PSA maps out Vauxhall’s path to profitability

Hence the need to get on the front foot with new product launches too – because that gives dealers access to the latest, very best products and, as Max Warburton, senior analyst at Bernstein Research, highlighted, because it sets the firm on the path to achieving its stated goal of stripping around £620 of cost from each car it makes. This, for instance, is why the new Corsa was delayed while it is engineered to sit on PSA’s small car platform and why the next Astra will share its underpinnings with the Peugeot 308.

“PSA’s own turnaround has been rather unconventional,” said Warburton, recalling the firm’s own near-bankruptcy in 2012. Years of multi-billion-pound losses had finally reached crisis point, ending with the Peugeot family selling around half of its shareholding in the firm to stay afloat.

“Car industry history is full of comeback stories but they normally involve deep restructuring at a time of economic crisis, a radical improvement in product range and substantial volume growth. PSA under Tavares hasn’t really seen any of these things.

“Instead, it’s been a series of small things that collectively add up to a big improvement in performance: some job cuts and early retirements; a big focus on standardisation and purchasing cost reductions; slashing all non-essential spending; sorting out some chronically loss-making emerging markets. Then an intense focus on pricing – being very calculated on reining in discounts and pushing up prices if feasible. Tavares has shown it’s possible even on weak brands and products.”

PSA may be an anomaly, but its strategy is working. In 2017, the firm made £3.5bn: its most financially successful year to date. As the graph on page 16 shows, Peugeot’s operating profit margin is the envy of most mass-market manufacturers. To paraphrase Warburton, that’s not a bad situation for a firm that arguably makes one market- leading car (the 5008), one good car (the 3008) and a host of decent, if not inspiring, ones.

“PSA provides the template for Opel,” adds Warburton.

“Cynics argue that the brands are too weak to save and, after a decade of cost cutting by GM, there’s not much to do. That’s too pessimistic. There are always things that good management can find and improve. Cut and paste the PSA strategy across to Opel and you might just find it works. It won’t be straightforward, it’s theoretically possible.”

Under Tavares’s leadership, the goals for Opel and Vauxhall could not be more explicit, nor the blueprint for success so clearly written before them. “We have faced a near-death experience,” says Tavares. “That means we can be more Darwinian, thinking with agility to survive. The choices we must make to thrive are very clear.” 

A model of efficiency: 

There are many measures of a company’s success, and some view operating profit margins as a rather blunt and simplistic measure.

“Profit margins give a broad approximation of what return a business is making and how healthy it is,” says Max Warburton, senior analyst at Bernstein Research. “Investors are often surprised that Peugeotis making higher margins than VW, given the VW brand has better mix, pricing and volumes. But it’s not complicated – the PSA Group has vastly better labour efficiency.

It makes many more cars per employee than VW, its plants build each car in fewer hours and it doesn’t make stuff like axles, seats and interior plastics in-house the way VW does.

“It’s incredibly tough to make money building mass-market cars but if you’re not making at least 4-5% operating margins, then you’re unlikely to have the underlying cash flow to invest in new-generation products and technology.”