Vice-President(Innovation and Quality) said, "lnnovation is a way to differentiate our cars in terms of concepts,styling and featuresthat deliver perceptible customerbenefits at affordable cost."' At its R&D centersat Belchamp La Garenne-Colombes and Veliry, hunclredsof engtneersand scientists were working towards new and inaovative solutions,with the result that PSA filed more than 300 patentsevery year. in October 2004, PSA unveiled a new design center named Automobile Design Network near Paris to give a further drust to its researchidtiatives. PSA's research& developmentefforts were based on a 'Researchand Innovation Plan' which was an integated and comprehensive system of research projects covering every area of automobiledevelopmentFor example,PSA engagedscientiststo improve the ergonomics, production process, of its vehicles. architecture, etc. At a strategiclevel, PSA had adopteda product policy whereil it was focusing its researchefforts particularly on thrce critical areas- safety, ftrel economy,and comfort. To improve the safety of its vehicles,the companyconductedresearchon driver-support, anti-skid, and emergencybraking systems. It was also working on energy-absorbing deformable mechanical structures. Fuel economy was anotler area on which the company was focusing its researchefforts. Diesel and petrol engines with improvedmileage,fuel cell technology were andhydrogenstorage systems26, someof the researchprojects that PSA was engagedin. Driver-vehicle interface ergonomicswas another area of focused researchfor PSA. The objective was to enhancedriving pleasure and comfort.

"" "Rewed uD for battle."www.businessweek.comJanuarv10-2005. '?5 Strategy. 2b04arm*i R.poa ***.pr"-peugeor-citroen.com, 2004. '" As part of its rcsearch on fuel cell technology, PSA had designedtwo demoostrato$ powered by fuel cells - the TaxiPAC and HrO. The TaxiPAC system uses hydrogen stored on board the vehicle. This system rcquies fi:rther refrnement and PSA was conducting research on making the hydrogen stomge systemsafer and more efhcient.

10

306-340- 1

CEALLNNGES Volkswagen was the undisputedleader (in terms of the number of cars sold) in the Europeancar market in 2005. Even though PSA continuedto retain its secondposition ir Europe,the gap with Volkswagen was widening. Volkswagen rnanagedto ilcrease its market share from 18.6% in 2004 to 19.3yoin 2005, while PSA's sharefell from 13.8%to l3.5Vo.ThoughToyota was a distant eightl in the rankings, it had improved its salesin a sbrinking market.'' Moving towards its goal of capturing 15% of the world automobile market by 2010, Toyota was intensi8'ing its eforts in Europe- an important market for the carmaker. PSA's strengthwas in compact cars which were hugely popular in most countries in Euope, its traditional market. However, the Japanese players (especially Toyota and Honda) were increasingly targetirg the samesegment.Even DaimlerChrysler and BMW were expandingtheir product rangesto include small cars. PSA received a mere 15Vo its revenuesflom outside Westem Europe. In other markets where of PSA had a presence, company the was not doing too well. ln China,GM and Volkswagen were ruling the roost.'" PSA's market sharein Chha was stuck at around 5olo over severalyears. And in Inlia the companywas not even present.However, its salesin RussiaanclBrazil were picking up. @efer Exhibit VII for PSA's international presence) Though PSA collaborated with its competitors, it was also sometimes critical of them. For example, PSA criticized some technologiesintroduced by Toyota. PSA was of the opinion that the Prius gasoline-electrichybrid car intoduced by Toyota in the early 2000s was high-priced. The high price resulted in low sales,which it felt didn't do much to help the environment."When you :tre not satis&ing the massmarket you are simply not doing the job," said Marc Boquet, a for spokesman PSA."At PSA we produce advanced tecbrolory for everyone."Though PSA was considered a champion of alliances, analysts felt that competition from its parhers in the futule might affect its relationship with them. However, other analystsfelt that the pupose of alliances was to lower costs and risks and PSA was certainly reaping thesebenefits. Carlos Ghosn, Chief Executive, Renault talking about his company's alliances once said, "It (enteringinto alliarces)doesn'tmeanthat peoplewill be complacent eachodrcr.We're still of competitors, and competing heavily. But at the same time we are businesspeople. That means jt whenan agreement makessense hasto be done."'u In October2005,PSA announced its operatingprofits for the year 2005would be litde less that than 4Voof sales(PSA traditionally enjoyed operatingprofits of close to 4.4% of sales).In January2006, the company announceda secondprofit waming which put the operatingprofits at 3.4% of sales(Refer Exhibit VIII for PSA's financials). PSA saw its salesin the European marketslideby 2.7V.n 2005G.efer Exhibit IX for PSA's worldwide salesand production). The 2005 full-year repor! which was releasedin February2006, showeda 37lo drop in net profits comparedto 2004. Intensecompetition (Refer Exhibit X for estimated market shares in 2005, and Exhibit XI for generalinformation on the world automobile market), a gloomy Europeaneconomy, rising prices of gasoline, and an unfavorable product range were cited as reasons.

