Corporate Governance, Innovation, and Economic Performance in the EU

(CGEP)

A project funded by the

Targeted Socio-Economics Research Programme of the European Commission

William Lazonick and Mary O'Sullivan, Directors

INSEAD, Fontainebleau, France

The Automobile Study

Are the French Car Companies PSA and Renault the European Automobile
Industry’s Champions of Shareholder Value?

by

Vincent Frigant

and Yannick Lung

IFREDE-E3i, Université Montesquieu-Bordeaux IV

Avenue Léon Duguit, F-33608 Pessac, France

Tel: + 33 5 56 84 86 17
Fax: + 33 5 56 84 86 47
Email: frigant@montesquieu.u-bordeaux.fr
lung@montesquieu.u-bordeaux.fr

Second draft to be revised

April 2001

1
 Are the French Car Companies PSA and Renault the European Automobile
Industry’s Champions of Shareholder Value?

1. INTRODUCTION

1.1. PSA AND RENAULT, CHAMPIONS OF SHAREHOLDER VALUE

In December 2000, following the Automotive News Europe and PricewaterhouseCoopers

(PwC)’s publication of its Total Shareholder Return Index1 and for the past 3 years' performance,
PSA and Renault were declared champions for the maximisation of shareholder value among
European major car companies (Figure 1). In terms of global competition, Renault has also
outperformed Japanese and American companies (Figure 2) over the past 24 months, and the
February 2001 publication of its 2000 earnings has accelerated an ongoing rise in its share price
(Figure 3).

These economic and financial performances could easily explained by a macroeconomic

environment in Europe and in France that has allowed for high sales volumes in the firms’ main
markets. However, these factors alone cannot explain the exceptional results that few observers
could have anticipated in the early 1980s when Renault and PSA almost went bankrupt. There
needs to be some extension of existing analyses of Renault’s and PSA’s trajectories (Freyssenet,
1998, 2000; Loubet, 1998, 2000a) over the past few years so as to explain the internal
organisational changes and strategic decisions that could be at the origin of this recovery.

Figure 1 – European "Big Six" Shareholder Value Performance (based on the PwC Index)

n.a.
-19,0% DaimlerChrysler
3,9%
Fiat
-5,3%
15,8%
Volkswagen
2,6% Past 36 months
70,3% Past 12 months
BMW
16,3%
118,6%
PSA
9,5%
130,6%
Renault
18,8%

-50,0% 0,0% 50,0% 100,0% 150,0%

Source: Automotive News Europe, January 15, 2001

1
"The Total Shareholder return shows the change in the value of an investment over a given period. Each company
is measured using stock price movement, stock splits or buybacks and reinvestments of any cash dividends. The
calculation assumes that all dividends are reinvested in additional stock" (Automotive News-PwC).
2
Figure 2 – Global car companies Shareholder Value Performance (based on the PwC Index)

-43,2% DaimlerChrysler
0,1%
Volkswagen
-4,0%
3,1%
Honda
0,7%
9,9%
-28,2% General Motors
10,3%
-11,4% Fiat
11,7%
TSR Average Index
-22,9%
13,6%Toyota
-33,8%
40,9%
Nissan
46,1%
47,0%
Ford
-16,7%
47,2%
BMW
8,8%
97,2%
Renault
11,2%

-60,0% -40,0% -20,0% 0,0% 20,0% 40,0% 60,0% 80,0% 100,0%

Past 12 months Past 24 months

Source: Automotive News, January 15, 2001

Figure 3 - Renault and PSA stock movements since 01/01/95

PSA Renault
330 70
300 65
60
270
Renault 55
240
50
210
45
180 40
150 35
PSA 30
120
25
90
20
60 15
1/1/95 1/7/95 1/1/96 1/7/96 1/1/97 1/7/97 1/1/98 1/7/98 1/1/99 1/7/99 1/1/00 1/7/00 1/1/01

3
There has been no convergence between the two firms in terms of their history, their main
shareholder (the State for Renault, the Peugeot family for PSA), their product, international
strategies or productive models - quite the contrary. Nevertheless, their economic performances
(measured by profit, employment, sales volume and the success of their products) are largely
comparable. Again, the idea of a "one best way" is in contradiction with a reality that indicates
clearly the possible coexistence of a number of different strategies and models of organisation
(Boyer, Freyssenet, 2000; Freyssenet, Mair, Shimizu, Volpato, 1998).

The present paper will develop a comparative analysis of the Renault and PSA, not from a
general point of view, but in terms of specific issues such as corporate governance and rising
shareholder power within these companies (Lazonick, O'Sullivan, 2000a). In French companies,
the corporate governance ideology is a relatively new phenomenon (Lazonick, O'Sullivan, 2000b;
Lordon, 2000). In fact, for French carmakers, it was totally absent before 1997. Our
understanding of corporate governance is that it is a convention amongst those stakeholders
(shareholders, managers, workers, suppliers, clients, etc.) who are involved in the implementation
of new procedures (regarding investment decisions, the dissemination of financial ratios such as
ROCE, EVA, etc.); in the adoption of new rules (relating to the activities of supervisory entities
such as the Board of directors); and in the preparation of increasingly transparent financial
communications (road shows, one-to-one explanations, the regular publication of detailed results,
etc.). All of these instruments express a firm’s conversion to a system that is based on the rules of
shareholder value. Over the past few months, French firms have been adopting this orientation at
an accelerated rate. Moreover, in light of all of the changes that have occurred over the past
twenty years, this trend should be rightfully considered as a long-term one. As such, a historical
approach is necessary if we are to discuss these changes with any efficiency (Volpato, 2001). A
rapid survey of the firms’ historical trajectories over the final quarter of the 20th century will help
us to understand the scope of these changes, as well as the issues involved2.

1.2. RENAULT SA: FROM A PUBLIC ENTERPRISE TO THE CHAMPION OF CORPORATE GOVERNANCE

Renault is certainly the French car firm that has experienced the greatest change over the past
twenty years. Originally a fully State-owned enterprise, and once the symbol of a French model
of "mixed capitalism", Renault has been discretely turned into a champion of corporate
governance by a CEO (Louis Schweitzer) who personifies a typically French managerial career
path. Having been Chief of Staff for Laurent Fabius when this latter was Prime Minister,
Schweitzer had taken an "Enarque" professional trajectory as far as he could before starting a
career in industry. It remains that Renault’s switch to its current form, after once having been a
stakeholder company in which labour unions (the CGT) were implicitly associated in
management decisions, is a long-term trend that dates back to 1984-86.

Renault had a leading role in the French model of capitalism after the Second World War (Boyer,
1996). Nationalised in 1945 (with the creation of the Régie Nationale des Usines Renault), this
state company became a symbol of the modernisation of technology and of social relationships
during the 1950s and 1960s. The main stakeholders involved in the decision-making process
were: the managers, the State and the unions (CGT). The Régie Renault had an economic role
(modernisation) as well as a social one, and the State was not a shareholder who demanded that it

2
For detailed analysis, see publications by the business historians Patrick Fridenson and Jean-Louis Loubet, as well
as an analysis of Renault’s trajectory by Michel Freyssenet that was part of the GERPISA’s Emergence of new
industrial models programme (indicated in References)
4
turn a profit. Net margins (net income / sales) were positive during the 1950s (2-4%) and close to
zero during the 1960s and 1970s (Fixari, 1998) – see Figure 4.

Figure 4 – Net margins at Renault 1945-1992 (in percent)

Source: Fixari, 1998

During the 1970s, Renault was also the symbol of the labour crisis. A permanent state of crisis,
failed product strategies and overambitious diversification and internationalisation policies
(Renault took the control of the fourth largest American vehicle maker AMC) almost caused the
company to go bankrupt. Its status as a state enterprise is what kept the firm going during the
seven years in a row that it made losses (1980-86) - especially during an extreme crisis period
(1984-86) when its cumulated financial losses reached nearly 30 billion Francs.

This crisis led to a significant turnaround in Renault’s system. It signalled the end of previous
compromises between stakeholders as well as changes in company rules and routines. Michel
Freyssenet has proposed an extensive analysis of this change, and of the progressive trajectory
towards a profit strategy that is based on innovation and flexibility (Freyssenet, 1998, 2000). We
will only focus on those changes that are useful for the present discussion. The implicit
partnership between Renault and its labour unions has been reversed, and during the 1980s, after
a number of serious confrontations (during which ten CGT unionists were dismissed), the
partnership vanished completely. The State progressively withdrew from direct intervention in
the firm's decision-making processes, and managers now dispose of a great deal of autonomy in
terms of policymaking. In fact, Renault’s managers were ultimately the ones to have introduced
its new business orientation. Moreover, the firm decided to abandon its adventurous
diversification strategies, and to focus on its core automobile activities: vehicle design, the
manufacturing of its main mechanical components, automobile production and assembly. It
introduced strictly financial criteria into its decision-making processes, and its targeted net
margin of 4% has to be respected by each global or local investment.

Renault’s privatisation, starting back in 1994 and 1995, has served to confirm all of these
changes. The French State remains the main shareholder with a 44.2% holding, but it has been
maintaining a largely passive attitude, without any direct intervention either in strategic decision-
making. Nor was the State directly involved during the 1990s in the progressive shift towards an

5
innovation-oriented policy that gave Renault a first mover advantage in certain new European
automobile market segments (minivan, compact minivan). And it had no input in the sudden
acceleration of Renault’s globalisation stemming from its alliance with Nissan in 1999, and
followed by its investments in Samsung (South-Korea) and in Dacia (Romania). Last year, which
was highly profitable for Renault, the French State acted as just another institutional investor
benefiting from a shareholder value creation that is based on profitability and on the firm’s
growth orientation - without any industrial policy background.

Now that its labour union partnerships have ended, and given the passive attitude of the State
(basically a result of European Commission conditions for allowing the French government to
recapitalise the company in view of its privatisation), Renault’s corporate governance at the dawn
of the 21st century would appear to be totally different from the latter half the 20th century – if
only because the shareholders are clearly dominant.

1.3. PSA: THE PEUGEOT FAMILY IS STILL ON TOP

The product of Citroën’s 1974 take-over by Peugeot and of the 1979 acquisition of Chrysler’s
European activities, the PSA company (PSA-Peugeot-Citroën) carries a long tradition of family
capitalism. The industrial history of the Peugeot family begins in the 18th century with a whole
set of diversified activities (Loubet, 1995). The Peugeots have been producing bicycles since
1885 and as early as 1890 Armand Peugeot built a quadricycle featuring a Daimler engine. With
the creation of the Société Anonyme des Automobiles Peugeot in 1897, Peugeot became one the
first car producers in France: assembling 500 cars in 1900, by 1913 it had become the country’s
number two vehicle maker (after Renault). All of these activities have been developed in the
region of Montbéliard, near Switzerland, away from the core of the French auto industry - Paris.
This family and provincial tradition have had a deep influence on the company.

On the other hand, André Citroën was one of the first car managers to be fascinated by mass
production techniques, and between the two world wars he introduced Fordist manufacturing and
marketing techniques. Launched in 1919, the Type A was the first European car to be produced
using mass production techniques. Nevertheless an inadequate industrial strategy in a fragmented
market caused Citroën to encounter structural difficulties. Financial difficulties were exacerbated
by the crisis of 1930, and André Citroën had to resign. The Michelin family took the control of
the company in 1935, and managed it efficiently for a period of 40 years (Loubet, 1995;
Broustail, Greggio, 2000). During the 1960s, Citroën became involved in mergers, acquisitions
and alliances: take-over of Panhard in 1965; majority stake in Berliet (industrial vehicles) in
1967; significant co-operation with the Italian Fiat from 1968 onwards (Fiat controlled up to 49%
of the Citroën shares, having purchased them from the Michelin family); and industrial
collaborations with Renault, NSU and Maserati.

Unfortunately, history repeated itself with the 20th century’s second economic crisis. The 1973 oil
crisis put Citroën into severe financial difficulties. As a result of the close relationship between
the Peugeot and Michelin families, and in order to avoid being acquired by Renault, Peugeot S.A.
took the control of Citroën in 1974 (38.2%), through an exchange of shares, the Michelin family
becoming a minority shareholder (9.5%). The merger was officially sealed in 1976 with the
creation of the holding PSA-Peugeot-Citroën in May of that year –the entity having a 100%
control over both Peugeot SA and Citroën SA.

In 1976 began an industrial process involving a merger of the two companies’ development and
manufacturing activities. This was a long and arduous process that was only fully achieved in
6
1998-2000. The merger’s difficulties were accentuated by the 1979 take-over of Chrysler’s
European activities (France, UK and Spain): Chrysler took a stake of about 15% in the capital of
the new company and received $230 million cash from PSA. With this acquisition, PSA became
n°1 in European automobile industry, with an output of 2.5 million vehicles in 1978. It would
have to wait another 21 years (1999) before reaching this level again.

PSA has clearly pursued a Sloanist strategy, insofar as it has been developing specific products
for its three brands (Peugeot, Citroën and Talbot, a new brand that was created for products
coming off of the assembly lines at the ex-Chrysler plants and meant to replace the Simca and
Sunbeam brands). All of these new brands share components and platforms. The Talbot brand
never had any success with the generic products that it inherited from the Peugeot/Citroën
platforms. The challenge to create a new brand image and retail network was too difficult, and
the Talbot brand was abandoned in 1986.

Still, these takeovers gave Peugeot access to a wider industrial system, with Citroën and Simca-
Chrysler plants in the Paris region and others across Europe (in the UK, or in Spain for Chrysler).
Rationalisation lead to a reduction in excess production capacities (closure of engine and
assembly plants) and to the integration of product development capabilities – a move that has
been difficult to realise due to the specificities of Citroën’s innovative culture and its reluctance
to collaborate with Peugeot’s more conformist traditions. In the early 1980s, the PSA company
encountered financial and commercial difficulties (almost going bankrupt), and was saved by a
providential and successful new product: the Peugeot 205.

A new CEO, Jacques Calvet, arrived in 1982. With a background in finance (he had previously
been President of the Banque Nationale de Paris), Calvet focused on curtailing the company’s
debts and reducing its break-even point. In manufacturing he insisted on rationalisation via an
integration of Peugeot and Citroën. This involved the development of products featuring shared
platforms, a new purchasing organisation (creation of the SOGEDAC), and an automotive
industry focus involving a reorganisation of the company’s numerous components and diversified
industrial activities (bicycles, motorcycles, etc.) with a view towards creating a major supplier
company (ECIA, Equipements et Composants pour l'Industrie Automobile being launched in
1987). Jacques Calvet managed the company, insisting on financial autonomy and on a type of
industrial rationalisation that was enabled by a prudential and systematic Sloanist policy. Over a
period of 15 years, and with the support of the Peugeot family, he progressively furthered the
difficult long-term integration of Peugeot and Citroën. The 1997 arrival of a new CEO (Jean-
Martin Folz) changed for good the firm’s attitude towards corporate governance.

All of these changes will be presented for both PSA and Renault. We will analyse how corporate
governance rhetoric and organisational structures emerge and are diffused within the two car
companies, and their impact on economic performance. Special attention will be paid to
(technological and conceptual) innovation policy, and to investments/divestments that are related
to innovative capabilities. In section 2, we will describe the emergence of shareholder value
criteria inside of PSA and Renault. Section 3 discusses the car companies' attitudes towards the
movement in their share prices, and section 4 analyses the role of the stock market in funding
their investments. Section 5 focuses on the integration of stock options and on variable
remuneration for managers and employees. Section 6 discusses the application of the "golden
rules" of shareholder value by PSA and Renault. Section 7 analyses their innovative strategies,
and section 8 provides a conclusion.

