The PSA Group reported third quarter financial results today that showed a mixed picture of stagnant revenue and falling profits as a result of largely deteriorating sales in Europe, slower growth in emerging markets, rising cost pressure and a wide-scale supply chain disruption for European plants in September. The group’s results were partly lifted, however, by the strong performance of its tier supplier Faurecia and its group logistics provider, Gefco, both of which reported stronger revenue growth that outperformed the automotive division.
In the face of slower growth and further potential falls in Europe, PSA said that it would lower production, cut jobs and seek greater cost savings as it pursues an €800m ($1.1 billion) cost reduction plan in 2012.
A declining outlook
PSA’s automotive division, which includes Peugeot and Citroën, saw its revenue decline 1.6% in the third quarter of 2011 compared to 2010 as European sales (which include the European Economic Area and Croatia) fell 10.5%; European sales are now down 6% in the first nine months of the year.
Sales outside of Europe faired better, although they have moderated from the first two quarters; in the first nine months, sales in global regions are up 42% in Russia, 16.7% in Latin America, 11% in China and 17% in the rest of the world. PSA’s share of sales outside Europe has risen to 41% compared to 38% a year ago.
Total assembled volume and CKD units in the first three quarters are down 0.6%. PSA forecasts for the rest of 2011 call for a stable volume in Europe, China rising 7%, Latin America up 6% and Russia up 30%.
The drops in Europe were the result of economic instability, particularly in southern Europe where PSA is heavily exposed. However, half of the volume decline in the third quarter was the result of a supply disruption, according to PSA’s chief financial officer, Frédéric Saint-Geours. An IT system failure at the distribution hub of fastening system supplier Agrati, which supplies screws to PSA, led to a mix up in order fulfilment and meant that screws were wrongly allocated, eventually affecting every plant in Europe and leading to a loss of about 45,000 units. The disruption follows supply problems in the first half of the year caused by the Japan disaster, which the company estimated to have negatively impacted profits by nearly €150m in the first half.
These factors, the economic outlook, along with rising cost pressures in raw materials and negative currency factors have led CEO Philippe Varin to downgrade the group’s profit forecast for the second straight quarter; he now expects 2011 operating profit to be close to breakeven for the automotive division, compared to an outlook for €300m ($418m) three months ago. In 2010 the automotive division recorded profits of €563m ($784m).
Cutting inventory and costs in the supply chain
The response to the negative outlook has already been to scale back production in the fourth quarter. According to Saint-Geours, PSA has already cut inventory of finished vehicles to 65 days globally as of September 30th (59 days for Europe alone), compared to 76 days at the end of June. The end of year target is 62 days. This inventory positioning already put PSA in a much better position should it face a global slowdown; by comparison, the company was carrying 103 days of inventory at the end of September 2008. The company is also closing a number of plants during the national holidays in November, something that its French rival Renault is also planning to do. Renault is planning to cut inventory to between 50 and 60 days.
As part of wider plan to improve PSA’s finances, the company is also embarking on a €800m cost reduction drive for 2012, which is likely to have significant impacts on the supply chain. Of this target, the company aims to reduce procurement by €400m by increasing standardisation and economies of scale, as well as a €400m reduction in fixed costs. PSA will cut 3,500 full time jobs and 2,500 temporary workers.
Gefco is reasonably well placed
But while the automotive division continues to struggle, its poor performance is being partly offset by the strength of Faurecia and Gefco, although revenue growth was less robust than in the first half of the year. Faurecia’s revenue increased nearly 16% in the third quarter, while for the first nine months of the year they are up 18%. Gefco saw growth of 7% in the third quarter and is up 14% so far for the year.
Varin said that he expected Faurecia’s 2011 profits to be between €620m-€650m (compared to €232m last year). He did not give specific guidance for Gefco but said he expected a higher return on investment than in 2010, when Gefco recorded operating profits of €198m. Gefco’s profits in the first half were €143m.
The strength of the logistics division appears to stem both from its increasing role in the PSA Groups on-going global expansion as well as in its own diversification of business outside the group. With PSA now selling more than 40% of its vehicles outside Europe, the group is relying more on Gefco’s logistics services to move parts and vehicles around the world. This is at least partly evidenced by Gefco’s revenue growth from Peugeot and Citroën, which at 10% in the first nine months of year has outpaced PSA’s stagnant sales and production figures.
PSA’s Guy Lederer, executive manager for international logistics, told Automotive Logistics this summer that PSA was now using a Gefco-run consolidation centre in China and Argentina, for example. He expects PSA’s global inbound material movement to increase from 35,000 TEUs in 2010 to 70,000 TEUs by next year. He also said that there could be an expanded role for Gefco to play in China as PSA opens another joint venture plant in Shenzhen. Gefco currently has a limited role in PSA’s joint venture plants in Wuhan. (Read more here:
Last month PSA also announced that it would build a fully integrated factory in Gujarat, India, where it will build 170,000 cars a year by 2014. Between new plants or expanded capacity in India, China, Russia and Latin America, PSA expects to build and sell half of its global output outside Europe, a trend that is likely to create more demand for Gefco.
Antoine Redier, vice president of vehicle logistics at Gefco, also told Automotive Logistics that the company was expanding its operations globally for outbound distribution, including the opening of a new distribution centre south of Moscow this autumn. The company is also targeting growth in Latin America and India, including leveraging the existing operations of the Mercurio Group, of which it bought a controlling stake earlier this year. (Read more here:
Gefco’s growth outside the PSA Group has also been strong this year, growing 21.5% in the first three quarters compared to last year. Non-group turnover now represents 37.6% of Gefco revenue, compared to 35.4% at this time last year.
While Gefco would not be immune from further slowdowns at PSA’s automotive division or cost cuts – 2,500 of the jobs to go will be ‘non-production’ – the company’s services are also reasonably well placed to serve certain aspects of the group’s cost cutting drive. For example, part of the reduction in procurement costs are, according to Varin, expected to come from more modular concepts for manufacturing and the “massification” of orders – a French usage referring to higher standardisation and uniformity, such as of parts across global platforms. In both cases, the demand for more sophisticated, global logistics services should rise.
On the other hand, Gefco’s asset-based business, which includes a large fleet of trucks and around 3,600 rail wagons, is almost entirely based in Europe and would be highly susceptible to declining load factors should volumes contract further across the continent.