'' According to ACEA, the total light vehicle rcgistmtions in Euope (26 cormtries) in 2004 were I . I 1 million. In 2005,the registrations dropped 1.07million. to 28In the first half of (tbroughthetjoint with 10.9%and 9.2502 marketsbares, GM and Volkswagen 2005, ventwes), were the market leaders(in terms of sales)in the Chineseautomobile industry. " James Kanter,"Toyota leadsAsia drive in Euope," wwwiht.com, July 23, 2005. 30Jon Madslien, "French car maker takes on the world," wwwbbc.co.uk, October 9, 2002.

11

306-340-1

OUTLOOK The Peugeot207 @efer Exhibit XI for a photograph of the Peugeot 207.; was unveiled in early 2006,and was a successor Peugeot - the company's 206 most popularcar ever.ln 2005, to PSA had launched 407 (saloon), 407 coupe,the 1007several modelsincludingthe Peugeot the a smallcar with electricslidingdoors,the 107,the CitroenCl cify car,and the CitroenC6 luxury limousine. In January2006, PSA launcheda new fuel cell called 'Genepac'.Genepac was considered a major stepin fuel cell technologybecause could power a car for a distance upto 500 kms, it of which was much more than all other fuel cells available in the market. However, it sufferedfrom most other drawbacks that made fuel cells unviable.The 80 KW cell was the size of a large suitcase which made it diffrcult to use in ordinary passengercars. Moreover, the cost of manufacturing the cells was too high. PSA was consciousof the problemsbut felt that the technology had potential. Folz told a news conference,"This technology is still at its early stages but offers a real answerfor the firture."ll The companypromisedthat it would try andhalve the price ofthe cellsby 2010.It would alsomakeeforts to male the cell morecompact. policy of cooperation collaboration PSA's explicitly stated and with independent autocompanies posedby globalization its was seenby the companyasfte bestway to counterthe challenges and larger competitors. At the sametime, the company was making sure dlat it secruedcompetitive advantagesby going solo on several vital research projects. This dual strategy had obvious advantages. one level, PSA reapedbenefitssuchas highermargins,lower development At costs andlower time to marketnew models.In Folz's words,"These"win-win" agreements allow us to sharedevelopmentand production costs without renouncing our independence, to pool skills and and expertise. They also genentethe economies scalewe needto be competitive, speediag of by our developmentand increasingproduction capacity. In addition, -suchco-operationsoffer many oppornrnities to leam about each other's culture and processes."" At another level, the strategy allowedPSA maintainits leadin technology andthusenhance competitiveness. its

" "PSA Peugeot Citoen uveils smallfuel cell," uww.fuelcelltoday.com, January10,2006. 32"Citroen:Strength throughco-operation," w',1,.!v.citon.com, 11,2005. July

306-340-1

EXEIBIT I A. PEUGEOT LOGO

ra * : ! G{il
r!. I

rgfl.fitlt*:r
-

B. CITROfN LOGO
m

E*il
Souc: www.psa-peugeot-citroen. com

4?