7
 2. INTERNALISING FINANCIAL LOGIC INTO MANAGEMENT CRITERIA

The most direct way of identifying the emergence, rise and diffusion of a corporate governance
ideology within a firm is to study its internal decision-making processes. With this in mind, the
diffusion of corporate governance can be expressed through modifications in firms' attitudes,
involving a recognition of the fundamental role played by the providers of capital (1). Once this
attitude has been manifested, firms soon begin to act in accordance with it. The challenge is to
identify whether this attitude is reflected in carmakers' decisions. As such, we will be
emphasising the increased use of financial profitability criteria to guide decision-making (2). A
second indicator studies the distribution of capital, helping us to understand the constraints
carmakers face and to identify key actors in the decisions being made (3). It remains that the wide
range of actions at the disposal of the various providers of capital means that we should look
more how they actually get involved in the automakers' decision-making entities (4).

2.1. THE INTRODUCTION OF VALUE CREATION ATTITUDES

IN REFERENCES TO STRATEGIC POLICY-MAKING

Until recently, the two car companies based their strategic policies on exclusively industrial
criteria. For example, in 1997 Renault defined a seven-point development strategy:
1) quality products and services
2) the development of a "coherent and open company"
3) a product range policy that is "young , strong and innovative"
4) an internationalisation policy
5) a willingness to cut global costs
6) "finding ways of working together in greater harmony"
7) searching for profits so as to “ensure the company’s independence and fund its
development.".

The same logic can be found at PSA. In J. Calvet's speech to the general shareholders' meeting in
June 1991, he reminded the audience that company' s main objectives were to:
1) improve its industrial tool
2) increase material and immaterial investments
3) improve team spirit and incentives within the company
4) emphasise the renewal of models and more specifically the development of a strong
technological innovation policy
5) increase the quality of service
6) increase the company's (and more specifically, PSA’s) degree of internationalisation
7) accelerate the operational merger between the Peugeot and Citroen brands.

The overall logic of these two strategic policies would in general appear to be similar. They stress
the importance of customer satisfaction; searching for internal savings; recognising the role of
product innovation as a factor of competitiveness; and the need for carmakers who were still far
too focused on Europe (and even on France) to become further internationalised.

In the late 1990s, the firms began to view shareholder interests as an integral part of their
strategic objectives. Renault preserved its first six strategic orientations (although they were
formulated in a different manner), but from 1998 onwards, in an attempt to maintain its economic
and financial independence, it replaced its profit targets with a goal of "engendering earnings that
correspond to shareholders' expectations and fund our development." PSA followed suit by
establishing a "profitability imperative". In January 1998, the new CEO, Jean-Martin Folz,
8
announced three priorities for the PSA company that he would actually start to run a year later:
growth, innovation and profitability. These semantic re-orientations may appear somewhat
artificial, but they do indicate a deliberate intention of putting the shareholders' interests at the top
of the executives' list of concerns.

2.2. THE DEVELOPMENT OF A LOGIC WHICH EMPHASISES FINANCIAL PROFITABILITY

The implementation of this attitude presupposes changes in the logic that orients the way in with
strategic and operational decisions are made. This attitude must be transposed into the firm's
operating rules so that decisional choices become less guided by growth-based or technological
performance-related criteria, and more guided by profitability criteria.

⇒ Renault

For nearly a dozen years, all of Renault's economic projects have been evaluated according to
three criteria: a positive net present value for the investment, using a discount rate of 14 %; a
gross operating margin of 4 %; and a return on equity of 11 %. Despite the length of time that
these criteria have been in place, they have become increasingly stringent in recent years. Even
strategic decisions such as the Nissan takeover must satisfy these three criteria. In the past the
company sought to conquer new territories - but now that seems little more than ancient history.

Carlos Ghosn’s arrival in 1997 accentuated this shift towards the use of profitability as a "guide
for action". Ghosn was the driving force behind the creation of two committees whose purposes
were respectively to cut costs and to impact the growth process. The cost-cutting committee
began by monitoring savings opportunities both internally and also with suppliers and
subcontractors. The growth committee sought to define paths towards a type of growth that
would create value. The issue for Renault became the identification of economic areas
(MERCOSUR, Asia) that could be sources of growth. It also sought to define organisational
modalities that would enable a penetration of these areas and the realisation of scale economy
(alliance with Nissan, acquisition of Samsung and Dacia, direct commercial and industrial
presence).

⇒ PSA

At PSA, the transposition of shareholder attitudes was even more direct than at Renault, in that a
logic of financial profitability was openly announced as one of the firm’s strategic targets. Two
complementary criteria were chosen. The first was the before-tax Return on Capital Invested.
(ROCI)3. This rate is the principal criteria for the company that each year sets itself a target in
which it estimates that this ROCI represents the cost of capital that the company has used.
Effectively, the rate have risen significantly over the past few years, and more specifically, the
original targets have been exceeded (12.5% in 2001).

This first indicator involves the entire company, whereas the second one focuses on its core
carmaker business. PSA has set for itself a minimum threshold that is based on the ratio between

3
In its “invested capital”, PSA includes fixed assets, operational provisions and working capital needs – plus those
operational provisions that impact gross operating margins and provisions for restructuring. The capital that the
funding department invests is accounted for on a net basis. The economic profit used to calculate the gross operating
margin is adjusted by the other elements in the profit, corresponding to the definition used for the capital invested.
9
its gross operating margins and the turnover of its automobile activities. Revised annually, the
objective was 3.0% in 1999, 4.5% in 2000 and 4.8% in 2001.

Figure 5 – Financial ratios at PSA (Return On Capital Invested and Operational Margin)
18
16,7
16 15,7
14
12 10,4

10 ROCI
Operating
8
profit margin
6 4,5 4,2
2,7 2,6 3,5
4
2,1
2
0
-0,9
-2
1995 1996 1997 1998 1999 2000

Renault’s use of criteria such as these allows for a partial explanation of their industrial decisions.
For example, Renault’s international development strategy is based on a step approach that seeks
to optimise economies of scale and scope. The company has been focusing on markets in Central
Europe, in MERCOSUR and in certain Asian countries where it is easier to commercialise
vehicles that have been adapted from European platforms.

Although these types of efficiency measures vary somewhat between the two carmakers,
financial criteria remain a core concern for both of them.

2.3. DIFFERENT SHAREHOLDER STRUCTURES - BUT SEEMINGLY IDENTICAL VALUATION CONSTRAINTS

Long presented as one of two alternative forms of capitalism, Renault’s privatisation in 1994
erased most of the differences between the two firms in terms of their shareholder structures.
Nevertheless, a number of significant divergences remain.

2.3.1. Renault: between State funding and pension funds

Renault’s privatisation, which began in the late 1980s, was carried out on a step-by-step basis.
The firm first opened up its capital in 1990, at the time that it was negotiating an agreement with
Volvo. However, it was not until 1994 that this privatisation was finally confirmed. The State’s
stake dropped to 52.97% in November 1994, and Volvo became the main private shareholder
with a stake of 11.35%. Judging by the number of applicants for Renault shares, the operation
was a success. Inasmuch as the maintenance of a hard core ("noyau dur") of stable shareholders
was a priority (this being a system that is very characteristic of French privatisations), a
shareholder pact was signed. This core group held 5% of Renault’s capital, and included major
players in French industry: Sogepaf (Elf-Aquitaine), 1.5%; Lagardère, 1.5%; Rhône-Poulenc
Finance, 1% - plus BNP, 1%. In 1995, Renault was listed in the CAC40 stock market index, and

10
the privatisation decree was signed into law, leading to a new reduction in State ownership
(44.2%) and a rise in public (private individuals’) ownership (40.45%).

One issue in this privatisation drive was Renault’s personnel. Union reluctance created fears of a
rift between senior management, favourable to privatisation (following the lead of CEO Louis
Schweitzer who for several years had been calling for it) and factory employees. Yet privatisation
also appeared to be a success in this respect, with 102,000 employees becoming shareholders.
Representing 61% of all staff members, Renault’s personnel held 4% of its capital in 1995. Note
that this percentage dropped in subsequent years (and was estimated at 2.1% in 2001).

Since 1995, the State’s shareholding has been unchanged. The late 1990s were marked however
by changes in the composition of minority participations. Two major trends were observed.

• First of all, industrial group shareholding dropped. In addition to Volvo’s total

withdrawal in 1997 (11.35%) following the failure of the Renault-Volvo merger project,
the core industrial shareholders also dissipated (Elf-Aquitaine’s subsidiary withdrew in
1997, and Rhône-Poulenc in 1998). Only Lagardère kept its stake, which rose to 1.49% in
20004. This general withdrawal was accompanied by a partial dissolution of the (core)
shareholder pact. In 1996, the State actually organised a new over-the-counter sale to
institutional investors, who then signed the already existing core shareholder pact. These
new entrants, mostly banks and insurance companies, nevertheless dropped out of the pact
in 1999, dragging BNP along with them. As such, on 31.12.1999 the pact was organised
around 5 shareholders (Lagardère, CDC, Bayerische Landesbank, Caisse Centrale des
Banques Populaires, Lazard Frères), representing 3.14% of Renault’s capital. This
dilution of the pact was part of a dramatic shift in the composition of Renault’s
shareholders. It was a sign that investors had become relatively less interested in
following a stakeholder logic, and that they were becoming increasingly enamoured of a
more speculative one. As such, it should be analysed as part of the imposition of a value
creation approach by shareholders who have become potentially less loyal. The same
phenomenon can be witnessed in foreign investors’ behaviour.

• Secondly, foreign investors started to play a significant role. As soon as its privatisation
commenced, Renault announced that it intended to incorporate shareholder interests in its
targets, and it began to establish good relationships with institutional investors
(Americans above all)5. One sign of this orientation is that today nearly 22.66% of the
company’s capital is held by institutional investors - including 8.86% by foreigners. Give
that the State’s presence limits the amount of floating capital, Renault’s shareholders
seem to be relatively internationalised6.

Alongside French-based banks and insurance companies, a significant percentage of Renault’s

capital is held by overseas investment funds (unit trusts and pension funds). In 1997, Templeton,
an American mutual fund, took a 4.96% stake in the French carmaker. This participation dropped
in subsequent years, but in 2000 Templeton was still the company’s main private shareholder
with a direct stake of 2.24% and a further 0.32% through its overseas subsidiaries. More
generally, amongst the 15 largest foreign investors, there are 4 mutual funds, 2 pension funds, 2
4
Asides from J.L. Lagardère, whose presence was justified by Renault’s industrial co-operation with Matra
Automobiles, there are no industrial company shareholders amongst Renault’s first 30 French and foreign owners.
5
Interview 14.02.01 with J.-F. de Andria
6
For example, on 30 September 2000, 34 US institutional investors owned 3.3% of Renault (vs. 63 for 3.6% of
PSA).
11
banks, 4 insurance companies and 3 investment companies (in the proper sense of the term, c.f.,
Table 1). The strong presence of these (potentially volatile) investors contributes to the
imposition of a logic that focuses on the enhancement of financial returns.

As such, Renault’s position appears to be ambiguous. On one hand, the State’s strong presence
would appear to protect it from any overriding value creation imperative. Yet in many ways the
State has been trying to avoid getting involved in the firm’s management, apparently giving its
executives a great deal of autonomy to define strategic objectives – including the idea that profits
must be made for the benefit of the shareholders (c.f.,. supra). For this reason, and despite their
quantitatively smaller representation, the institutional investors seem to be qualitatively
important, especially since in the future the State may one day sell its 42.2% stake in Renault,
and the firm will have to find substitute shareholders. This scenario is particularly likely since the
existence of worker-shareholders has induced the firm to admit, internally, the usefulness of
financial profitability criteria.

2.3.2. PSA: between family capital and French investors

With PSA, the key role of the founding family must be stressed, as well as its ties to a few major
industrial actors. Originally a family-run business, the Peugeots have maintained their influence
despite the many changes that have affected the business. Operating through a variety of different
companies7, the family has maintained on average around one quarter of PSA’s capital: 23.21%
on 31 December 1990, 22.7% on 31 December 1995 and 25.11% on 31 March 2000. The priority
voting rights that the Peugeots hold means that their effective control on the above dates was
34.93%, 35.17% and 38.08% respectively. In addition to this direct control, the Michelin
company’s holding should also be counted. Citroën’s former owner for many years running, the
Michelin family has been the Peugeot family’s traditional associate since the takeover. Working
through two different companies, Michelin held, as of 31 December 2000, a 7% stake in the
carmaker. Its weight in terms of the voting rights it enjoys was much higher, again due to the
priority shares it holds 8. Industrial investors’ significant presence is further strengthened by the
Lafarge (Cement) company, which had a direct holding of 1.93% on 31 March 2000, and 2.94%
of all voting rights 9.

Despite the importance of this control, more capital has been offered to the market than is the
case at Renault, and this alone has justified the involvement of a greater number of actors.
However, where Renault’s capital would appear to be widely internationalised, most of PSA’s
capital is being provided for by French institutional actors, who held during the course of the year
2000 33.5% of all PSA shares (21.6% excluding Michelin and Lafarge), or 46.8% of PSA’s
floating capital. At Renault, the figure is only 27.12% 10. The result is that foreign investors’
participations are relatively smaller at PSA, where they represent 9.1% of the capital. The two
7
Depending on changes in legislation and to reflect the increasing number of family members involved, this control
is wielded through several firms, the three most important of which are the Etablissements Peugeot Frères, la
Française de Participtation Financière et la Société Foncière, Finance et de Participations. The smallest and most
recent firms in this group are the Comtoise de Participation and the Cogevam (a 100% subsidiary of the LFPF).
8
Needing cash to fund its ambitious acquisitions programme, Michelin unwound a part of its direct stake, which
dropped from 5.82% in 1990 to 3.51% by March 2000 (or 5.34% of voting rights). This reduction was however
offset by an indirect stake held by its 99.9% subsidiary, Pardevi, which owned 3.5% of PSA’s capital as of 31
December 2000.
9
In fact, this stake grew over the course of the year with the Lafarge group holding a direct stake of 3.0% plus 1.9%
via its subsidiaries as of 31 December 2000.
10
In the numbers for Renault, we subtract the State and the staff members’ participation, as well as self-controlled
shares – for PSA we subtract the shares that are held by the family and by staff members, as well as self-control.
12
carmakers thus feature an equivalent percentage of foreign institutional investors (around 9%),
even though this presence is lower at PSA if we only consider the floating capital.

More than anything else, the difference between the two resides in the qualitative changes that
have affected this presence. PSA’s main foreign investor is a mutual fund of course (The
Northern Cross Investments Ltd.), but this is only the company’s 15th largest shareholder
(excluding the family), with holdings of 0.7%. In addition, the nine largest foreign investors only
include one mutual fund and one pension fund (TIAA-CREF, with 0.4% of the capital, which
also has a 0.92% stake in Renault).

Figure 5bis - Peugeot's Family's Share Control over PSA Peugeot Citroën (31 March 2000)
Famille
Peugeot

79.7%

100%
FFP Cogevam
16.7%
2.3%
Etablissements
Peugeot Frères 2.54%
PSA Peugeot
Citroën
LFPF
3.59%

Comtoise de
Participation 0.01%

Thus the company’s shareholders are structured around two main blocks. On one hand, as is the
case at Renault with the presence of the French State, there is a block of stable shareholders
(surrounding the extended family) that seeks a stable long-term investment, emphasising an
approach that emphasises industrial development and economic profitability. On the other hand,
there are the institutional investors, who are mainly guided by a logic of financial profitability.
The entry of these foreign investors at PSA is old news however, inasmuch as it stems from the
sale of Chrysler’s stake in the company. In fact, a share swap programme accompanied PSA's
takeover of Chrysler Europe. The American carmaker’s quasi-bankrupt condition at the time
induced it to sell its PSA shares on the market, opening the door to US investors. PSA has
therefore entertained relationships with actors from this category for several years now, but its
CEO has not been the one to get involved in this area, which until the arrival of Jean-Martin Folz
had been the exclusive responsibility of the CFO. However, despite the weak presence (in
absolute terms at least) of this category of investors, the manufacturer has shown itself to be
relatively sensitive to their needs, and has therefore made efforts to ensure transparency. Hence
its longstanding adoption of an administrative structure that is based on a separation between
managerial and supervisory functions - Automobiles Peugeots having been run since 1973 both
by a Board of Directors ("Directoire") and by a Supervisory Board ("Conseil de surveillance").

