PSA CEO succession seen as key to completing Dongfeng alliance deal

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PARIS (Bloomberg) -- PSA/Peugeot-Citroen's move to name former Renault No. 2 Carlos Tavares as its future CEO stands to help secure an alliance with Dongfeng Motor Corp., which may be the carmaker's last chance to end its reliance on Europe's slumping car market.

Tavares will join PSA's management board on Jan. 1 and will replace CEO Philippe Varin, 61, later in the year, the automaker said Monday. Before stepping down, Varin will focus on discussions with partners, the company added.

While the Paris-based automaker didn't mention specific companies, deepening cooperation with Dongfeng -- one of PSA's joint venture partners in China -- represents its best opportunity to gain a foothold outside Europe. With other automotive options scarce, the most likely alternative to Dongfeng is to go it alone and hope the French government steps in if finances get tight.

"It does seem as if the Chinese are the only lifeboat left for Peugeot," said Garel Rhys, head of the Centre for Automotive Industry Research in Cardiff, Wales. "In a sense, PSA is lucky to have a Chinese company wanting to get involved because there are huge issues."

GM partnership

PSA forecasts burning through about 1.5 billion euros ($2 billion) in cash this year and reported a first-half operating loss of 510 million euros in its automotive unit. The company has been searching for new partners to end its dependence on mid-market cars in Europe, where auto demand is at a two-decade low and PSA is losing market share.

A previous deal with General Motors Co. that was focused on cutting costs in Europe has failed to provide relief and offers limited potential because the two carmakers largely compete for the same customers. PSA said in October that it's reviewing backing away from part of the cooperation.

"Going back to GM is not an option," said Ferdinand Dudenhoeffer, director of the Center for Automotive Research at the University of Duisburg-Essen. "Dongfeng is the only option and the best option."

Dongfeng offers Europe's second-largest carmaker a stronger footing in China, the world's biggest auto market, and above all a life line of fresh cash, while the Chinese manufacturer could gain access to modern technology.

PSA has proposed a capital increase of at least 3 billion euros, with Dongfeng and the French state taking equal holdings of about 20 percent, people familiar said last month.

Dongfeng snag

That plan has hit a snag as Dongfeng seeks a smaller stake than first discussed, people familiar with the matter said last week. Dongfeng is weighing buying about 10 percent, half the size of the original proposal, said the people, who asked not to be identified discussing private talks. It's not necessarily an all-or-nothing proposition.

"Why do they need a rights issue if cash generation is going to turn around next year," said Jose Asumendi, an analyst with JPMorgan in London. "The refinancing needs are pretty much under control" and the French state could step in if needed.

Talks with Dongfeng will focus on industrial projects before the companies address financial matters, Varin said Nov. 23 at a conference in Berlin. In the future, "there will be more and more cross links" between carmakers, he said.

Car guy

Tavares, who previously worked at Renault's Nissan affiliate and races cars in his spare time, may also be part of winning over Dongfeng. The 55-year-old executive has experience with European-Asian auto alliances and that could give Dongfeng reassurance that a cooperation will survive after Varin steps down as planned next year.

"He knows the sector well, and he's fast-moving," said Gaetan Toulemonde, a Paris-based analyst at Deutsche Bank AG. "He's a car guy. He has the knowledge, the discipline."

The French company, which sells more than half of its vehicles in its home region, is getting squeezed as BMW and other premium carmakers shift into the lower end of the market with new compacts and as budget brands such as Renault's Dacia and Korea's Kia Motors Corp. expand.

PSA's sales in Europe fell 10 percent through October, more than any other carmaker in the region. The French manufacturer's market share this year is 11.0 percent, down from 11.8 percent a year ago.

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