306-340-1
EXHIBIT II NDW MODEL LAUNCHES BETWEEN 1977AND 2OO5

Year Models t977 Peugeot 305

Year Models
1986 205 convertible, 309 GTI, Cifo(:n AX

Yefi

Models
206, Partrer Electric, Xsara Coupe,Xsara Estate,Berlingo Electric

1998

1978 CitroenVisa,Simca

t987 405 1989 605, Citron XM ZX 1991 106, Citroen

I993

t999 2000 2001 2002

206516
XsaraPicasso, 607, 206 CC

Horizon

r979 505, 604turbo diesel

1980 305 StationWagon,505 rurbo, Talbot Solara l98l Peugeot Samba, J5, Tagora, Visa II, C25

307, C5 206SW,307SW, 307Estate, C3, 807,

306,Citrodn Xantia

c8
1982

BX, Citroen 505

1994 806,306

2003

Convertible, citocn synergie, Relay 1983 205 1995 406, 106electric, 2004
PeugeotExpert, Citodn Xantia Activ4 AX Electric, Jrunpy 1984 205GTI I996 Citroen Saxo, Berlingo, Saxo Electig Peugeot Partrcr,406Es@ Coupe,Xantia LPG, Berlingo Multispace,Xsara
Source: \4.ww.psa-peugeot-citroen.com.

307CC,CirodnC2, C3 Pluriel

407

2005

107,Cr,t007,407 Coupe

1985 309,BX Estate

406 t997 306 Estate,

14

306-340-1
EXHIBIT Itr RI,GION-WISE SALES* OF PSAIN 2OO5 REGION Franc Other WesternEuropeancountries CentralEurope& Turkey Africa The Americas Asia-Pacific Other TOTAL
* - Salesinclude passenger oarsand light commercial vehicles Source:www.psa-peugeot-citroen.com.

SALES(in units) 777,000

1,583,400

209,700 83,600
194,500 511,900

29,800 3,389,900

EXHIBIT IV LIST OF MODELS As of February 2006

Peugeot

107, 206,206cc, 207,307,307cc, 407,607, 807-1007Parorer Combi Cl,C2,C3,C3Pluriel, C5,C6,C8, C4, Berlingo, Xsara Picasso

Citron
Source:ur$r.peugeot.com and www.citroencom.

l4

306-340-1 EXHIBIT V SOMESTRATEGIC ALLIANCESIN THE AUTOMOBILEIIIDUSTRY

No I

COMPANIES
Fiat Auto & Tata Motors

YEAR 2006

REMARKS Tata Motors was to managedisribution and after-salesservicefor Fiat in India. Fiat- in turn, would provide accessfor Tata Motors to world markets. Fiat Motors and Suzukico-developed SUV. a Suzukiwasto useFiat's 1.9I dieselencines for its version of the SUV. lntegration of forklift businessof both companies-fiom product developmentto marketing. Shareenginesaswell as platforms and pool purchaseand finance operationsin Europe and Latin America. joint Joint research fuel cell tecbnology, on operation of auto manufacturingplant ir Califomia. Joint establishment management a and of companyin Ingersoll, Canada.The objective of fte alliancelor Suzuli was to gainentry into the North American market. while GM attempted gaininsightsinto Japanese to manufacturing methodsand management.

Fiat Auto & Suzuki

2005

Nissan& Mitsubishi Motors

2000

Fiat Auto & General Motors

2000

f,

Toyota & General Motors

1999

Suzuki & General Motors

1987

Compiledfrom varioussoluces.