13
Table 1: Renault and PSA’s main shareholders PSA
as of 31 December 2000 16,7% Societé Foncière & Financière De Particip.
6,1% Peugeot Family holdings
Renault 3,0% Peugeot Sa
44,220% The French State 2,3% Cogevam
2,800% Renault Personnel 0,6% Peugeot Personnel - F.C.P.
2,100% Renault Sa 28,7% Extended Peugeot group
49,120% Total 3,5% Pardevi (Participation & Développement I
1,585% INDOCAM 3,5% Groupe Michelin
1,497% Lagardère Sca 3,2% Caisse Des Depots Et Consignations
1,127% AGF Asset Management 3,2% Groupe Cdc
1,040% Caisse des Dépôts et Consignations 3,0% Groupe Lafarge
1,026% BNP Paribas Asset Management S.A.S. 2,0% Société Générale Asset Mgmt (France)
0,926% CDC IXIS Asset Management 1,9% Lafarge Coppee (Filiales)
0,600% Union of Swiss Banks 1,7% INDOCAM
0,580% Generali Finances S.A. 1,7% CDC Asset Management Europe
0,530% Société Générale Asset Mgmt (France) 1,4% BNP Paribas Asset Management S.A.S.
0,467% Crédit Lyonnais Asset Mgmt S.A. 1,3% Geneval
0,400% Lazard Freres Cie 0,8% Crédit Lyonnais Asset Mgmt S.A.
0,368% Crédit Mutuel Finance 0,8% Banque Populaire Asset Management
0,340% Sogéposte 0,7% AXA Investment Managers Paris
0,244% Étoile Gestion 0,6% Victoire Asset Management
0,242% CCF Capital Management 5,2% Others
2.870% Others 33,5% Total French institutional investors
13,800% Total French institutional investors 0,7% The Northern Cross Investments Ltd.
2,244% Templeton Investment Counsel, Inc. 0,6% Bernstein Investment Research & Mgmt
0,920% TIAA-CREF Investment Management Inc. 0,5% UBS Brinson
0,626% Capital Research & Management Co. 0,4% TIAA-CREF Investment Management Inc.
0,600% Banque Cantonale Vaudoise 0,4% Merrill Lynch Invt Mgrs (UK) Ltd.
0,495% Allianz Kapitalanlagegesellschaft 0,3% Acadian Asset Management, Inc.
0,308% Templeton Management Ltd. 0,3% Frankfurt-Trust Investment-Gsl. mbH
0,233% Commerzbank AG 0,3% Grantham, Mayo, van Otterloo LLC
0,215% Foreign & Colonial Management Group 0,2% BlackRock International Ltd.
0,186% Scottish Widows Invst Partnership 0,2% AEGON Nederland N.V.
0,182% Grantham, Mayo, van Otterloo LLC 0,2% Old Mutual Asset Managers (UK) Ltd.
0,150% M & G Investment Management Ltd. 0,2% Standard Life Investments Ltd.
0,137% Arca SGR S.p.A. 0,2% Mercator Asset Management, L.P.
0,118% Bernstein Investment Research & Mgmt 0,2% Teacher Retirement System of Texas
0,099% Franklin Templeton Invst Mgmt (UK) 0,1% Deutsche Bank Fund Management SGR
0,098% MEAG Munich ERGO Kapitalanlage GmbH 0,1% Dresdnerbank Investment Mgmt. (DBI)
0,097% Thompson, Siegel & Walmsley Inc. 0,1% BBVA Gestión, S.A., S.G.I.I.C.
0,094% Chase Fleming Asset Management 0,1% Allgemeine Deutsche Invst (ADIG)
0,079% Oppenheim Kapitalanlagegesellschaft 0,1% Zulauf Asset Management AG
0,076% Delta Lloyd Bank N.V. 0,1% AXA Colonia Kapitalanlagegsl.
0,075% Julius Bär Kapitalanlage AG 3,8% Others
1,828% Others 9,1% Total foreign investors
8.860% Total foreign investors 71,4% Total identifiable shareholdings
71,80% Total identifiable shareholdings
Source: Shareworld-LEREPS (in Dupuy,
Lung, 2001)

14
 2.4. TOWARDS “GOOD GOVERNANCE” PRINCIPLES AT THE BOARD LEVEL

As limited companies, the two car companies’ administration is delegated to a board born out of
the general shareholders’ meeting. Responsible for evaluating and ratifying decisions that commit
the firms for the long term, and for controlling its executive, the boards’ situation is such that
they constitute a prime location for corporate governance, inasmuch as they are the entities that
enable the shareholders to see how their company is being run. Numerous academic analysis and
managerial reports have discussed the “best practices” for these boards (Caby, Hirigoyen, 2001).
They can be broken down into two types of focus: the composition of the board; and its
functioning. We will see that Renault and Peugeot differ in both of these respects. Renault
emphasises a professionalised functioning and an open Board of Directors. PSA seeks to
reinforce the power of its main shareholder company (the extended family) whilst modernising its
Supervisory Board.

2.4.1. The opening up and professionalisation of Renault’s Board of Directors

2.4.1.1. The composition of Renault’s Board

Legally structured as a Board of Directors ("Conseil d'Administration"), Renault has created, in

accordance with French legal obligations, a role that is somewhere between that of a CEO and a
Chairman of the Board. Some observers disagree with this approach, viewing it as poor practice
(i.e.,. the second Viénot report in 1999), but its usefulness is that it ensures a better explanation
whenever strategic proposals are being brought before a Board whose many transformations have
mirrored the company's varied development. The most significant of course is the change in
status that took place in 1994.

Having been administered by the French State since its nationalisation, the 1984 law covering the
democratisation of state-run firms comprised a first alteration. Its application at Renault leads to
the constitution of a 12 member Board of Directors. These include 6 representatives of the
ministry that supervised Renault, individuals who were supposed to convey the State’s vision
inside the firm – but there were also 5 administrators who were named by the State because of
their acknowledged competency. Although they too were representatives of the State in its role as
a shareholder, their presence nevertheless meant a slight shift in orientations, inasmuch as the
State was allowing itself to name persons (not necessarily civil servants) who were considered to
be necessary for the efficient running of a firm that, albeit state-owned, was operating in a
competitive marketplace. In addition to this first change, there was also the nomination of 6
employee representatives, resulting from the application of the Auroux laws on workplace
democracy. This involvement of Renault’s personnel in its management is still in effect, despite
the many changes that have occurred in the mean time.

Privatisation lead to a complete reshuffling of the Board of Directors. In 1997-98, the Board was
comprised of 15 members, with a 16th arriving in 1999 (Y. Hanawa, CEO of Nissan, which had
been partially taken over that year). The directors included:

⇒ 3 employee representatives and 1 shareholder employee representative. Partially offsetting the

unions’ lesser power in managerial circles, the employees have been able to wield some power
through their relatively significant presence on the Board of Administration.

15
⇒ 12 administrators elected by the General Shareholders’ Meeting, broken down between
representatives from the public and private sectors. As a shareholder, the State has 4
representatives, plus H. Martre, President of Honour of Aerospatiale (EADS), a State-run
company. The State also seems to have maintained much of its power. Excluding L. Schweitzer,
Renault’s CEO, and Y. Hanawa, Nissan’s CEO, 4 out of the 5 remaining members represent one
of the company’s major shareholders11: BNP, represented by M. Pebereau since May 1995;
Lazard Frères (F. de Combret, July 1996); Lagardère SCA (J.-L. Lagardère, Mai 1989); Union of
Swiss Banks (R. Studer, July 1996). Three belong to the (core) shareholders’ pact that is still in
effect, and which the BNP joined when its representative was nominated.

It may be difficult at this juncture to evaluate the real strengths of each of these distinguished
shareholders, but the changes in the Board’s composition clearly manifest a shift from an
industrial champion’s logic to one that is more suitable for a profitable firm that remains very
focused on its privatisation. The presence of employees on the Board is not enough to impede an
increased prioritisation of company profitability, especially given the high percentage of
employees who are shareholders, and the presence of one of their representatives on the Board.
The issue of the State's involvement (or ability to act) is also unresolved. It would seem to be
restricted to a supervisory role that leaves it up to the other members to draw up the company's
lines of strategic development, as witnessed by the closure of the Vilvorde plant. In this view, the
Board's composition is an efficient relay for the shareholders' concerns - preoccupations that are
clearly indicated in the public interventions of the company's principal senior managers12. A
corporate governance influence is also clearly displayed in the Board's modus operandi, inspired
from suggestions made in the 1995 Viénot report

2.4.1.2. The functioning of Renault’s Board

The Board of Directors’ modus operandi is seen by Renault as one of the best ways to import
"good governance" principles. At a lower level, this is reflected by the frequency of Board
meetings ensuring that the shareholders exert a real control over senior managers 13

At a secondary level, the company has been making a real effort since 1996 to structure and
specialise its Board's functioning. These efforts have lead first of all to the drafting of internal
rules defining the rights and obligations of Board members. In addition, it has lead to the creation
of smaller committees, enhancing transparency on behalf of the shareholders. There has been an
attempt to clarify people’s responsibilities, and to uncover the purposes of the decisions being
made, by having three specialised committees manage these processes. There is an Accounts and
Auditing committee, comprised of five members representing the various strands in the Board of
Directors (the three types of shareholders [private, State, employees] as well as the employees'
representative), whose objective is to analyse accounts and evaluate the coherency of the methods
being used. A Nominations and Remuneration committee exists, where only private institutional
shareholders are represented. Its role is to look into the nomination of administrators and into
executive remuneration, particularly as regards stock options. Finally, there is an International
Strategy committee with 7 members representing the various strands within the Board of
11
The exception being A. Riboud (Danone), member since May 1995
12
When asked in August 1999 by Option Finance about the State’s shareholding, C. Dor, Renault’s CFO, declared,
“I don’t see any problem. Most of the major European carmakers have a stable group of core shareholders. At
Renault a family isn’t involved,- the State is instead. And the State acts like any responsible shareholder, giving
management as much freedom as it has in any large French firm.” (nr. 560, p. 17)
13
Hence the Board of Directors met 9 times in 1997, 7 times in 1998 and 8 times in 1999.
16
Directors. Its mission is to define Renault's internationalisation process. The people on this
committee and its representativity are clear signs that the company considers this approach to be
a strategic one. In addition, it is also seen as a way of legitimising the firm's choices in the eyes of
the various strands that make up its internal compromise (shareholders, employees and the State).

The absence of any representative of the State or of the firm’s employees (even its shareholder
employees) in these three committees exemplifies the desire to restrict the number of factions that
can deal with conflictual issues such as senior management remuneration. In the corporate
governance logic, this breakdown is legitimate because it will supposedly ensures that
administrators will keep pay increases down – seeing as exorbitant packages reduce the total
income that can be distributed to shareholders. A Board that has been set up in this way should be
able to ensure the convergence of shareholders' and managers' interests whilst putting together a
stock options policy that is a sufficiently motivating for the most important managers.

When described in this manner, Renault’s Board of Directors has been tantamount to an open
announcement that it intends to follow corporate governance norms. For this reason, the company
has brought in an outside consulting firm to evaluate its composition and internal functioning.
Above and beyond the intrinsic utility of this gesture, it should be interpreted as a sign to the
financial markets concerning the way that Renault plans to be managed14. This overt
professionalisation mainly translates an attitude shown to the outside world to avert any external
pressure being exerted on a company which features a State presence at the Board level – a status
that might cause certain financial operators to be sceptical as to Renault’s economic autonomy.

2.4.2. At PSA, the Supervisory Board is tightly controlled

by the family and by close relations

2.4.2.1. The composition of Peugeot’s Supervisory Board

PSA has a legal structure that is relatively unusual in France15. Management is carried out by
both a Supervisory Board ("Conseil de surveillance").and a Board of Directors.("Directoire").
Often presented as a source of better control for the shareholders, this separation is usually seen
as a means of introducing a value creation logic into the firm. It is a legal obligation in countries
such as Germany and the Netherlands, but this separation between executives and administrators
does not mean that value creation is always being sought. In reality, everything depends on the
power relationships inside the Board.

PSA's Supervisory Board is comprised of no more than 12 members. Its main characteristic is the
relatively close-knit nature of its composition. The Board has little room for institutional
shareholders and is mainly organised around the family, corporate executives and executives
from other industrial firms. As such, the Peugeot family has three members on the Board,
respectively the President (Pierre Peugeot), Honorary President (Roland Peugeot) and Auditor
(Bertrand Peugeot). Another strand, which is more difficult to identify, gravitates around the
firm's current or former managers. The third major strand includes representatives from France’s
main industrial companies 16.

14
This explains why Renault communicates the existence of this audit (and its periodic renewal).
15
2 to 3% of French companies are organised in this manner. 20% of those on the CAC40 (Caby, Hirigoyen, 2001).
16
Thus we note for the year 2000 the presence of J.-P. Parayre (Bolloré), J Gandois and E.A. Seillère de Laborde
(current and former leaders of MEDEF, the French employers’ association), M. Friedel (Flammarion), F. Michelin,
P. Faure (Sagem), J. Toot (Timken, USA)
17
The Board reserves a great deal of room for external members, but its homogenous support for an
Industrial firm’s logic is noteworthy. The relational dimension is patent in the composition of
PSA's Supervisory Board. At this level, whereas Renault's Board seems to have organised in such
a way as to increase the role attributed to its main financial institutional shareholders, PSA has
maintained a nomination policy straight out of the French industrial (and family) annals.

2.4.2.2. The functioning of Peugeot’s Supervisory Board

The Supervisory Board meets around once a quarter (4 meetings took place in 1999) but this
infrequency is partially offset by the specialised committee meetings that take place17.

PSA Supervisory Board decided in 1998 and 1999 to create two specialised committees. The
latest one studies Remuneration. Attended by Roland Peugeot, Pierre Peugeot, François Michelin
and Ernest-Antoine Seillière de Laborde, it monitors executives’ pay 18 and the stock option
allocation programmes that were set up in 1999. The family' s control is particularly evident at
this level. The second committee focuses on Strategy, basically understood at PSA as the
definition of the firm’s frontier. This committee's role is to study industrial and technical co-
operation projects with competitors, vectors of internationalisation and the extent of the
automobile division's vertical integration. With Pierre Peugeot presiding, it includes F. Michelin,
E.A. Seillière de Laborde, J. Boillot and J.P. Parayre. One of PSA's particularities is this
possibility of double committee membership. In general, firms (like Renault) have adopted a rule
of exclusivity as regards membership in different committees. PSA on the other hand authorises
dual mandates.

All in all, the two car companies are quite different from one another as regards their respective
Boards’ composition, and above all, functioning. Renault seems to be more receptive to the
canons of corporate governance, featuring both a greater openness to private institutional
shareholders and also an operating mode that aims to provide transparent information. As for
PSA, it appears to be more conservative, both in the composition of its Supervisory Board and
also with a functioning that, even if it suggests some lower level adaptation to the norms of
corporate governance, nonetheless remains under tight family control. It is possibly in order to
offset this state of affairs that PSA has been more active on the stock markets.

3. THE CARMAKERS' ATTITUDES TOWARDS SHARE PRICE CHANGES

The emergence of a corporate governance logic has lead to greater emphasis being placed on
share prices changes. In this view, firms want to be proactive in this area. In recent years, we
have therefore witnessed massive share repurchase programmes concretising the general idea that
the lesser supply of a stock will make its price increase (Grullon, Ikenberry, 2000).

