Battered Peugeot feels the pain

Labor would do well to heed a warning from France, where the use of taxpayer's money to prop up Peugeot-Citroën has proven a fruitless exercise as the car maker announced major job cuts overnight.

The futility of using taxpayer money to prop up struggling car makers was graphically illustrated overnight when the big French auto group PSA Peugeot-Citron announced that it would be slashing 8,000 jobs and closing one of the country’s biggest car factories.

Peugeot, which has suffered as new car sales have withered with the deepening European recession, said it would close its factory at Aulnay-sous-Bois, on the outskirts of Paris – the first such closure in France in more than a decade. The French car maker also said it would shed 8 per cent of its French workforce.

Peugeot said it had little choice but to take radical steps, given that it is currently bleeding €200 million ($US244 million) a month from its under-utilised factories. "This pace of losses is unsustainable," Peugeot boss Philippe Varin said. "It risks putting the entire enterprise in peril."

But the Peugeot move has created shock waves in France, particularly since the automobile industry has benefitted from generous government handouts in recent years.

In the wake of the financial crisis, former French president Nicolas Sarkozy lavished assistance on the industry, which then employed around 737,000 people. He immediately launched a French-style "cash for clunkers” program to boost demand for new cars, at a cost of around €2 billion over two years.

In early 2009, the French government stumped up with a five-year €6.5 billion loan for car makers, to allow them to invest in innovations. In exchange, Sarkozy proudly proclaimed that both Renault and Peugeot had promised "not to close any of their sites for the term of these loans, and to do whatever they could to avoid laying off workers.” But in April 2011, both car makers repaid their loans in full, along with €715 million in interest.

Critics point out that Peugeot failed to prosper, despite Sarkozy’s largesse, because it made a fundamental strategic blunder. Instead of penetrating the international market, particularly the Chinese market, Peugeot focused on developing mid-range cars for the European market, even though its production costs were higher than its competitors.

Meanwhile, its German competitor Volkswagen, is enjoying ruddy financial health as a result of pursuing exactly the opposite strategy – producing high-end cars for the international market.

France’s new Socialist government was rocked by Peugeot’s decision overnight, with French Prime Minister Jean-Marc Ayrault calling it "a real shock”. He’s immediately asked his cabinet to start working on a new plan for the car industry, which would save jobs and help reindustrialise the country.

It won’t be easy. France’s competitiveness has slumped to the point where many are questioning whether it can continue to profitably produce industrial goods, such as cars. In the past five years, France has shed around 400,000 manufacturing jobs.

It’s telling that Renault has fared better than Peugeot because it has shifted more of its production offshore. It only produces 23 per cent of its cars in France, compared with 44 per cent for Peugeot.

But it’s impossible to imagine that the French government’s new car plan will encourage French car makers to shift their factories offshore. Instead, it’s likely to be a repeat of previous failed efforts – using French taxpayer money to buy a temporary delay in inevitable decisions.

It’s a lesson that the Gillard government– which this year has tipped in $215 million on a deal to keep General Motors manufacturing in Australia until 2022, and $34 million towards a package to keep Ford in the country until 2016 – would do well to heed.

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