16

306-340-1
EXHIBIT VI MAKING ALLIANCES WORI(
The success ofan alliance dependson three main factors: parhrer selection,alliance structue and the way in which the alliance is managed. Partner Selection: The choice of parher can make or break the alliance. In oilrer words, the strength and successof the alliance dependsto a large extent on the parher's characteristics.A good partner helps an organizationachieveits strategicgoalswhich could be to sharecosts,risks, inves&nent concernirgnew productdevelopment gain access technology. or to Secondly, good a partner would have similar erpectationsfiom the alliance. And thirdly, a good partner would not exploit the alliance unfairly. Alliance Structure: The structue of the alliance also has a bearing on the successand duration of the alliance. Issues such as percentage of ownership, mix of fmancing, technology and machinery to be contributed by eachpartner figure prominently. The alliance should be designed in such a way that it is diffrcult to transfer technolory that was not part of the agreement. Contsactualsafeguards should be included in the alliance to guard againstrisk of oppomrnismby a partner. Managing the Alliance: The managementof the alliance should be basedon mutual trust. This can be achievedby building interpersonalrelationships between the managerVworkforceof the parmers. A major determinart of successof an alliance is the ability of partners to leam from eachother. In most cases,learning Akes place at the lower levels of the organizations.Therefore, lhe lower-levelemployees must be informed aboutthe parher's strengths and weaknesses and also made to understandthe importance of leaming particular skills from the paftrer so as to rmprove compeddveness the organization. the of
AdapIed, from Introduction to BusinessStrategr, ICMR.

17

306-340-'1
EXHIBIT VII PSA'SWORLDWIDEPRODUCTION SITES COUNTRY
Bmzil Argentina United Kingdom

PRODUCTION SITE
Rio de Janeiro BuenosAiles Rlton Rennes Sevelnord Mulhouse

OUTPUT (2004) 50,000 70,000 1,80,000 2,92,000 I,62,300 3,79,100 4,30,000 3,02,400
4,18,380 53,450

France
Sochaux Poissy Aulnay Portugal Margualde Madrid

1,38,100 4,58,550
1,83,195 1,41,000#

Spain Vigo
Italy China Iran^ Morocco^ Indonesia^ Turkey^ Nigeria^ Val di Sangro Wuhan Tehran Casablanca Jakarta

2,93,000 8,000 500

n.a

Bursa
Kaduna

n.a
n.a

Egypt"
Czech Republic Slovakia*
n.a - not available

Cairo
Kolin Trnava

1,05,000*
n.a

^ - assemblyplant , * - will start operationsin 2006, # - 2005 figrrle

Soulce:www.psa-peugeot-citroen.com-

18

306-340-1
EXHIBIT VtrI FINANCIAL DATA OF PSAPEUGEOT CITROEN CONSOLIDATED SALESAND REVENUE
million Euros

2004
AutomobileDivision BanquePSA Finance(car finance company) 45,239

2005
45,071

1,601
2,894

1,656 3,000
10,978

Gefco(transportation supply & chair management company)

Faurecia(automotiveequipment company)

10,7t9
899

Other businesses
Inter-sesmenteliminations Total

709

(s,247)
56,105

(5,14D
56,267

CONSOLIDATED FINANCIAL HIGHLIGHTS

million Euros

2004
Operatingmargin Profit before tax and sharein net eamingsof companiesat equity Consolidatedprofit Profit attributableto equity holders of the parent 2,481
) Llq

20(E 1,940 1,530

990 1,029

1,680 1,646

FINANCIAL POSITION million Euros

2004 Workingcapial
Grosscapital expenditure 4,561

2005
4l??

Equity
Net financial position of the manufacturingand sales compames Numberof employees
Source: www.psa-peugeol-ciboerlcom.

2,804 13 "703 1,347

2,873 t4,406
381

207,600

208,500

'19

306-340-1
D(HIBIT IX WORLDWIDESALESAND PRODUCTION PSA OF
(Number of vehicles) Worldwideunit sales Worldwide production
Soulce: p\a'\i/.psa-peugeot-citroen.com

2004 3,375,300 3,405,100

2005

3,389,900 3,3 75,500

EXHIBIT X EUROPE AUTOMOBILEMARKET SHARES 2OO5 IN (Based volume) on

rvw
rDc

f PSA I Ford B To),ota H BMW

rGM lRenaultHFiat B Nissan I Others

Compiled from vaxiolls sowces.