The two car companies have acted very differently in terms of their attitudes towards their share
prices. Whereas PSA has presented itself as being particularly active in this domain, Renault has
seemed rather passive. This latter attitude should not however be belittled - it translates a

17
Specialist committees meet with a similar frequency at both Renault and PSA – in 1999 the Remuneration
committee met twice at both firms, the Strategy Committee once for Renault and 4 times at PSA, and Renault’s
Accounts and Auditing Committee twice
18
The Board of Directors is comprised of three senior executives from the company’s two brands (C. Satinet from
Citroën and F. Saint-Geours from Peugeot) with J.M. Folz presiding.
18
different vision of the way in which share prices should be valued, and in all likelihood a
different set of constraints that need to be taken into account.

3.1. AT PSA, A POLICY OF ACTIVE INTERVENTION

PSA has long been sensitive to changes in its share price. Two distinct eras can be identified.

3.1.1. Share price adjustments during the 1990s

We can traditionally find in the resolutions that are submitted to the shareholders for their vote an
authorisation allowing the company to trade on the stock market so as to adjust the price of its
shares. As such, PSA intervened in 1990 and in 1996 to support its share price, which was
dropping rapidly at the time. The 1990 action took place against the backdrop of a generally
lower stock market - although the PSA had been particularly affected, having lost 40 % over the
course of the year. From its initial holding of 542,000 shares, the firm increased its self-control
by 9,000 shares in the 12 months that followed. The 1996 intervention was even more significant,
company acquiring 632,129 shares over the course of the year. It is true that at the time the
market was generally bullish, with the PSA share moving against this trend. The following year,
the carmaker resold the shares that it had acquired, taking advantage of higher prices.

Figure 6 – Changes in the PSA share and changes in the CAC40 index
(monthly data, January 1988 – March 2001)

700

600

500
CAC40
400

300

200

PSA
100

0
janv- janv- janv- janv- janv- janv- janv- janv- janv- janv- janv- janv- janv- janv-
88 89 90 91 92 93 94 95 96 97 98 99 00 01

These initial interventions, although a reflection of the carmaker’s concern for its share price,
were in the end relatively minor. Moreover, they were done on an ad hoc basis, that is, as a
response to a temporary weakness in the share price. Note the continued under-performance of
Peugeot shares when compared with the CAC40. The index’s value increased by a factor of 6
between 1988 and December 2000, whereas PSA shares rose by a factor of 3.5 over the same
period of time. Between January 1995 and December 2000, the CAC40 grew by 215% versus

19
104% for PSA. This environment induced PSA to alter its intervention policies, shifting from
mere share purchases to an active policy of reducing the offer of stock via outright cancellations.

3.1.2. Recent adjustments of the share price

Share purchase programmes, relatively infrequent in France in the early 1990s, have risen sharply
since a 2 July 1998 law that loosens the operational modalities of such measures and reduces
their fiscal burden. Seizing this opportunity, PSA has launched various purchasing programmes
over the past two years, accompanied by a stock cancellation policy.

The stock repurchases announced in 1999 and 2000 are a net change in company policy.
Henceforth repurchases are accompanied by a partial share cancellation programme. PSA
cancelled 4.65 million shares in November 1999, and up until November 2001 it is authorised to
cancel a further 350,000 shares. In parallel, and a few months after this operation, the company
called 1.755 million convertible bonds, again so as to counteract any previous dilution of its
capital.

There are many reasons why a firm can repurchase its shares (Grullon, Ikenberry, 2000). PSA is
clearly showing that its prime objective is to increase the yield of its stock. The latest share
repurchase programme, as described in a prospectus co-signed by the COB on 4 May 2000,
identifies four objectives classified in decreasing order of priority:
1) optimisation of earnings per share
2) adjustment of the share price where need be
3) implementation of a stock option purchase plan
4) transferral or sale of shares (on the market, over-the-counter or through swap programmes) as
part of overall financial management.

Figure 7 - Net earnings per share distributed (in FF)

NB. The number of PSA shares doubled in 1989 after a two for one stock split

30
25
20
15
10
5
0
87

88

89

90

91

92

93

94

95

96

97

98

99
19

19

19

19

19

19

19

19

19

19

19

19

19

Renault PSA

The company’s main objective is thus to increase the yield of its stock through the cancellation of
some of its shares. At a basic level, this cancellation can be analysed, from a financial point of
view, as a redistribution of cash to the shareholders, replacing the distribution of dividends. Yet if
20
we observe dividends paid per share or the total volume of dividends distributed, it is clear that
PSA is not just replacing one redistribution policy with another (Figure 7).

Instead of a substitution effect, such dividend increases show that PSA wants to render its shares
more attractive. The share repurchase programmes are an attempt to reinforce this attractiveness.
Along with the rise in the firm’s economic profitability, the stock’s hitherto insignificant
financial valuation indicators have tended to rise recently. The company’s PER rose from 9.6 to
11 between 1998 and 1999, indicating increased interest for the share due to its higher profits.
Similarly, EVA and MVA evaluations show a clear improvement, with PSA moving ahead of
Renault in 199919. In an evaluation by Automotive New Europe and PriceWaterhouseCoopers,
PSA had one of the best Total Shareholders Return of all European carmakers (c.f., section 1).

Figure 8 - Changes in the PSA share price (in Euros)

(Monthly data, January 1980 – March 2001)
350

300

Share price adjustments

250
Cancellation (shares,
convertibles bonds)
200

150

100

50

0
janv-80

janv-81

janv-82

janv-83

janv-84

janv-85

janv-86

janv-87

janv-88

janv-89

janv-90

janv-91

janv-92

janv-93

janv-94

janv-95

janv-96

janv-97

janv-98

janv-99

janv-00

janv-01

When presented in this light, the company’s aims are best reflected by value creation indicators.
Yet questions remain as to whether this share repurchase programme also entails a secondary
aim.

The cancellation of convertible bonds may be part of this effort to improve the securities’ yield,
but it can also be seen as a means of increasing control over the firm’s capital. The company’s
relatively small size means that it is more vulnerable to its competitors. PSA is sensitive to the
risk of takeover, as witnessed by the authorisations that it submits to voting during shareholder
meetings. With this in mind, the share repurchase programmes, when followed by a cancellation
of securities, has two purposes: creating shareholder loyalty by enhancing the securities’ yield;
and increasing the relative percentage of capital that is held by family shareholders. The control
of PSA by the family Peugeot and its associates which represents already more than 50% of the

. 19 In a ranking published by l’Expansion (nr. 598, July 2000), PSA jumped from 196th to 168th between 1998-99
(Renault dropping from 42nd to 169th) in EVA terms. As for MVA, PSA went from 200th to 169th (vs. 199th to 173rd).
The two carmakers’ results were basically mediocre – according to these two indicators, they were destroying value
21
votes, would be reinforced by the new programme of stock repurchase that will be submit to the
general shareholders’ meeting on 16 May, 2001 ("La Tribune", 11 April 2001).

3.2. RENAULT’S GROWTH EXPECTATIONS

Renault’s handling of its shares is very different. Even though it has the same financial
authorisations, it does not try to overly influence its share price. For Renault’s management team,
it is ultimately up to the market to validate the firm’s rapid growth strategy.

3.2.1. Renault’s non-intervention policy

Just like PSA, Renault has had its general shareholders’ meeting adopt resolutions authorising the
firm to repurchase its own shares for up to 10% of its total capital20. However, the objectives of
this programme are extremely different from PSA’s. The explicit goals, in order of priority, are:
1) to be able to access all or some of the shares so as to:
a. sell them to the company’s employees and executives
b. participate in share swaps
2) to operate adjustments in the share price - where need be
3) to manage the company’s cash and equity positions

Figure 9- Changes in Renault’s share price and changes in the CAC40

(Monthly figures, January 1995 – March 2001)
400

350

300

250
CAC40
200

150

100
Renault
50

0
janv- juil- janv- juil- janv- juil- janv- juil- janv- juil- janv- juil- janv-
95 95 96 96 97 97 98 98 99 99 00 00 01

Unlike PSA, most of the company's objectives are related to its need to cover staff share
ownership programmes (cf. infra). The 3,136 million shares that were acquired as part of the
1999 repurchase programme were entirely allocated towards this end. All in all, the company is
not specifically attempting to control its share price, and even more significantly, the
authorisation it sought states that no share cancellation operations will be following any such
share repurchases.

20
The authorisation was granted by the COB on 19 May 1999 and on 8 June 2000.
22
The reasons for this lack of intervention do not mean that the share is performing particularly
well - quite the contrary, over the past few years it has lagged behind the CAC40 index21 and
even slightly behind PSA’s share price. For example, Renault's share took three years to reach its
original November 1994 issue price. Its strong albeit chaotic recovery between 1997 and the year
2000 (the CAC40 rose by a factor of 2.56 during this time and Renault by 3.17) therefore did not
result from the company's having pursued an active stock market intervention policy.

Renault's position on this score involves the expectation that the market will ultimately legitimise
its strategy. The same attitude prevails at PSA, which feels however that it is necessary to send a
message to the market "whenever the share price does not discount all of our [growth and
profitability] objectives". Renault's position can be explained by three factors.

First of all, its main shareholder company revolves around a State presence. Any significant
modification in the State's stake in Renault would require that certain major issues be resolved
first, relating both to the institutional procedures that would need to be implemented and above
all to certain social and political factors. In the short run, a main shareholder is a priori primarily
interested in a firm's long-term economic profitability rather than in short-term financial gain.
Pension funds increased weight as Renault shareholders is a relatively recent phenomenon, but it
has had repercussions for share price volatility. The stock's weakness up until 1996 meant that
Renault was a very speculative investment, and this is why Templeton held a stake of 4.96 %
until 31 December 1997.

Secondly, Renault is convinced that the market will validate its external growth strategy. Almost
all financial analysts view mergers and acquisitions as a source of value creation for shareholders
(Caby, Hirigoyen 2001). Renault's dynamism in this area explains why it does not manipulate its
share price - the company is convinced that the stock market will validate its growth strategy.
However, the impact of growth on a share price is unclear when we try to see if there is a
relationship between price movements and the timing of the principal acquisitions that have taken
place (cf. graph below). The market may initially greet each announcement favourably (Renault
rose 8.7 % the day it announced it was negotiating with Nissan) but analysts soon question the
company's ability to manage the merger. As information comes through, share prices fluctuate
strongly (i.e. the steep drop in the weeks following the Nissan announcement in July 1998).

Renault's confident attitude, echoed in some of its director’s speeches22, seemed to start with the
closure of the Vilvorde factory. Announced in February 1997, this triggered an upward cycle in
the share price. After a period of uncertainty relating to the involvement of the Belgian Justice
Department in the affair and the unclear intentions of the State-shareholder in the aftermath of a
parliamentary electoral campaign, analysts finally seemed convinced as to the success of
Renault's profitability approach. This reaction validated Renault's belief that its share price
should reflect its strategic policy, which was based on the search for profitable growth.

Thirdly, Renault has not seen it fit to even try to apply a policy similar to PSA's. It has the
financial resources allowing it to act upon its share price, but such interventions could well be
pointless. Share price volatility would make it difficult to choose the right moment - and maybe
more fundamentally, a strategy of this nature could be construed as an act of defiance towards the

21
From January 1995 to December 2000, Renault’s share price rose by a factor of 2, and the CAC40 by 3.15
22
The firm’s financial communications are full of this confident attitude. In a letter to the shareholders written in
November 2000, Louis Schweitzer stresses that the alliance with Nissan and the operations with Samsung, Dacia and
AB Volvo were all successful, concluding that this growth has been reflected in the strong share price.
23
market, thereby possibly amplifying negative expectations. The intervention would be interpreted
as a signal that the company's fundamentals are fragile.

Figure 10 - Changes in the Renault share price (in Euros)

(Monthly data, January 1995 – March 2001)

60 Acquisition
of Dacia

50

Announcement
Nissan
40
Acquisition
of 20%
Volvo AB
30
Vilvorde Offer
Samsung
Announcement
20 Dacia &
acquisition of
36,8% Nissan

10
janv-95 janv-96 janv-97 janv-98 janv-99 janv-00 janv-01

Moreover, shares cancellation is a delicate proposition. On one hand, cancelling shares that were
acquired in the marketplace would automatically lead to an increase in the percentage of the
State's holding. Despite the discrete role that the State plays, analysts could interpret this change
negatively. On the other hand, the company has had a relatively poor cash position since its
recent deals, and would have to borrow funds to finance the cancellation. Now, Renault has little
room to manoeuvre in this area. Financial analysts see it as carrying a relatively high level of
debt. As we will see, the company's growth over the past few years has involved a reliance on
debt.

The attention that the two carmakers have paid to their share prices has therefore manifested itself
in different ways. PSA, as an industrial, has adopted an active stock market policy. Renault, with
its finance predilections, has placed its trust in the market. Nevertheless, both have emphasised
their shareholders' interests. The question remains as to whether this attitude can be explained by
an increased reliance on the stock market in the funding of each firm’s growth.

4. THE ROLE OF THE STOCK MARKETS

From a corporate point of view, the stock market’s role is to facilitate funding. Certain recent
studies have shown however how the rise in corporate governance has lead to a negative net
issuance of securities. With this in mind, we should examine the two car companies' attitudes
towards the stock market. Both would seem to have been recently relying less and less on the
stock market to fund their growth - and more and more on internal resources and debt.

24
 4.1. LESS AND LESS RELIANCE ON THE STOCK MARKET AS A SOURCE OF FUNDING

Over the past period, the two car companies' relationships to the stock market have evolved in a
parallel manner. During an initial period both turned to the markets for help with their funding
needs; during a second phase they issued a limited amount of capital; and in recent times such
operations have been null and even negative.

4.1.1. Renault's decision not to issue any new capital

Renault's capital issuance phase corresponded to years of hardship for the company, stretching
throughout the entire 1980s and up until 1992. The firm' quasi-bankrupt condition forced the
State as its shareholder to re-capitalise it on several occasions23 - but the European Community
did not approve of this aid, seeing it as a contradiction with the tenets of fair trade. In 1990 for
example, the Community only accepted a new recapitalisation plan under the condition that the
firm reimburse a 3.5 billion FF subsidy that it had received in 1988, and that it changed its legal
status. This happened that very same year, leading to AB Volvo's entrance in Renault’s capital.

With the privatisation in 1994 a new phase began, with capital issuance operations becoming
more and more marginal. 5.01% additional shares were issued in 1994, but the share’s higher
face value meant that this corresponded to an increase of 75.02 % in FF terms. Subsequently
there were only slight variations in the firm's capital: 0.3 % in 1995 and 0.33 % in 1996. This was
the last year that Renault was to use the stock market to obtain funding.

Since 1997, the carmaker has refused to issue any new capital, and the stock in circulation has
remained stable with about 239.8 million shares representing a capital of around 6 billion FF. For
four years now, Renault did not use the stock market as a source of primary funding, despite the
rapid growth it has experienced (above all internationally).

4.1.2. PSA: stock repurchases which reverse earlier share dilutions

As regards its various phases of development, PSA’s experiences have been generally similar to
Renault’s. Between 1980 and 1991, PSA issued capital in four different ways: through the
exercise of stock warrants; the attribution of free shares issued against its reserves; cash
purchases of new shares; and equity option exercises. Two years stand out: 1987, when PSA’s
capital rose by 53.84%; and 1989, when the share’s face value was divided in two. This latter
measure had no effect on the amount of capital issued (0.06% in 1988), but did lead to a twofold
rise in the number of shares in circulation (100.13% with all the other operations that took place).

The following period, from 1992 to 1998, lead to a small increase in capital (0.24%). These were
automatic issuance operations rather than purposeful attempts to help the company with its
funding requirements. More specifically, they involved some small annual increases24 resulting
from options exercises and from the conversion of bonds into shares.

