French carmaker Peugeot Citroën in deep trouble

Euro Zone: Peugeot Citroën is struggling to keep its head above water and is considering shutting a huge manufacturing plant in its home country. And the dire situation has escalated to become an affair of state.

The Peugeot Citroën production site in Paris. Antoine Antoniol / Bloomberg News

After a month on holiday and an additional week-long lay-off, workers were in grim humour as they returned to the huge PSA Peugeot Citroën plant at Aulnay-sous-Bois, outside Paris.

The gloomy atmosphere was scarcely a surprise.

France's largest car making group is deep in trouble. And, as the workforce is acutely aware, one of the ways the company has chosen to dig itself out of that trouble is by closing the Aulnay factory in 2014.

With cuts elsewhere in France, the job losses will reach 8,000 - not to mention substantial knock-on effects on suppliers and others whose income depends on PSA's presence.

What began as a painful commercial decision has escalated into an affair of state, raising questions about PSA Group's stewardship of a major business and relations between the new socialist government of the president François Hollande and employers. When Mr Hollande spoke recently of France having to confront a crisis of exceptional gravity, PSA cannot have been far from his thoughts.

The sun may have shone on the south of France holiday destinations chosen last month by Mr Hollande and some of his ministers but storm clouds hang stubbornly over the group.

After a fall of 7 per cent in new car registrations in July, a sharper year-on-year decrease of 11.4 per cent was recorded last month.

Industry spokesmen point out August is always a quiet month, with many dealers closed.

The fall was severe for the Citroën brand, 19 per cent, less so for Peugeot cars (3.4 per cent). Another French car-making giant, Renault, fared even worse, except for its buoyant trade in low-cost models.

In the harsh market conditions created by Europe's economic woes, the whole sector is suffering to a greater or lesser extent.

A German firm of consultants said last week between five and 10 car plants in western Europe could be shut down in the coming years, throwing up to 80,000 people out of work.

The Roland Berger consultancy based its report on a study that identified low demand and "unsustainable" productivity levels. Only Volkswagen and Ford were excluded from this downbeat analysis.

On market trends, Roland Berger's Max Blanchet acknowledged the impact of the economic crisis but said soaring fuel prices meant motorists were using their cars less and keeping them longer.

The industry's malaise has also led to cuts in jobs and suspended production at Opel in Germany and Fiat in Italy.

But it is PSA Peugeot Citroën that seems to symbolise more than any manufacturer the cycle of over-capacity and outdated production methods. The group needs to make short-term savings of about £1 billion (Dh5.8bn) and also reduce high labour costs.

Even PSA's hopes of sharing technology with General Motors (GM) has been called into question.

GM has had to play down reports it has cooled on preliminary plans for such a partnership targeting the mid-cost car market.

Industry observers had speculated these plans would lead to Citroën and Peugeot models being built on GM platforms at its Ruesselsheim plant in Germany. Then Spiegel Online reported GM now feared the sale of their Opel cars would be hit by such an arrangement.

GM's response was to insist a global alliance between GM - not just its Opel wing - and PSA remained in place, its mission being to "create synergies in and for Europe" by focusing on logistics, purchasing and product development. "Manufacturing projects are not part of the existing alliance agreement so we have nothing to say about manufacturing," it added.

It will become clearer in the coming months whether, despite GM's calming words, this represents another setback for PSA.

Whatever the truth and with or without government pressure, the French manufacturer has been busy with a programme of restructuring beyond the job losses announced in July.

The chief executive of the Peugeot brand, Vincent Rambaud, has left for unexplained "personal reasons" to be replaced by a rising star of the group, Maxime Picat.

As the director-general of PSA's alliance in China, DongFeng Peugeot Citroën Automobiles (DPCA), Mr Picat presided over a doubling of sales between 2008 and last year.

In fact, Mr Rambaud's role had been changing since the start of the year as PSA removed key business functions from both him and his counterpart at Citroën, to concentrate the marketing of both brands at the heart of the group.

The group was undoubtedly stung by acrimonious exchanges with the government and particularly Arnaud Montebourg, who bears the optimistic title of minister for industrial recovery, after the redundancy programme was made public.

Mr Montebourg and his president have repeatedly angered French business leaders this year. The president's declaration on Sunday that he intends to raise a further €20 billion (Dh93.98bn) in taxes from big companies and the better-off will hardly improve relations.

Mr Montebourg was present when one industrialist, Pierre Bellon, the head of the Solexo food services and facility management group, told the annual conference of the employers' organisation Medef last month business was "sick and tired of being told how to behave". Mr Montebourg's response was to promise calmly to convey the employers' feelings to the president. As far as the French car industry in concerned, he has unveiled a revival programme devoted to the expansion of production of "green" vehicles.

"The government wants to help in promoting clean vehicles and make them available for every budget," the minister said.

His package includes further carrot-and-stick measures, notably heavier fines for the owners of cars that cause pollution to finance more generous incentives for environmentally friendly cars.

Charging stations for electric cars will be set up in 12 cities in what Mr Montebourg calls his blueprint for the "rebirth of the French car".

While no one doubts the government's belief the package will help, it is difficult to interpret it as an immediate lifeline for PSA.

Unions plan a big demonstration against the Peugeot Citroën cuts during the Paris Motor Show, from September 29 to October 14.

Back at the threatened Aulnay plant, however, there are signs of the customary militancy rubbing shoulders with a degree of resignation. "We must remain combative and ready for strong mobilisation," said Eric Basquet, a body-worker at the plant.

"Even if we are crushed."

* additional reporting by AFP