Since becoming chief executive of Paris-based PSA Peugeot Citroën nearly six years ago, Jean-Martin Folz has handled the tight turns and heavy traffic of Europe’s auto market with the aplomb of a Grand Prix champion. And he has done it at top speed.
Folz has guided Peugeot, once a slow-moving giant with the thinnest profit margins in the business, into the top tier of world automakers. Under Folz the company has unveiled popular models such as the sleek two-door Peugeot 206, Europe’s best-selling car, and moved aggressively into China, Eastern Europe and Latin America. At the same time, Folz has slashed more than E300 million ($351 million) in annual costs by combining certain Peugeot and Citroën operations and inking manufacturing partnerships with BMW, Fiat and Ford Motor Co.
The result: Peugeot is today the world’s sixth-biggest automaker, up from 12th when Folz arrived. Its market share in Western Europe, where it sells 80 percent of its cars, has risen to 16 percent from 12 percent, and operating profit has nearly tripled, to E2.9 billion.
For all his success, analysts and investors are worried that Folz won’t be able to steer clear of a new set of obstacles, which include Europe’s flagging economic growth and competition from Ford, Renault and Volkswagen Group. They wonder whether Folz is accelerating too fast for market conditions.
Peugeot’s share price has risen 166 percent, to E40, during the 56-year-old’s tenure. But some think it should be higher: The carmaker’s E1 billion annual cash flow equals 10 percent of its market cap; the industry norm is between 2 and 3 percent. What’s more, the Peugeot family’s controlling stake troubles shareholders who think the stock price might otherwise reflect the possibility of a takeover offer.
Folz isn’t inclined to moderate his goals to accommodate a weak, congested marketplace. “Part of what scares investors is that Folz has no intention of taking his foot off the gas,” says Shane McKenna, an auto analyst at Goldman, Sachs & Co. in London, which nonetheless rates the stock outperform.
Folz aims to boost annual sales from 3.27 million cars to 4 million by 2006. At the same time, he wants Peugeot’s operating margin -- already the highest in the world for a mass market auto producer -- to rise from 5 percent to 6 percent. Folz is also spending E1.1 billion to build plants in the Czech Republic and Slovakia. By 2006 the two plants are expected to boost annual manufacturing capacity by about 15 percent, or 500,000 cars.
Folz’s confidence is understandable. He has had a lot of success. Born in Strasbourg, France, he grew up in Burgundy, where his father was head of medieval studies at the Université de Dijon. In 1969 Folz graduated third in his class at Ecole Polytechnique, France’s top engineering school. After gaining a second engineering degree from another of France’s elite universities, the Ecole des Mines, Folz worked for the government for six years, then joined drug giant Rhône-Poulenc in 1978. Next came senior management positions at engineering group Schneider Electric and at packaging and aluminum producer Pechiney. In 1991 Folz became CEO of sugar- and food-processing group Eridania Béghin-Say.
Folz’s tough, independent streak and ability to quickly learn the ins and outs of new businesses caught the eye of then-chairman Pierre Peugeot. He hired Folz in 1995 to run the company’s automobile division. When CEO Jacques Calvet retired in October 1997, Folz moved up -- as Peugeot had promised.
Folz recently discussed Peugeot’s prospects with Institutional Investor Staff Writer David Lanchner.
Institutional Investor: How do you intend to increase your sales and operating margin while competition in the auto industry is increasing and car sales are falling?
Folz: Although car sales have declined overall in Europe this year, we’ve already managed to increase our own sales and market share. It hasn’t been easy, but it is a reflection of the success of our constantly evolving vehicle line, which we are updating with a flow of 26 new models between this year and 2006. As far as our operating margin is concerned, one of the main difficulties we face now is the strong euro. Raw material costs have also been rising, specifically for steel and polymers. It is not an easy environment to operate in, but we can still count on volume growth, reductions in production costs and a seductive product mix to protect our margin. We are sticking to our margin goal of 6 percent by 2006.
You’ve said you expect Western European car sales to fall by between 0 and 2 percent this year -- a more positive assessment than that of several competitors. If the slowdown is more severe, could it compromise your targets?
I can’t say what level of decline in Western Europe would compromise our targets, because they are based on the belief that we can further increase our market share globally. We think we can do this in Western Europe and South America as well as in the faster-growing markets of Eastern Europe and Asia. It is worth noting that although we increased sales by 55 percent between 1998 and 2002, we are aiming for only a 23 percent rise over the next four-year period. That target is ambitious, but it is also realistic.
Given the sluggish economy, wouldn’t it be safer to scale back costly expansion plans for Eastern Europe or even put them on hold?
It’s true we are making a significant investment over three years in two plants in Eastern Europe. But our average annual spending of E360 million for these plants has to be compared with our yearly capital expenditure of E3 billion. Moreover, if we want to reach our growth objective in 2006, we have to expand now. Our plants are working at 117 percent of what is considered normal capacity. We are running three and sometimes four shifts at our sites, and a few of our plants no longer close in the summer. That has limits in terms of machinery breakdown and overtime pay. There is also a social issue, because having people working on a regular basis during evenings is not always that well received.
Why have you been reluctant to quell speculation that Peugeot might enter the U.S. market?
Let’s be very candid about that. Ignoring the U.S., which accounts for roughly a third of world car sales, would signify that we accept being a regional player.
We are the sixth-largest car company in the world, and I don’t see how a group of our size and ambition can limit itself to that status. At the same time, the challenges would be huge for a newcomer to the U.S. -- for example, in terms of how to handle customer expectations and set up distribution. We certainly are not planning to get into the U.S. now, but we can never leave it out of our strategic thinking. So the speculation will undoubtedly continue.
Will you consider a merger if you don’t get all the growth you are expecting over the next several years?
No. We are convinced that mergers and acquisitions are inadequate in the car industry. Moreover, we believe that all the benefits that companies claim they are deriving from merging can be had without merging. I’ve listened closely to competitors’ explanations of their mergers, and they talk about sharing platforms and development in power trains and gearboxes and so on. Well, this is exactly what we have been doing very successfully through cooperation deals with the likes of Ford, BMW and Fiat. All the possible advantages of mergers and acquisitions can be found without their dangers. This is why we’ve stuck to independence.
Your shares currently trade at a discount to those of most of your rivals. Why not eliminate the extra voting rights of the Peugeot family as a means of lifting the share price?
Our strategy is not only about giving some pep to the stock price, and we do appreciate having a stable shareholder structure. Moreover, we don’t have different classes of shares. They are all the same. The only difference is that if you have held our shares for four years, you get double voting rights, no matter who you are. I’m really convinced that this is a good practice, especially when everyone is complaining about the excess volatility of the market.
Why not propose that the Peugeot family buy out the company, as some analysts have suggested? If your growth assumptions are correct, they would be getting Peugeot relatively cheaply, even if other investors walked away with a nice premium.
Part of the answer clearly lies with the Peugeot family and their own intentions, but I think it is important for the company to be publicly owned. The present situation -- a public company with a strong reference shareholder -- guarantees stability and competitiveness. Peugeot’s share price is certainly undervalued. But to change that all we really need to do is prove that we can steadily increase our results, year in and year out, as we have been doing for the past five years.