The final period, starting in 1999, combined three contradictory phenomena. Firstly, the capital
continued to rise as per the same automatic mechanisms as those that had been in effect during
the preceding period: options exercises and bond conversions. There was also a monetary effect

23
Between 1980 and 1986, the various recapitalisation plans caused the State as principal shareholder to inject more
than 22 billion FF into Renault.
24
1992: 0.06% - 1993: 0.08% - 1994: 0.01% - 1995: 0.11% - 1996: 0.03% - 1997: 0.00% - 1998: 0.01%.
25
linked to the conversion of the share’s face value into Euros. The rounding up to 6 Euros 25
increased the capital by 33million Euros, drawn against the company’s reserves. Finally, 9.3% of
the capital was cancelled. All in all, this final period corresponded to a new stage in PSA’s
relationship with the capital markets. The company, which has taken further strides in this
domain than Renault had done, not only no longer relies on the stock market as a source of
funding but even tends nowadays to indulge in negative financing operations26. The year 2000
was marked by a slight rise in the number of shares in circulation, an automatic by-product of
options exercises and bond conversions. Thus the year 2000 was indeed part of the third period,
especially since PSA repurchased some of its shares in the market, both to cover its internal
options programmes and also because it was planning to launch further share cancellation
programmes.

4.1.3. An occasional use of rising share prices so as to fund external growth

The stock market has an alternative way of providing for a company's funding needs. This
involves the swapping of securities during external growth deals. Mergers and acquisitions are
totally or partially implemented through an exchange of securities between the purchaser and the
firm being purchased. Firms therefore like rises in their share value, as this can help to fund their
growth. Our two car companies could a priori behave in the same manner inasmuch their market
capitalisation rose sharply after 1997 (cf. Figure 11). The correspondence between the timing of
there last direct capital issuance operation and the rise in their market capitalisation suggests that
recent operations have been financed through an indirect leverage involving the stock market. In
actual fact however, further study shows that they barely relied on this possibility.

Figure 11 - PSA and Renault’s stock market capitalisation (1989-2000, in FF)

9,00E+10

8,00E+10

7,00E+10

6,00E+10

5,00E+10

4,00E+10

3,00E+10

2,00E+10
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

PSA Renault

Given Renault's strong external growth over the past few years, we could legitimately assume
that it uses the stock market lever to finance its deals. The parent company's biggest acquisitions
25
The exact counter-value should have been 5.3375 Euros.
26
In 1999, the number of shares was cut by 9.23%, whereas the value of the firm’s capital rose by 1.93%, mainly as
a result of this conversion of the share’s face value denomination from FF into Euros.
26
have involved the takeover and/or purchase of a stake in competitor automakers (Samsung, Dacia
and Nissan Motor - Nissan Diesel). Yet in all three cases, Renault did not use the swap of
securities as a lever. It is true that its agreement with Nissan foresees the acquisition by this latter
firm of a stake in the French company, but as of yet it has not taken advantage of this possibility.
One reason that Renault gives for its non-utilisation of this lever is its desire to maintain control
over its capital. C. Dor, the CFO, states that " to realise the Nissan operation, our constant
concern was to avoid dilution for our shareholders." (Options Finances, nr. 560,p.16, 1999).

Although Renault’s largest deals have not involved any share swaps, it has however utilised this
method for secondary operations involving its subsidiaries. For example, in RVI’s sale to Volvo,
finalised in July 2000, Renault sold 100 % of its RVI-Mack shares for 15 % of the capital of
Volvo AB (with 5 % more being acquired on the market). Similarly, starting on 1 January 1999
Renault acquired 33.5 % of Teksid's capital in exchange for the firm’s own foundry subsidiaries.

As for PSA, for the three years running from 1998 to 2000, the carmaker did not make any use of
share swaps in the funding of its acquisitions. This may appear logical at the PSA parent
company level, given the absence of any deals equivalent to those that Renault was making, but
its transport (Gefco) and automobile equipment (Faurecia) subsidiaries did pursue their external
growth by means of cash purchases. One example is ECIA's takeover of the Bertrand Faure
company (starting in December 1997). The same applies to the newly constituted Faurecia's
purchase of the American components maker AP Automotives in 1999 - or to its acquisition of
Sommer-Alibert's automobile activities, announced in October 2000 27. Similarly, none of the
subsidiaries that PSA sold at this time were paid for through participations in the purchasing firm.

As such, the two car companies have not been fully using the opportunity offered by share swaps
to fund their external growth (and PSA not at all). Hence their use of the debt markets.

4.2 INCREASING DEBT

The two companies' growth has been ensured through self-funding and through increased debt, as
demonstrated by the rise in their long-term debt (Cf. Figure 12).

The Nissan takeover deal for example involved two mechanisms. On one hand, Renault used part
of its surplus cash, stemming in part from the resale of its stake in Volvo and in Elf-Aquitaine –
two operations that were unwound in 1997, respectively generating capital gains of 1,230 million
FF and 419 million FF. On the other hand, Renault issued a bond. All in all, the company
evaluated at 1.1 billion FF the annual pre-tax debt burden it incurred following its partial
acquisition of the Japanese carmaker28.

Similarly, PSA used part of its cash flow to fund its investment operations, and at the same time
increased its level of debt. This rise in indebtedness constituted a clear break with the company’s
previous policies. Under Jacques Calvet, PSA had taken great pains to reduce its debt. Jean-
Martin Folz’s arrival coincided with its adoption of a more flexible attitude. Henceforth the

27
The absence of surplus cash and level of debt at Faurecia nevertheless forced PSA to support this project. In
January 2001, PSA purchased all of the SIT holding that controlled part of Sommer-Allibert’s automobile business.
Once Faurecia and SIT’s have taken over another one of Sommer’s controlling holdings, PSA is supposed to give all
of SIT’s securities to Faurecia in exchange for recently issued Faurecia securities. PSA’s stake in Faurecia should
then reach nearly 70% (versus 52.6% in 2000)
28
Moody’s lowered Renault’s rating following this purchase (from Baa1 to Baa2).
27
objective became a sustainable increase in debt levels. The low interest rates that prevailed in
1995 justified a reliance on borrowings - which ceased to be “demonised”.

Figure 12 - Long-term debt at PSA and Renault

(1989-1999, in billions of FF)

50

45

40

35

30

25

20

15

10

0
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

PSA Renault

Traditionally more indebted than PSA, Renault’s large-scale external growth operations over the
past few years explain why the gap between the two companies has started to grow again. This
gap in the level of long-term debt is not particularly remarkable in absolute terms, but a ratio of
long-term debts to equity provides a clearer picture of what is really at stake. This ratio confirms
that both companies have been increasingly relying on borrowings instead of on the stock market
– and that Renault depends more on this source of funding than PSA does.

Table 2 - Long term debt as a percentage of total equity as of 31 December

(%) 1997 1998 1999 2000
PSA 29.6 53.4 62.3 50.6
Renault 70.0 64.7 84.7 n.a.

Jean-Martin Folz’s strategy of relying on debt whenever the opportunity is presented by

bondholders (and more particularly by bond market conditions as a whole) is clearly visible in the
changes in PSA’s long-term borrowings, both in absolute terms and as a percentage of
shareholder equity. Nevertheless, it is clear that this increased indebtedness has been subject to a
tight control. Pursuing Folz’s predecessor’s approach, PSA has been working hard to preserve a
healthy financial situation. For three years, it has succeeded in generating cash surpluses 29 (c.f.,
Figure 13). Despite the rise in investment outlays or in share repurchase programmes (275
million Euros in 2000), the car company succeeded in lowering its long-term debts over the

29
The only activities being taken into consideration here are industrial and commercial activities.
28
course of the year 2000. This financial strength allowed it to call a convertible bond that was
supposed to expire on 1 January 2001 without any increase in long-term debt 30.

Renault has had less room to manoeuvre in terms of its future borrowing policies. It has had a
negative net cash position for the past few years. 1998’s profits were basically due to a blip, with
the car company having been able to achieve cash surpluses by selling shares in Volvo and Elf.
Excluding 1998, Renault has been a net borrower. Moreover, this indebtedness increased by
77.5% between 1999 and 2000, following the acquisition of Volvo and Benetton Formula, with
the increase in fixed tangible assets and the rise in working capital needs stemming from a major
economic slowdown that began to affect the company as the year drew to a close.

Figure 13 - Net cash position for Renault and PSA’s industrial and commercial activities
(as of 31 December, in millions of €)

1997 1998 1999 2000

1 612 1 711
2000 1 409
817
1000

0
-285
-1000 -637 PSA
-2000 Renault

-3000 -2 700

-4000
-4 793
-5000

All in all, for the past few years the two companies have relied on banks and on the bond market
to finance their growth. Nevertheless, each enacts this reliance differently. PSA’s strategy is to
rely on borrowings as long as costs are low. It wants to be able to preserve its ability to raise
funds rapidly if need be without causing the financial markets any undue concerns. PSA wants to
emit the image of a company which is basically geared towards an industrial logic, and whose
financial situation is healthy. One gets the sense that part of this message stems from a desire to
dissociate itself from its French rival, which has been transmitting, ever since its nationalisation,
the image of an overly indebted company. Despite its efforts to reduce its overall debt levels,
Renault’s growth strategy has forced it to increase borrowings. The challenge for Renault is that
capital is currently relatively cheap, tempting it to continue to try to take advantage of any
potentially profitable growth opportunities 31.

30
Between 31 December 1999 and 31 December 2000, long term debt dropped by 454 million Euros. Excluding
convertible bonds however, it went from 4,590 to 4,739 million Euros.
31
Renault’s recent acquisitions will have a variable impact on the company’s earnings over the next few years.
Given the current strength of the market and its intensive refocusing on its core businesses, Nissan should be able to
make a positive contribution of 56 million Euros to Renault’s 2000 earnings. Samsung and Dacia on the other hand
will probably only start turning a profit in 2004.
29
At a more fundamental level, what we are again witnessing is the traditional opposition between
these two companies. Renault searches for a mythical “critical mass” of 4 million vehicles,
supposedly a threshold where debt becomes a growth-enhancing tool. PSA is focused on a
prudential financial management, wherein growth for its own sake is nothing to be aspired to.
There is however some convergence in that both feel that they need to get their employees
involved in their business by providing them with a stake in its economic and financial
performances.

5. INCORPORATING PERFORMANCE INTO STAFF REMUNERATION

By using financial performance as a parameter of staff remuneration, companies are trying to

provide their personnel with an incentive system for aligning themselves with shareholders'
interests, given that the employees’ total remuneration is linked to the firm's economic and
financial profitability. The main modalities for this approach are the stock option programmes
that are often the sole reserve of senior managers – as well as the introduction of variable
remuneration schemes where pay varies as a function of the firm's earnings.

5.1. STOCK OPTION PROGRAMMES

For their senior managers, the French car companies' preferred type of incentive involves an
allocation of equity call options. The usefulness of stock options is that they turn corporate
leaders into potential shareholders motivated by the desire to see the value of their stock portfolio
rise.

Table 3 - Comparison of PSA and Renault’s stock option programmes as of 30.06.2000

Company %age of %age of options Total number of Ranking amongst

capital issued reserved for beneficiaries CAC40 companies
as options executives (including executives) (potential capital gains)
PSA 0.27 36.00 n.a. (14) 35
Renault 2.10 21.10 743 (7) 27
Source : L'Expansion, n°628, 14.09.2000

5.1.1. PSA: the renewal of a longstanding tradition

In value terms, PSA's stock option allocations would appear to be relatively minimal. On 30 June
2000, they only represented 0.27 % of total capital, putting PSA in terms of this one criteria in
last place amongst large (CAC40) French companies. The rising share rise has increased PSA’s
rank as regards potential capital gains – but in total, the company only makes a marginal use of
stock options. However, this raw data hides two facts: PSA has a long tradition of allotting stock
options; and the smallish initial programmes have been getting larger in recent times.

PSA has long offered options to its executives as part of its performance-related policy. The June
1987 general shareholders' meeting authorised the Board of Directors to offer options to some
Peugeot SA (or subsidiary) personnel or representatives. This performance-related programme
was concretised at that time through a warrant for new Peugeot S.A. shares. Three allocations
took place in 1987, 1988 and 1990, involving 115 persons for a total distributed of 179,000
options with a five-year expiry period. The strike price was calculated on the basis of the average
30
share price for the 20 previous sessions, discounted by 20 % in 1987 and 1988, but only by 10 %
in 1990. Later years where this system was in effect (1991 and 1995) were marked by the
adoption of two other option allocations, with 39,900 and 43,700 options being distributed
respectively.

Although these initial programmes indicate that PSA was ready quite early on to introduce a
policy in which at least some of the remuneration it paid varied according to the price of its
shares, this does not mean that the company was already introducing a veritable corporate
governance logic. First of all, the countervalue of the options distributed was relatively small
compared to the company's capital. Secondly, these options allocations were very sporadic. Stock
options are not perceived to be an alternative form of remuneration - they are seen as a
complement. Thirdly, the allocations were relatively opaque. The company limited itself to the
regulatory minimum - and it was impossible to identify exactly which employees benefited from
these allocations, and which rules governed their distribution. Still, the 1995 plan did introduce a
modicum of transparency, with the firm announcing that the 43,700 options would be split
amongst 58 persons, including three members of the Board of Directors32 (identified as corporate
executives).

In 1999, a major change took place. PSA no longer allocated equity warrants, rather it distributed
call options. The objective was to reduce the amount of the potential capital even if this meant
that PSA would sometimes have to repurchase shares in the market. This procedural change also
leads to a net increase in the number of stock options: 77,150 at a unit price of 125 Euros in 1999
and 118,200 at a price of 212.74 Euros in 2000. Above and beyond this quantitative aspect, PSA's
changing stock option policy is also reflected in its distribution policy.

The first modification involved delegating to a Remuneration Committee the task of controlling
these allocations. The constitution of this committee marked the company's desire to make a
systematic use of stock options, and to professionalise their allocation procedures. The second
modification was the broadening of the definition of a corporate executive. Previously restricted
to the Board of Directors, the concept now included members of the Executive Committee and of
the Senior Management Committee33. These 14 senior managers were allocated a total of 30,500
stock options in 1999 (39.5 %).

This broader definition of executive status and increased number of options distributed reflected
PSA's desire to increase the variable proportion of its executives' remuneration. This variable part
represents 21% of the Executive and the Senior Management Committees' total remuneration
(4.98 million Euros in 1999). At the Directors Committees level, this variable percentage
represents 14 % of the total remuneration paid. In addition, the company has clearly displayed its
intention to increase this proportion in future years.

One main point in this increase of the variable proportion is that it tends to involve an increased
reliance on options programmes. In addition to the options incentive aspect, they also increase
their beneficiaries' potential upside. The rise in the company's share price, particularly since late
1999, has raised hopes that capital gains are there to be had.
32
Board of Director members received 13,000 options all in all.
33
The Executive Committee included 8 members in 1999 (9 in the year 2000) : 3 members from the Board of
Directors, and 5 directors from operational areas (Finance, Control and Performance, Innovation and Quality,
Platforms, Techniques and Industrial Purchasing, Human Resources and Relations). The Senior Management
Committee, which reports directly to the Chairman of the Board, includes 6 directors: Product Planning, External
Relations, Management Staffing, Legal, Communications, Strategy.
31
Table 4 - The option’s programmes’ potential capital gains (in millions of €, as of 13.03.01)

Programmes’ total Capital gains for Average per Options’ rate of

intrinsic capital gains executives executive diffusion
PSA 16.1 6.0 0.4 0.06%
Renault 78.6 15.8 2.3 0.26%
Source : http://www.stock-options.fr/, 13.01.2001

5.1.2. Renault: an emphasis on stock options

Stocks-options are a much more accepted type of remuneration modality at Renault. First used in
1996, the programmes cover more people (the diffusion rate at Renault is 0.26% versus 0.06% at
PSA) and a greater number of stock options are also distributed. The result is that according to
latest estimates, outstanding options still represent 2.10% of the company's capital. Moreover,
these programmes have increased rapidly in recent years (cf. figure 14).