20

306-340-1
Exhibit XI WORLD AUTOMOBILE MARKET IN 2OO5 In 2005, the worldwide automobile market grewby 3.2yoto 68.2 million passenger can and light commercial vehicles. However, there was a marked difference in sales grorth rates among different regions of the world. Owing to sluggish economic gowth in several counries, the Europeanautomobile market shrank by around 3%. In Central and East Europeanmarket, after peaking in early 2004, there was a sharp decline in 2005. Regisnationsin Poland slid 23.5Voand, safesin Hungary slipped by 4.2%o. T\e US market showed gxo$th with armual sales reaching 16.9 million units. The Canadian market glew by 3o/,to reach 1.58 million units. In Asia, the market eryanded W 6.4%. The Latin American market rebomded with Brazil registering a healthy 9.5%. Argentina recordeda growtlr rate of 35.2%. CAR SALES AND SALES GROWTE IN 2OO5 MAJOR MARIGTS IN

REGION USA CANADA EUROPE CHINA

GROWTH SALESIN 2OO5 (7o overprevious On millionunits) vear) 7.60 1.4

0.84
J

15.22
2.85

-0.7 ?.6.5

Compiled from various sources.

21

306-340-1

ESTIMATED PASSENGER VEEICLE SALESBY COMPAIYYIN EUROPE Manufacturer Volkswagen PSA Ford GM Renault Fiat Daimler{hrvsler Toyota BMW Nissan Hlundai
Honda

2fi)5 Sales (In million units)

2.944

2004Sales fln nillion units) 2.853 2.t22 1.686 t.637

1.569

2.061 1.628
1.625

r.487
0.988 0.914
0.818

r.129 0.922
0.787 0.710 0.381 0.313 0.236

0.779 0.357 0.317 0.259 0.242 0.234 0.233 0.133

0.195

Kia Suzuki
Mazda

0.r73
0.204 0.255

Mitsubishi Others Total

Compiled from various sowces.

0.t23
0.225 15.332

15.222

306-340-1

EXHIBIT )ilI A PHOTOGRAPH THE PEUGEOT OT 207

Source:www.peugeot.com

23

306-340-1

ADDITIONAL READINGS AND REFERENCES 1. PSA PeugeotCitroen to sell dieselhybrids in 2010,www.planetark.com, February01, 2006. 2. PSA Peugeot Citroen 'icautiously optimistic" about 2006, www just-auto.com, January18,2006. 3. Peugeot launches new 207 small car line, www.greencarcongress.com, Iant;ary 12, 2006. 4. John Manden, Poor car sales lead PSA to cut outlook, www.icbirmingham.co.uk, Ja try 12,2006. 5. PSA Peugeot Citroen unveils small fuel cell, www.firelcelltoday.com, January 10, 2006. 6. James Kanter,Toyota leadsAsia drive in Europe, www.iht.com,July 23,20057. Ford and PSA PeugeotCitroen strengthendieselcooperation,www.media.ford.com, October 05,2005. 8. Peugeotdeal boostsMitsubishi, www.bbc.co.ul,February 2005. 04, 9. Rewed up for battle, www.businessweek.com, January10,2005. 10. Dale Huq, Toyota and PSA Peugeot Citron unveil jointly developed cars, www jcnnetwork.oom, December 2004. 02, 11. Different brands, common strategy,2003. 12. BMW and PSA form joint engineproject, www.all4engineers.com, October18,2002. 13. Jorn Madslien,French car maker takes on the world, www.bbc.co.uk, October 09, 2002. 14. PSA Peugeot Citroen and Toyota announce the name of new joint-venture company,www.toyota.com, January10,2002. 15. PSA Peugeot Citroen and Ford Motor Company announce cooperation in telematicsin Europe,wurr.ford.com,September 27,2000. 16. Christhe Tierney,Can Peugeotgo it alone,www.businessweek.com, Aprll17,2000. 17. PSA aims to form joint venture with Japan's Koyo Seiko, www.bloomberg.com, November25, 1999. 18. Renault, Puegeot-Citroen, Michelin: Three flagships of the French motor industry, Jean-Michel Lamy, April 1999. 19. PSA launchesmegadepotjoint venture, www.worldcargonews.com, 1998. July 20. Mergers, takeoversand product differentiation, $.rvw.bized.ac.uk. 21. Engines:Peugeot(PSA PugeotCitroen), www.grandprix.com 22. w"wrv.psa-peugeot-citroen.com. 23. www.all4engineers.com. 24. trvw.media.ford.com.

24