Long Road to Europe for Dongfeng Despite Peugeot Deal

Long Road to Europe for Dongfeng Despite Peugeot Deal

"The first step will be to get access to technologies, access to knowledge and experience so they can learn how to deal in the global automotive market," which is "precisely something Chinese manufacturers might lack at this point of time," said Klaus Paur, London-based global head of automotive research for consultancy Ipsos.

BEIJING - Dongfeng hopes its acquisition of a $1.1 billion stake in struggling PSA Peugeot Citroen (IW 1000/55) will bring it a technology dividend and access to Western markets, but analysts say the road is likely to be long and bumpy.

Peugeot on Wednesday announced that China's state-controlled Dongfeng Motor Corp. and the French government will each inject 800 million euros (US $1.1 billion) for 14% stakes in the company, leaving the Peugeot family with a similar-sized shareholding. Altogether the firm is raising at least three billion euros.

While PSA is primarily in need of cash, Dongfeng -- China's second-biggest automaker -- is likely to try to use the deal to improve quality while simultaneously seeking to transform itself into a global brand, analysts said.

"PSA needs desperately some help and new capital," said Klaus Paur, London-based global head of automotive research for consultancy Ipsos, while the deal potentially offers Dongfeng entry onto a wider stage.

"The first step will be to get access to technologies, access to knowledge and experience so they can learn how to deal in the global automotive market," which is "precisely something Chinese manufacturers might lack at this point of time," Paur said.

Underscoring its financial woes, PSA said Wednesday it racked up net losses last year of 2.3 billion euros (US $3.2 billion) -- although that was an improvement on the 5 billion euros it hemorrhaged in 2012.

Dongfeng has long-standing joint ventures with several foreign firms, including Nissan (IW 1000/31), Honda (IW 1000/29) and Kia (IW 1000/106), has been a partner of PSA since 1992 and recently allied with its competitor Renault (IW 1000/80). But those partnerships are focused on production in China, the world's biggest car market.

"For Dongfeng and PSA, the approach is different, because this would propel the collaboration above the pure Chinese operations," Paur said.

"It means Dongfeng will have access to their international strategy and to their technologies," he added. "It's a completely different level of things."

'No Brand'

Namrita Chow, Shanghai-based manager of consultancy IHS Automotive, said the deal will help Dongfeng stand out among domestic rivals.

"It makes Dongfeng part of an international auto manufacturing group -- something which is very rare for Chinese automakers," Chow said.

Dongfeng last year agreed to sell a 45% share in its truck division to Swedish commercial vehicle maker AB Volvo (IW 1000/96), which says the deal will make it the world's biggest heavy truck manufacturer.

But Dongfeng still needed to find a partner to help it expand its passenger car business internationally -- an area in which its own brands have failed to shine, even in China, where foreign joint ventures have the lion's share of the market.

And to find that partner, Dongfeng opened its wallet.

"Obviously Dongfeng has nothing to contribute but cash -- it has no technology, no brand, no overseas operating experiences," said John Zeng, Shanghai-based analyst with consultancy LMC Automotive.

"This deal is definitely crucial for PSA Peugeot Citroen to sustain its current operation, but for Dongfeng, it could mean more risks than opportunities," he said.

One reason, he said, is the uncertain nature of technology transfers, while Dongfeng's stake in PSA is limited to 14%. That contrasts with compatriot Geely, which in 2010 bought Volvo Cars in its entirety.

"Technical expertise is something which only comes with many, many years of experience," added Chow. "For Chinese automakers, actually, the greatest advantage is having access to international engineers and international (production) locations."

First Step

But analysts say that Dongfeng, which means "east wind" in Chinese -- a phrase that carries a positive connotation of helping ships sail faster -- has a long way to go before its name breaks into developed markets in Europe or elsewhere.

"There is no reason why Chinese cars would not be able to be sold in Europe in the future, but it would only be on the long term," said Paur.

"There is the (problem of) access to markets and the conditions consumers are looking for: quality, reliability, high technology -- elements that are not yet available in Chinese cars in reality," he said.

"Chinese carmakers will have to work long and hard to upgrade the perception of their own products and brands," he said. "But the PSA tie-up is the first step in that direction."

Nonetheless the success of the deal will partly depend on PSA's management and the ability of Dongfeng, the Peugeot family and the French government -- whose interests do not necessarily coincide -- to work together.

Under the deal, none of the three will be allowed to increase their stakes for 10 years.

But Zeng said any desire to do so on Dongfeng's part was moot.

"It won't get the nod from the French government in the first place," he said.

Julien Girault, AFP

Copyright Agence France-Presse, 2014

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