Figure 14 - Annual stock market allocations

1999

1998

1997

1996

0 500000 1000000 1500000 2000000 2500000

Including GEC Stock options

Renault’s stock option allocations procedures are similar to those that can be found at PSA. The
Board of Directors approves a plan proposed by the Remuneration and Nominations Committee.
In terms of its intent, the company has clearly shown that the purpose of the options programme
is to create convergence between employees' and shareholders' interests:

The options allocation is mainly intended to associate the Renault company's worldwide
management teams, and in particular the members of its executive teams, in developing
the company's value (hence Renault's share price) through a participation in the firm's
ownership. (Renault 1999)

Three types of beneficiary executives are identifiable.

32
 Ÿ The main beneficiaries of these stock options are executives, in the strict sense of the term:
the members of the company's Executive Committee. They made only possess 21.1% of the
company's stock options (vs. 36 % at PSA), but there are only seven such executives at
Renault. As such, the countervalue of the stock options allocated to each Renault beneficiary
is much higher than at PSA (cf. Table 4). All in all, variable remuneration represents 24.9 %
of these executives' remuneration.

Ÿ In addition to this inner circle of executives, there is a second circle corresponding to

Renault's Directors' Committee. The 16 members of this committee also receive stock
options once a year, depending on their individual responsibilities and results.

Ÿ Finally, there is the third circle of close to 60 individuals who receive non-automatic
allocations that depend on their level of responsibility, performances and results34.

All in all, stock options are widely used at Renault. Above and beyond executives identified in
public communications, there are two other circles of managers for whom stock options
represent a non-negligible portion of total remuneration. In addition, stock options are also used
for certain non-executive managers, as we will see.

5.2. THE INTRODUCTION OF A PROPORTION OF VARIABLE REMUNERATION

5.2.1. PSA: wider participation in performance-related schemes

Long a symbol of an employer attitude that could be both paternalistic and punitive35, PSA has
been trying to modernise the foundations upon which its internal compromise is based. The main
modality for aligning employees with the company's objectives is the performance-related
scheme that was drawn up in March 1999. This was an improvement over the previous scheme,
dating from 1998. The scheme has explicitly tried to orient employees' interests so that they mesh
with the company's strategic objectives. It involves bonuses being paid, depending on results.
These bonuses can be analysed as a direct transposition of the main profitability criteria chosen
by the company - the automobile division's operating margins. This criteria’s minimum target
threshold is revised upwards each year (1 billion FF in 1998, 2 billion FF in 1999). The
breakdown between beneficiaries is proportional to employees' gross annual salaries - the
bonuses that were paid ranged from 2,528 FF to 7,584 FF in 1999; and for an average salary, they
rose to 9,700 FF in the year 2000.

Since it was first signed in 1998, the performance-related scheme has been modified and
improved every year. In 1999, for example, the total operating margin that came under its
purview was increased by 1 % (rising from 3 to 4 % for an operating margin of between 2 and 6
billion FF; and 3 % beyond this level). Similarly, the modification signed in May 2000 stipulated
that an added 0.5 % of this operating margin would be distributed if total billings exceeded 2.9
million cars (vehicles assembled and/or CKD). Since the year 2000, the scheme has covered all
automobile division employees worldwide.

This initial system is enhanced by a participation agreement. Representing a further strengthening

of the performance-related scheme, a new participation agreement was signed on April 1999.
Broader than its predecessor, this agreement not only covered automobile branch employees but

34
In 1999, members of this latter company received between 1,000 and 5,000 options, the median being 4,000.
35
One indication being the lawsuit the company lost as regards discrimination against unionised employees.
33
also staff working in subsidiaries that are at least 50 % owned by PSA (Gefco, Credipar, PCM,
SCEMM, CITER). This broadening was justified by the fact that the agreement is calculated on
net earnings at a company level (and therefore an outcome to which the subsidiaries contribute).
Here again, distribution depends on the salary paid.

As such, for the past three years, the principles of variable remuneration have advanced through
the two mechanisms that are performance-related pay and participation 36. These programmes
cover all employees, but it should also be noted that some of the company's senior managers (in
addition to the aforementioned executives) also benefit from stock options. The company might
not be very open about the nature of these beneficiaries, or about the modalities of their
allocations 37, but the data contained in Tables 3 and 4 show that they are relatively marginal in
quantitative terms.

5.2.2. Renault: a performance-related scheme for everyone

and stock options for limited number of managers

For Renault, the main way of getting employees into a performance-related scheme consists of
allocating a performance-related bonus (a system that was first set up when the company was
privatised). This bonus is calculated on the basis of the firm's net earnings and corresponds to a
distribution of 6 % of its net consolidated profits. In addition, Renault has set up local
performance-related schemes. Each entity receives at the beginning of the year certain objectives
which, if attained, enable its employees to receive a bonus. All in all, these measures meant a
distribution of 58.7 Euros in 1999, 120.1 in 1998 and 64.3 in 1997. In addition, certain business
units had benefited from specific measures since 1997, including the utility vehicle division, the
MERCOSUR unit and the spare parts and accessories branch. Here the variable portion is
calculated according to the business unit's performance.

This profit-sharing policy 38, open to all personnel, is rounded out by an active and specific policy
that covers certain non-executive managers which the company deems to be strategic. These
"strategic managers" and "young managers with high development potential" sometimes benefit
from stock options. Such allocations are nevertheless sporadic, and in principle they cannot be
made two years in a row. There are a multitude of allocation rules enabling an evaluation of those
who are "the most deserving". This involves an annual evaluation interview that is carried out by
a hierarchical superior (in 1999, 1,000 employees were involved in interviews of this nature). In
parallel, the Careers Committee makes a monthly evaluation of positions of responsibility. It
assesses staff members' contribution, particularly young managers with "high potential".

The birth of this latter category of managers can be explained by a desire to lock in competencies.
Faced with an ageing workforce, PSA and Renault have sought aid from the French State to
finance early retirement programmes 39. Nevertheless, a strong economy over the past two years
has modified the situation: the two companies had increased their numbers recently, an effort that
has had to be particularly intensive since the early retirement programmes have already started to

36
These two programmes cost the automobile division 181 million Euros in 2000. They cost 196 million Euros for
the whole company.
37
The website http://stock-options.fr/ classifies firms according to an options policy transparency index. PSA was
marked « incomplete and/or relatively unclear ». Renault was called « an open and thorough company ».
38
Another component of this strategy relates to the development of employee-shareholders. This policy was very
active during Renault’s privatisation, with staff holding 2.8% of its capital versus 0.6% at PSA (c.f., Section 4).
39
At Renault, 2525 employees were affected by early retirement programmes in the year 2000. 6,000 employees
were recruited, including 5,000 in France.
34
kick in. The relative shortage (at a macroeconomic level) in labour, which is a side-effect of the
return to growth, has forced the car companies to try to increase the attractiveness of the
automobile sector (whose image is not very positive at all) - and more specifically of their
particular brand (versus foreign manufacturers). It is for this reason that Renault has defined this
concept of young, high potential managers. The classification provides members of this category
with two advantages. The first is that it gives them the right to access stock option allocations.
The second is that it opens up promising prospects for young managers who since 1999 have
been kept informed whenever they are classified in this category.

6. THE FRENCH CAR COMPANIES AND

THE GOLDEN RULES OF SHAREHOLDER VALUE

We will now discuss the way in which French car companies have applied, or are continuing to
apply, the "golden rules" of shareholder value. We will see how this drive affects those
productive activities that come under the aegis of the new corporate governance - and how it can
impact companies' economic performance (profitability) and innovation capabilities in the long
run.

These so-called "golden rules" involve:

• downsizing and rationalisation (cost-cutting)
• focusing on the core business
• growth through internationalisation

6.1 DOWNSIZING AND RATIONALISATION

The two French car companies had to cope with a major crisis in the early 1980s. Since then,
their policies have been geared towards downsizing, reducing surplus capacities, rationalising and
closing a number of facilities - but also towards increasing manufacturing and assembly plants’
flexibility.

6.1.1 About 45% reduction in total employment

In the past, downsizing measures had been undertaken in the absence of a corporate governance
ideological influence. For PSA, employment has declined since 1979, when the company
acquired Chrysler’s European activities: the rationalisation that followed this acquisition, and the
failure of the Talbot brand, accelerated the trend. Total employment declined from a peak of
263,000 employees in late 1979, to a low of 139.800 in 1994: 123.000 jobs were lost, meaning a
drop of 46.8%. The same occurred at Renault, which began its decline in total employment in
1977 (maximum of 243,500) to 138,300 in 1994 (-43,2%) – see Figure 15.

This reduction in employment has been largely realised through an early retirement ("pré-
retraite") system that is funded in part by the French State (O'Sullivan, 2000), which assumes a
large proportion of the cost of this downsizing, indirectly supporting the national car industry. Up
until now, more blue-collar workers have been concerned by these changes than any other
category. It has lead to the rapid destruction of in-house competencies that had been developed in
the past. However, many of these difficulties have had a purely local fallout resulting from the
disappearance of tacit knowledge as older workers were laid off or retired early. At a wider level,
it does not appear that this trend has produced any serious problems in an environment in which
35
the new technological and organisational competencies that have been needed on the shop-floor
have been (at least partially) satisfied through automation and via the introduction of just-in-time
procedures. As a result, labour has declined as a relative percentage of total costs: for PSA, from
31.4% of the net sales in 1983 to 18.8% in 1990.

Figure 15 - Total staff at Renault and PSA (1979-2000)

(In thousands, as per 31 December of each year at the company level)

270

250

230

210

190

170

150

130
1979
1 2 3 4 5 6 7 8 9 101989
11 12 13 14 15 16 17 18 19 201999
21 22

PSA Renault

Source: companies

Since the mid-1990s, total employment has stabilised, and in recent years the number of workers
rose significantly: globally there has been a net staff variation of 33.300 for PSA between 1997-
2000, and of 28,100 for Renault in 1999-2000. This growth in employment is linked to the firms’
internationalisation strategies (new plants in Brazil for both carmakers), and also to the arrival of
new engineers and technicians in their European centres. These new employees are working to
develop innovative capabilities in new technologies (information technology as well as new
materials, fuel cells, etc.) and in design, trying to broaden the variety of products that the
companies offer. However, these changes have not produced any reversal in the existing trend
towards lower labour costs: for PSA, the ratio of total labour costs to net sales has continued to
decline, from 16.8% in 1998 to 15.1% in 2000.

These trends in employment levels do not necessarily stem from any of the corporate governance
measures that have been taken. On the contrary, the most recent period has indicated a clear trend
upwards in terms of activities, innovation, and employment.

6.1.2 The closure of facilities

Nevertheless, some of the events which have marked the chronology of facility closures that is
associated with this trend clearly reflect radical changes in the firms’ previous rules. If we
consider facilities closures (see table below), some events are the by-product of the underlying
major trends: whether the closing of the firm’s oldest assembly plants in Paris (Billancourt for
Renault) and/or marginal and obsolete plants (PSA); or the relocation of its activities towards
more modern assembly plants enabling a flow management (both internal and external) that is
clearly tied to a rationalisation drive. For PSA, this reduction in overcapacities led to the closing

36
of the former Chrysler plants in UK and Belgium, and to 700 jobs being lost at Villaverde in
Spain.

Two specific events are noteworthy: the example of Chausson; and the decision by Renault to
close its Vilvorde plant in Belgium (with the indirect support of the French government). In 1996,
Renault’s closure of its small assembly plant at Setubal in Portugal was accepted by the
Portuguese government because of the company’s new investments at its Cacia engine plant. The
closure of Vilvorde was a more dramatic event. It has been interpreted as a clear signal both
internally (it is referred to in many interviews as a watershed for radical change) and externally
(especially by the financial markets) that European overcapacities have to be rapidly cut in the
name of increased profits, whatever the social price of such a decision. Corporate governance and
shareholder value now comprise the new driving forces at Renault. The same was true in Japan
when C. Ghosn decided to close Nissan’s oldest plants.

Table 5 - Closure and opening of plants in Europe since 1980

Renault closures Renault new plants PSA closures PSA new plants
Gennevilliers Guyancourt (France): Lille (France): engine Hourdain (France):
(France): stamping technocentre (1998) plant (1998) assembly plant (Fiat
(2005) Levallois (France): j.v.: Sevelnord 1994)
Haren-Vilevorde (Slovenia): assembly assembly plant (1988) Trémery (France):
(Belgium): assembly plant (1992) Stoke (U.K.): engine plant (1982)
plant (1997) assembly/engine plant Valenciennes
Setubal (Portugal): (1987) (France): transmission
assembly plant (1996) Nanterre and Clichy plant (1982)
Billancourt (France): (France): foundry and
assembly plant (1992) mechanical parts
(1985)
Linwood (U.K.):
assembly plant (1981)
Belgium (1980)

The Chausson example is related to this change. Chausson was a joint venture between Renault
and PSA, who were producing light commercial vehicles in two separate assembly plants. With
the development since 1978 of a new co-operation with Fiat in light commercial vehicles
(SEVEL), Peugeot’s interest waned, and towards 1983-84 it began to negotiate an exit from its
previous joint ventures. Under huge pressure from the French government, Renault took control
of this entity and ensured a socially responsible management of the divestment by re-allocating
its manufacturing activities to Chausson's plants. After buying PSA shares in 1996 and
progressively reducing its activities, Renault sold Chausson to an Italian company, Magnetto, in
2000.

37
 6.2. FOCUSING ON THE CORE BUSINESS

6.2.1 Renault: the outsourcing of component activities

Renault was the first to carry out a widespread divestment of its component activities. Upstream,
Renault sold off some of it mechanical activities, not only those prototyping businesses (France
Outillage and Crecia) that involve very specific competencies, but also large volume mechanical
activities such as the foundry (Teksid) and the transmission joints (NTN). In recent years, it has
continued to exit from those new technologies that require very specific capabilities: after
electronics (failure of its venture with Bendix in Renix) and equipment (Renault Machine Tools),
it withdrew from robotics (Renault Automation) in 1999.

Clearly Renault considers that its prime core business relates to an overall function that is
comprised of an integration of the numerous subsystems and components that make up an
automobile. It focuses on advanced engineering and on managing the overall process of
designing and producing a growing range of diversified products, with technological innovation
becoming the responsibility of its suppliers (see below). In the motor vehicle sector, Renault’s
core competencies relate to passenger cars: light commercial vehicles and industrial vehicles are
designed in collaboration with strong partners such as General Motors and Volvo AB.

Table 6 - Divestments: Main outsourcing operations during the latter part of the 1990s
PSA
2000 – Sale steering operations: joint venture with
Koyo Seiko (51%, PSA 49%). Two plants were
concerned: Dijon and Saint Etienne (1,000
workers).
1999 – Sale of rubber/metal component operations
to CF Gomma SpA (Rennes La Barre, 2,000
employees)
1999 – Sale of moulding activities SOGAMM
(Société d'Outillage Général Appliqué aux Moules
et Moulages) to Duarte
1999 – Sale of professional travel organisation
Gefcotour to CWT (Accor)
1999 – Sale of aerospace equipment activities
SAMM to Lucas Aerospace
1996 – Sale of stake in Chausson to Renault
Renault
2000 – Sale of Chausson to Magnetto
2000 – Sale of prototyping activities France
Outillages Prototype to Heuliez
2000 – Spin off of industrial vehicles activities
RVI to Volvo AB (Renault: 20% of the new
company)
1999 – Sale of travel activities Cat Voyages to
Capital Events
1999 – Sale of robotics activities Renault
Automation to Comau (51%)
1999 – Exchange of foundry activities with
Teksid, creating a joint venture with Fiat (Renault:
33.5%)
1999 – Sale of Le Mans chassis activities to ACI
(Renault subsidiary)
1998 – Sale of prototyping activities Crecia
Prototype to Duarte
1998 – Sale of Le Mans transmission joints
production to NTN
1996 – Sales of Orleans mechanical plants to
TRW

Source: press, companies

Renault's second core business is its direct relationship with its clients. This infers the
restructuring of its retail network, as well as investments in services. Since profit opportunities

38
are lower in the manufacturing activities (due to outsourcing and strong price competition),
services are a new frontier for car company profits. In both cases, the search for new capabilities
continues to be mainly handled internally. The restructuring of Renault’s retail network will be
largely determined by changes in European block exemption regulations (Jullien, 2000). Some
evidence from other service activities could also be considered in this area. The failure of a direct
acquisition (Europcar during the 1970s) led to a choice being made in favour of an internal
growth of car maintenance and repair capabilities, rather than the acquisition of an existing
network. In 2000, Renault launched its new low cost repair network, Car Life, instead of
acquiring Midas or Speedy (which was purchased by Ford and Fiat in 1999). Its new challenge is
internationalisation. In February 2001, Renault announced that it would withdraw from its
logistics activities (CAT: Compagnie d'affrètement et de transport) - with PSA reaffirming that
GEFCO is to remain part of its core business.

6.2.2 PSA Peugeot Citroën: a greater degree of internalisation

PSA is a more integrated company than Renault. Historically, Peugeot has had a diversified range
of activities, including bicycles, motorcycles, tools, etc. During the 1970s, all of these activities
were being progressively oriented towards automotive components: Peugeot’s components
division (ECIA) was very strong. The 1997-98 merger with Bertrand Faure led to an involvement
in a new company, Faurecia, with PSA holding a 52.6% stake before its latest acquisition. PSA’s
financial involvement in Faurecia’s 2001 acquisition of the French supplier Sommer-Allibert
means that its stake will rise to 70% of Faurecia’s capital. This latter company is about to become
Europe’s 4th largest supplier, and it is market leader in vehicle interiors (seats, cockpit), exhaust
systems and front-end modules. Nevertheless, Peugeot’s behaviour with respect to Faurecia has
been fundamentally opportunistic: the company announced that its 70% participation level is not
definitive, and that it may be lowered in the near future. Despite its financial relationship with
PSA, Faurecia conducts a great deal of business with other carmakers. In fact, they represent 75%
of its total sales, and VW’s share in Faurecia sales is about as important as PSA’s (24 vs. 25%).

Some differences exist between the two French car companies in terms of the way in which they
define their core business. PSA is a global leader in diesel engines (see below) and prefers to
maintain strong relationships with its suppliers so as to be able to control the development of the
technologies that are crucial to its car product integrity. Nevertheless, PSA seems recently to
have undergone a policy shift. Over the past few months it has taken advantage of the
opportunities for outsourcing that have been cropping up (see table 6), and some PSA new
product component orders have been won by Faurecia’s competitors (for example the seats for
the new "306" model are supplied by Johnston Control). Faurecia will probably remain the
company’s most important supplier, given its capabilities in certain key
component/module/subsystem areas, especially since the acquisition of Sommer-Allibert.
However, as regards new technologies, PSA had over the past few months signed new co-
operative agreements with certain global suppliers, all of whom are leaders in their respective
fields.

6.3 GROWTH THROUGH INTERNATIONALISATION

6.3.1 Internationalisation: a compulsory step that involves a variety of trajectories

In a mature industry such as the automobile industry, where companies have withdrawn from
component making activities they have sought new growth in the service sector (where prospects
are limited) or else (and even more so) in growing emerging country markets (Humphrey, Lecler
39
and Salerno, 2000). Internationalisation has been a key challenge for carmakers (Freyssenet,
Lung, 2000). In line with its traditional reliance on internal growth, PSA’s strategy involves the
creation of new capacities in a limited number of emerging countries (mainly China and Brazil).
In some countries, foreign investment controls continue to be strong, and PSA will organise a
joint venture with a local partner (India, China). It refused to participate in the merger mania that
the auto industry went through in the late 1990s. The company remains a regional one: more than
9 in 10 vehicles rolling off PSA assembly lines are produced in Western Europe, where 80% of
all PSA products are sold. In the year 2000, 480,000 vehicles were sold outside Western Europe –
but the company has now announced a new target of 800,000 units sold by the year 2004, with
Central and Eastern Europe (including Turkey) and South America being the key growth markets
(200,000 units apiece).

Renault has also been building new plants in recent times, but it has accelerated its
internationalisation via external growth, mainly after its alliance with the Japanese company
Nissan, in which Renault has a 35% stake. This alliance opens up a great number of potential
synergies between the two firms, and offers both brands direct access to new markets – each
being able to use its partner’s existing capacities (Australia and Mexico for Renault, South
America for Nissan). Other deals with the Korean Samsung and the Romanian Dacia have
enabled Renault to access emerging markets with a huge potential for sales growth: Korea and
South East Asia for Samsung, and other emerging countries for Dacia with its low price (5.000
Euros) passenger car project. Renault-Nissan and its associated brands are now the 4th largest
carmaker in the world with a total output of 4.9 millions vehicles in 1999.

Table 7 – Internationalisation through internal growth: the new capacities that have been added
outside of Europe since 1995
PSA
First car produced in Porto Real, Brazil, 2001
Agreement to produce Peugeot light commercial
vehicles under license by Kiriça, Turkey, 2000
Agreement to produce Peugeot cars under license
by Iran Kodro, Iran, 1998 and 1999
Exit from Peugeot joint venture in China (GPAC)
and India (PAL), 1997
First car produced in Wuhan (j.v.), China, 1995
Renault
New light commercial vehicles plant in Curitiba,
Brazil (second plant) announced in 2000
Industrial vehicles RVI-ZIL in Moscow, Russia,
announced in 1999
Assembly of car in Moscow, Russia: Avtoframos
(j.v.50-50), announced in 1999
First car produced in Curitiba, Brazil, 1998

The opposition between PSA’s and Renault’s internationalisation strategies is evident. PSA’s
CEO, Jean-Martin Folz, regularly repeats that the company does not need global alliances or
mergers, an attitude that is certainly coherent with its history (Loubet, 2001). The integration of
Peugeot, Citroën and Chrysler Europe has been a long and difficult process that has created an
aversion towards mergers. The recent problems encountered by BMW and Rover, and by
DaimlerChrysler, could reinforce this aversion. For PSA, local alliances with different partners
could be an alternative to a mega-deal such Renault-Nissan.

We continue to be sceptical about the efficiency of mergers and acquisitions - and remain
true to our strategy of internal growth accompanied by occasional collaborations with
other partners.
Jean-Martin Folz, "Le Monde", 22 February 2001

40
 6.3.2 Horizontal alliances the search for economies of scale

The driving force behind these co-operations with competitors is still primarily the search for
volume and economies of scale. In the past few years, PSA has concluded a number of co-
operative agreements with other carmakers:
• The joint venture SEVEL was created together with Fiat in 1978 to produce light
commercial vehicles. In 1988 it was extended to include minivan production (with a new
plant in the North of France)
• Peugeot has been signing agreements with Renault, since 1966, involving joint ventures
producing engine parts, complete engines (Française de Mécanique, joint-venture 50/50)
and transmissions (Société de Transmissions Automatiques, j.v. PSA 20%, Renault 80%).
These joint ventures involve specific mechanical components (V6 engines and automatic
transmission) with each carmaker requiring no more than minimal volumes.

A new agreement has been recently concluded with Ford for diesel engines (see above). In
addition, a number of purchasing-related bilateral components exchanges are in effect with the
world’s different carmakers, mainly involving the sale of PSA diesel engines to the other
manufacturers.

In new technologies and competencies (i.e., recycling, fuel cells or telematics), PSA is involved
in bilateral relationships with Fiat, Renault or Ford, as well as in several European consortia and
programmes (EUCAR, ERTICO, AGATA) that basically constitute pre-competitive R&D co-
operations. As regards the alliances in Europe, there is little difference with Renault, especially as
the two firms are partners in many projects. Moreover Renault has concluded its own co-
operative agreement with GM Europe, involving the development and production of a light
commercial vehicle. This new product, launched in 2001, will be manufactured at the IBC plant
in Luton (UK), and at the Nissan plant in Barcelona (Spain). In industrial vehicles, Renault has
concluded a deal with Volvo AB (Volvo Cars having been acquired by Ford). Volvo AB has
absorbed Renault Véhicules Industriels, with Renault keeping 20% of the new company.

Horizontal alliances at the global (Renault) and at European levels (PSA and Renault) appear to
be driven more by economic factors (volume) than by a desire to access certain specific
competencies that the partner can offer – even though this too can be an associated factor. On the
contrary, vertical partnerships are clearly driven by the hypothesis that such activities do not in
fact comprise the company’s core business, and that vertical alliances with suppliers offering
specific capabilities comprise a path that is better than trying to develop in-house activities which
rely on competencies that are too dissimilar from the ones the automobile activities require.

7. THE FRENCH CAR COMPANIES’ INNOVATION STRATEGIES

7.1 RENAULT: AN INNOVATION-ORIENTED INDUSTRIAL STRATEGY

7.1.1 Innovation becomes a fundamental profit strategy

Renault is openly committed to an innovation-based profit strategy (Freyssenet, 1998, 2000;

Boyer, Freyssenet, 2000). Most of its innovations are conceptually oriented, involving new
product launches that can help Renault to benefit from monopoly rents before competitors launch
similar products. During the 1990s, the strategy was successful:

41
• the Renault "Espace", launched in 1984, was the first product on the European minivan
segment (on which 200,000 units had been sold by the year 2000);
• the "Twingo" (1993), a monobox city car;
• the "Megane Scenic" (1996), which fostered a new European "compact minivan" segment

Recent products such as the "Vel Satis" and the "Avantime" (launched in 2001) are really new
types of car. Renault has resigned itself to competing with the German or Swedish brands (BMW,
Mercedes, Volvo, Saab) that offer the same kind of product in the luxury segment of the market –
only Renault offers different products. The new commercial message associated with its brand
translates this innovative orientation: "Renault, créateur d'automobiles".

Renault developed this innovative strategy little by little over the course of the decade. It was the
success of the "Espace" (originally designed and produced by Matra Automobile, a low volume
producer) that paved the way for this new orientation. Where it has been clearly identified, the
strategy has induced Renault to completely change its structural organisation so as to be able to
adapt the necessary product development routines (Fujimoto, 1999).

The "Twingo" small car was important for Renault, not for the very small profit it could have
(eventually) engendered for the firm, but as a new step towards the use of a project team
approach in a product development organisation (Midler, 1996). The key here is the presence of a
heavyweight product manager (Clark, Fujimoto, 1991). The key competences in design (product
development) have been progressively identified as the ability to manage project teams and to
integrate the activities of actors coming from Renault’s various internal departments – and from
the first-tier suppliers who are involved in the co-development process (Lecler et alii, 1999;
Laigle, 1996). The "plateau" concept, with a room in which all actors can work in close proximity
to one another (thereby facilitating face-to-face discussions and the exchange of tacit knowledge)
has been intensively analysed within the firm.

Previous experiences by BMW and by Chrysler (Carrincazeaux, Lung, 1998) convinced Renault
to build a Technocentre in the suburbs of Paris. Here the company assembled its in-house
research and engineering resources, and which had been dispersed throughout Paris. Such co-
location includes also engineers of suppliers associated in concurrent engineering projects. The
engineering plant is fully integrated (including a prototype assembly line) and it is designed for
8,000 persons (including 3,000 from Renault’s supplier companies). An integration of this sort
could improve the development activities’ productivity, reducing lead times, enabling new
product development and facilitating the transfer of learning from one project to another. The
Guyancourt centre was opened in 1998 and the first product developed here (the "Laguna II")
was launched in 2001. This engineering plant is by far the largest in terms of staff numbers.

Downsizing caused a decline in the number of blue- collar workers. This has been partly offset by
the growth in white-collar employees, especially engineers: there were 7,100 managers and
engineers in 1999, up from 5,360 ten years before. There were 19,006 blue-collar workers on the
other hand, down from 38,965. Since 1992, blue-collar workers have represented fewer than 50%
of all Renault employees (against 42.7% in 1999).

42
Figure 15 – The structure of employment at Renault (automobile activities) 1989-99
(APR et apprentis, ETAM, Cadres et ingénieurs)

80 000
70 000
60 000
50 000
40 000
30 000
20 000
10 000
0
1989 1999

Blue workers Employees and technicians Management and engineers

Source: Renault

7.1.2 The new innovation policy: outsourcing technology

and developing integration capabilities

Carlos Ghosn’s arrival at the helm in 1997 cleared the path for the new strategic choices.
Decisions taken since 1998 have clearly expressed the greater role allotted to corporate
governance, with "profitable growth" having become Renault’s main objective. Previous
innovation and product development management trends accelerated. In 1998, Pierre Beuzit
replaced Jean-Pierre Payan as Renault’s " Research Director". The previous director was an
academic. The "Research Department" (Direction des affaires scientifiques et techniques) had
been created in 1976 to enhance the firm’s relationship with the academic world. This department
was not involved in product development. The new targets that were associated with Renault’s
explicit innovative strategy inferred the creation of a new organisation with a research department
that was integrated into the Guyancourt engineering plant. In an October 1999 speech presenting
Renault’s Technological Resources and Innovation policy at the Les amis de l'Ecole de Paris
seminar, the new director stated that "research is at the core of the Renault strategy", and insisted
on altering the main objectives of the department he was running. Henceforth technology was to
take the back seat - and the creation of value was to put in the driver’s seat. Pierre Beuzit
summarises this policy as follows:

We do not create any technology. Our suppliers do the technological research, not us. We
have been developing specific competencies in areas that are of value for us as a
manufacturer- that is, relating to how these other technologies can be integrated. And this
competency requires a specific type of research.
(Beuzit, 1999, p.166)

Shorter lead-times (from 48 to 24 months) and increasingly varied product ranges were the
catalysts causing such changes. These factors have been converging with one of the golden rules
that is associated with corporate governance, to wit, that non-specific capabilities be outsourced,
and that focus be placed on the core business. That is definitely the case with:

43
• the outsourcing of technological research to first tier suppliers who are supposed to develop
their own R&D capabilities;
• and the focusing on Renault’s core competencies, defined as the ability to integrate different
(supplier developed) technologies so as to design an innovative product that is valuable and
firm-specific.

Yves Dubreil, Renault’s Programme/Projects Director, follows an explicit approach when dealing
with the key organisational capabilities that are involved in the management of projects within an
extended enterprise (i.e., including suppliers):

A project means the management of contradictions. Nowadays, the real savoir-faire in a

project lies in the management of change.
Dubreil, 1998, p.35

Technological competencies are, and will remain, necessary for the evaluation and absorption of
external technologies. However, they can be seen as something that is generic, in that they are
available in each car company. What might be specific are the organisational capabilities that
make it possible to integrate the different technologies that can allow for an efficient design of
differentiated high quality, low cost products - and which facilitate the day-to-day management
of the production and distribution of a wide range of these types of products.

Figure16 – Changes in Renault and PSA’s R&D/net sales ratios during the 1990s

5,5

4,5

3,5

2,5
1
1991 2 3 4 5 6
1996 7 8 9 10
2000

Renault PSA

Source: companies

New cars’ product integrity not only depends on the technologies that each supplier offers – it
also depends on the systemic integration of the various subsystems. The company’s ability to
develop a modular architecture for its passenger cars is a topic of internal debate. Even if some
elements of modular production are introduced (i.e., at the Sandouville suppliers’ park), Renault
seems reluctant to commit too soon to modularity. It is still important that the company maintain
those internal technological competencies that will enable it to evaluate and integrate the
solutions that its suppliers are proposing. In other words, it has to preserve its ability to absorb
external innovations. Moreover, and despite outsourcing, if the company is to develop these

44
integration capabilities, greater R&D investments will be needed. R&D expenditures40 exceeded
2 billion Euros in 2000, i.e. 5.1% of the net sales, up from 3.6% in 1991.

7.1.3 Variable remuneration and stock-options

The rapid growth in the number of employees working in its research and development function
has caused Renault to hire engineers from the outside. This could become a permanent policy,
and it suggests that the role of the internal market has been declining. The Research Department
has set a target of a 20% turnover rate (P. Beuzit), and it is supposed to hire people from the
outside - insiders get more involved in project management, although this task plays a different
role in product development. Nevertheless, for the past three years, there has been a rise in
complementary variable remuneration on top of people’s base salary (see section 5). Top
managers have a variable percentage that is target-dependent (i.e., there is a transfer of
technology coefficient). It is also predicated on overall company profits.

Stock options are also playing a leading role in retaining the most qualified people, or in
attracting such people from the outside. Growth strategies, especially at an international level,
have exposed Renault to managers’ inter-firm mobility - the arrival of Carlos Ghosn from
Michelin, and his subsequent departure for Nissan, being one of the most visible examples. At
other levels, mobility is higher still: some of Renault’s best designers have been hired by its
automobile sector competitors. Renault had already experienced this outside competitive pressure
during the 1960s-70s when it located its financial activities in Switzerland. Renault Credit
International recruited and paid people without paying any attention to the wage structure that
was prevailing within the Régie Nationale des Usines Renault. Instead, it used financial and
banking sector scales as a guide (Fridenson, 1993, 1999). It does not seem that the same sort of
thing is occurring as the company tries to outsource those new activities that require new
competencies. In e-business, for example, Renault and Nissan have rapidly joined in the Covisint
B2B platform that the US carmakers have decided to set up.

Nevertheless, it is clear that with growing percentages of variable remuneration, and with its new
stock-option policy, Renault is trying to motivate and retain "highly qualified" employees, and to
attract new people who can support its traditional capabilities (i.e., design) or add the new
capabilities that will be needed if the new technologies are to be integrated.

7.2 PSA: INNOVATION IS THE NEW KEY ISSUE

Only a few months after his arrival, Peugeot’s new CEO Jean-Marie Folz announced three main
priorities in January 1998: growth, innovation and profitability. At the same time, he criticised
PSA’s " innovation and growth deficit" and its "aversion to risk", declaring that he wanted to
multiply the company’s net profits by a factor of three within three years (with an ROCE target of
12.5%).

PSA has not been a leader in product innovation. It refused to launch the minivan that Matra
Automobile had proposed – a car that Renault ultimately marketed as the "Espace". PSA has tried
to apply a Sloanist policy of compiling a variety of products for its Peugeot and Citroën brands
(sometime working together with other carmakers such as Fiat within the SEVEL joint venture).
All of these cars are supposed to share the same platform. This policy has never been truly

40
This rise in R&D expenditures is naturally also explained by the growing number of projects that need to be
developed simultaneously (relating to the increase in product variety).
45
successful (Loubet, 1998, 2000a). Moreover, PSA has not compensated for this relative failure by
committing to innovative products such as the electrical car (despite its major one-year social
experiment at La Rochelle in electric vehicle use, and its European leadership in electrical car
production). This remains a low volume activity, and in the absence of any prospects of
immediate development, PSA has been focusing on its diesel engine capabilities.

7.2.1 Diesel engine as a core competency

In recent times, it is primarily in the field of technology that PSA has continued to act
innovatively: electronic/hydraulic suspensions for Citroën; and above, specific diesel engine
competencies, including some very recent technological developments (the common rail) in
which PSA is one of the world’s leaders. The company presently supplies many of its
competitors, including the Japanese firms Nissan, Toyota, Suzuki, with most of its supply
agreements having been concluded over the past few years when diesel engine technology was
evolving rapidly and PSA confirming its leadership role.

PSA is also involved in deeper co-operations involving an exchange of competencies with

competitors who can offer specific capabilities in technological areas where PSA may be weak.
The agreement that PSA reached with Mitsubishi on 11 January 1999 allows it to use Japanese
direct injection (GDi) capabilities to develop a new type of gasoline engine (HPi). Moreover, a
broader agreement was concluded with Ford the same year, involving the co-operative
development of a full family of diesel engines (direction injection): small engines; medium-size
engines; V-engines for luxury models; and light commercial vehicle engines. PSA is the leader in
small and medium-sized engines, Ford for the two other projects.

Table 8 - PSA supplying of diesel engines to its competitors.

Company Year of the Agreement
agreement
Ford Europe (and Mazda) 1998 Development of a small diesel engine (common rail
technology). Project scope was widened in 1999.
Nissan (U.K.) 1998 PSA engine (TUD5) on the Micra
Toyota (U.K.) 1998 PSA engine on the Corolla (2 l)
Santana (Spain) 1996 PSA engine on the Suzuki Vitara and Samurai
Daewoo FSO (Poland) PSA engine (1.9 l) on the Polonez
Hyundai (South Korea) 1997 PSA engine on the Lantra (1.9l)
Ssangyong (South Korea) PSA engine (XD3P) on the Korando Family RV
Suzuki (Japan) 1999 PSA engine on the Baleno (1.9l) and on the Grand Vitara
(HDi 2l)
Mahindra & Mahindra 1986, 1998 Production of PSA diesel engines
(India)
Maruti (India) 1997 PSA engine (TUD5) on the Zen, Esteem and Gypsy
Source: Accords entre constructeurs automobiles. Situation au 1er janvier 2001, CCFA, Paris.

Mechanical tasks remain one of PSA’s strongest core competencies. This is different from
Renault, whose Japanese partner Nissan offers excellent mechanical capabilities – and the
46
company is still reluctant to depend on strong suppliers for key components that could severely
affect the quality (product integrity) of its models. This could explain a totally different strategic
orientation, one that emphasises internalisation rather than outsourcing, and which is exemplified
by the reinforcement of PSA’s control over its supplier division, Faurecia, and by its prudence as
regards modularisation.

When Automotive News Europe asked Hervé Guyot, PSA’s Purchasing Director since 1998, "Are
you increasing the outsourcing of your new functions?” he answered:

We have no intention of giving up activities like foundries and stamping. These are
essential for PSA. We would not outsource the foundry like Renault has done. But in the
future, we will look to outsource a little more.
H. Guyot, Automotive News Europe

7.2.2 Vertical co-operations in an effort to access specific capabilities

In fact, for the past few months, PSA has concluded several alliances with suppliers in an effort
to develop new innovations. The company is beginning to accept the idea of outsourcing, seeing
the explicit integration of a supplier’s technological management as a normal event, much as
Renault does with its innovation management strategy.

PSA has developed a contractual arrangement to manage such cooperative agreements, and it has
concluded several explicit alliances ('technological innovation plans') with key partners41:
• Delphi (September 1999): active and passive security, comfort and energy management
• Valeo (December 1999): active security and comfort
• Pechiney (June 2000): aluminium and supplying
• Magneti Marelli (September 2000): mechanical and thermal problems, navigation
systems, on-board electronics

Other agreements include in 2000: Visteon (air conditioning), Vivendi (e-business, a B2C project
involving the development of a multi-access internet portal together with EGERY), IBM (for the
design of a "communicating car", prototype demonstrated at the Mondial de l'Automobile, Paris,
October 2000); and in 1999: Siemens (pumps/fuel injection).

This indicate that PSA now considers alliances as a normal way of accessing suppliers'
capabilities – competencies that it no longer develops in-house due to Faurecia’s desire to limit
the number of businesses where it has to compete on a global basis. Even if PSA is late in this
respect in comparison with the other European carmakers (Fiat, VW, Renault), its breakdown of
cars into 51 technical subsystems, all of which can be used on a variety of different platforms,
indicates a first step toward modularisation. Given that the second generation of modules might
offer cost savings without damaging quality, and in light of the development of module suppliers’
capabilities, these modules could be used by PSA in Europe as well as in Brazil. On this topic,
PSA’s Purchasing Director has declared:

We won't outsource existing components - but with our new projects, a greater proportion
of components will be bought in.
H. Guyot, Automotive News Europe, 3 January 2000

41
Source: www.psa.com/strategies/cooperation/equipement.html, March 2001
47
 7.2.3 A new innovation organisation

Like all carmakers, PSA has been relying more and more on the innovation capabilities of its
suppliers. Given that the average outsourcing level is close to 70 %, and as part of a broader
reorganisation of the company, PSA has set up a dedicated innovation organisation within its
purchasing area. Its goal is to participate in conceptual innovations. These changes are similar to
the organisational changes that have take place at Renault.

The organisational merger of the two Peugeot and Citroën brands was achieved in 1998, 24 years
after the official merger. The new CEO, J.M. Folz, announced a new organisation wherein the
Innovation and Quality Department (DINQ) became one of the five operational departments (the
others being "Platforms"; "Techniques and Industrial Purchasing"; "Human Resources";
"Financial Management"). A member of the founding family, Robert Peugeot, runs this
department. The former Research Department was integrated into the new organisation and given
more operational activities. This corresponded to the idea that advanced planning was to assume
a key role in product development (Ciavaldini, 1996).

Figure 17 – The organisation of product design at PSA

Generic Programmed
Preliminary
advanced advanced Development Life cycle
planning planning definition

Innovation Department Platform Department

Source: Le magazine du groupe PSA, n°216, février 1998

The development of a new vehicle is organised into five different phases (figure 17):
1. generic advanced planning: exploration of new concepts and preparation of technological
innovations to be introduced on future vehicles
2. programmed advanced planning: analysis of several vehicle concepts and choices
3. preliminary definition: definition of elements needed to build an integrated vehicle
4. development: detailed design of each component, test and completion of the vehicle
5. life-cycle: regular improvement of the vehicle

As for the marketing side, the new policy differentiates the role of the two brands: Peugeot being
oriented towards a full range policy, and Citroën towards innovative products. This was a return
to the company’s origins – a reminder that it had once come up with conceptually innovative
products such as the "Traction avant", the "2CV" or the "DS" (Broustail, Greggio, 2000).

This seems to be a very ambitious challenge. In February 2001, PSA’s CEO announced that it
will be launching 25 new passenger car and light commercial vehicle (LCV) models over the next
4 years (2001-04), compared to 9 between 1997 and 2000. Moreover, these products will share
the same platform (three passenger car platforms, and one LCV platform that will be shared with
Fiat within the confines of the SEVEL joint-venture). The Citroën brand is supposed to be leader
in conceptual innovation – just as it once had been in the French automobile industry.

48
 8. CONCLUSION

European carmaker champions in shareholder value for the past three years, PSA and Renault’s
financial performances have been very strong (figure 18). Yet there is no obvious link between
these results and the firms’ recent introduction of the principles of corporate governance. In the
automobile industry, economic conditions influence corporate performance in a fairly
mechanistic manner: when the market is expanding, sales are high and economies of scale
enhance manufacturers’ returns; when the market is depressed, sales are down and low volumes
cause a drop in profits, even (financial) losses sometimes. The European market has been very
strong recently, and this economic environment could be the main explanation for the car
companies’ financial and economic performances42.

However, there is another aspect that should be taken into consideration: in this industry, inertia
is a significant factor, and organisational changes require time in order to be effective. Most of
PSA and Renault’s current success is due to strategic decisions (particularly product-related
decisions) that were taken during the early 1990s, long before the introduction of the new rules of
governance. Several years need to pass before the economic performances (commercial,
financial, innovation-oriented, etc.) that stem from these new rules of corporate governance can
be analysed. And it should be noted that 1999-2000 financial performances are not all that high
when compared with PSA and Renault’s financial results of ten years ago, in the late 1980s, back
when the concept of corporate governance was still totally unknown in France (see figure 18).

Figure 18 – PSA and Renault’s operating profit margins (1989-2000)

10

-2
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Renault PSA

Source: companies

The diffusion during the late 1990s amongst French companies of the ideology based on the
principles of corporate governance (Lordon, 2000) was a momentous event that cannot be solely
explained by pressure from public shareholders, principally foreign institutional investors. The
myth of the tyranny of the shareholders is widely contested by observers who consider that
42
For PSA, its European assembly lines' average rate of utilisation has been about 101% in 2000 (Harbour Index).
49
managers have been able to remain highly autonomous in their policy definition, thereby
controlling the decision-making process (Carroz, Texier, 1998). The example of the automobile
industry seems to validate the hypothesis that, in France, foreign institutional investors are more a
pretext for managers to use corporate governance rhetoric whilst introducing organisational
changes than a catalyst for the aforementioned changes (O'Sullivan, 2001). Considering the
French car companies’ relatively low economic profitability during the 1990s, and the intense
competitive pressures they faced, managers have been committing to such changes for some time
now, at the very least since their 1980s confrontation with Japanese competition. Moreover, the
rhetoric has two functions. Firstly, it is largely a means of communicating with the financial
community (pension fund managers, financial analysts, etc.). Secondly, it could be a way to
justify and manage internal organisational changes. Nevertheless, in the case of the French car
companies, corporate governance rhetoric has had to be translated into an internal discourse for
engineers and managers who have more of a technological and economic orientation (i.e.
focusing on criteria such as productivity, quality or cost). PSA and Renault do not speak
explicitly about the 'creation of shareholder value' - and they do not announce the calculation of
any shareholder indexes such as EVA, MVA, etc.

PSA and Renault both seem to be very attentive to their shareholders’ interests, even though their
principal shareholder has no specific interest in achieving high financial performance (focusing
more on the long-term survival of the company). Neither the Peugeot family (PSA) nor the
French government (Renault) can be described as active shareholders who demand short-term
returns - as is the case with some Anglo-American pension funds. Foreign institutional investors
hold about a 9% share in each of the French carmakers. None are in a position (individual stakes
are relatively low, i.e., less than 1%) to exert any great pressure on the company's senior
management. Moreover, the stock market does not support the two car companies by helping
them to finance their investments: Renault and PSA’s financial resources came from retained
profits and from long-term borrowings. Renault has collected no additional resources from the
Paris stock market since the company was privatised. And for PSA, the stock exchange has been
a place where resources are destroyed via share repurchases. It is particularly irrelevant to the two
firms since (with the exception of Renault’s deal with Volvo) they do not use share swaps to
enact their mergers or acquisitions.

So what could be a rational explanation for this attentiveness to financial performance? One
significant factor would be if the main shareholders, the Peugeot family for PSA and the French
State for Renault, were preparing exit strategies. Despite recurring rumours, the Peugeot family
reaffirms regularly that it wants to keep control of PSA. For Renault, the issue is more political. It
is entirely possible that the French government will one day sell its remaining shares in the
company. The present Socialist French Prime Minister has undertaken quite a few privatisations
recently, primarily to reduce public debt. In the absence of any such exit strategy, however, the
advantages of this financial emphasis are much less clear.

Moreover, a policy of this sort entails a certain amount of danger. The strict application of
financial criteria (i.e., net operating margin calculations) could lead to decisions being made for
short-term reasons, with long-term performance being systematically undervalued because of the
uncertainties that affect such economic calculations. There is still a traditional trade-off between
the short-termism that financialisation induces (Froud et alii, 1999; Williams, 2000) and long-
term strategy. French car companies have invested relatively little in emerging technologies
(especially in electronics where Renault and PSA are weak, having dropped out after an initial
involvement). In addition, since the decision was taken to focus on traditional competencies, new
capabilities development has been outsourced to their suppliers. These policies contrast with the
50
strategies of other carmakers such as Toyota, which has been trying to control those technologies
that it considers to be key for the future (Chanaron, 2001). Nevertheless, the prudential attitude of
French carmakers may well become part of a specifically European model of inter-firm
cooperation (Lung, 1999) – an alternative to the market organisation that prevails in North
America, and to the hierarchical relationships between keiretsus in Japan (where long-term
partnerships between suppliers and carmakers offer an alternative way of managing innovation).
If this were to occur, Renault and PSA’s future experiments with the principles of corporate
governance will have to involve an integration of their suppliers and of the other actors in the
automotive system – policies that will lead to a broadening of the carmakers’ horizons.

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