Not long after Carlos Tavares became chief executive of struggling French car maker PSA Peugeot Citroën a year ago, he ordered employees to work smarter, not harder.
“There was disarray. People were working like hell, but the methods weren’t appropriate,” said the 56-year-old former race-car test driver. Employees, from the factory floor to sales teams, lacked proper benchmarks, and much effort was wasted as the company drifted farther behind the competition, he said.
The former chief operating officer at Renault SA, Mr. Tavares landed at Peugeot following his abrupt resignation and an unusual public declaration of his frustration at waiting for his boss to retire. Immediately, he slashed costs, by reducing the number of cars it makes and cutting the workforce.
Since then, the company appears to have turned a corner, with the auto division posting an operating profit for the first time in three years.
Peugeot shares have soared 53% so far in 2015. The company will be readmitted later this month to France’s top stock benchmark, the CAC-40 index, following a three-year absence—a symbolic victory for a company that was bleeding cash and mired in an existential crisis during the depths of the eurozone recession.
The auto maker still has much to do, however. It posted a net loss last year and profit margins are lower than its rivals. And, like other legacy car makers, it faces the disruptive threat of tech giants, likeGoogle Inc. and Apple Inc.
Mr. Tavares recently spoke with The Wall Street Journal about cutting costs and finding future growth in a saturated European car market. Edited excerpts:
WSJ: What is your outlook for the European car market?
Mr. Tavares: In Janu Citroenry and February, the growth of the European market was higher than what we expected. We’re a little bit cautious about 2015 because we still believe there is a lot of volatility ahead, mostly coming from the situation in Ukraine and Greece. We still think the overall market in Europe will grow 1%.
WSJ: When you arrived at the company, what did you think had to be changed?
Mr. Tavares: There was a lack of benchmarking that was creating some blindness. In some areas, like inventory management, net pricing management, and manufacturing efficiency, there were big contrasts with the rest of the industry. The company was improving, year after year, but the progress was below the pace of the industry. We were going backward. When I came in, I could see with my eyes, tons of things we could do. That was very striking.
WSJ: Can you give an example?
Mr. Tavares: The Peugeot 308 was the European Car of the Year in 2014. But the car was being discounted at a level that wasn’t consistent with the quality of similar cars and compared with our German competitors. There was no reason we couldn’t price higher. There was some lack of confidence in our capability.
WSJ: The company posted better financial results this year, largely due to lower costs. What did you cut?
Mr. Tavares: Most of it was waste. In the plants, we improved the quality on the line, improved the internal logistics, [reducing the size of] the sites so we can have lower energy costs.
It was about empowering people to make the right, good decisions. If I tell the head of a plant he can [reduce] his plant, sell part of the land and keep the money to reinvest that cash in new equipment, he will look at me and be surprised. Nobody told him before he could do it. That’s the autonomy that we’re trying to deliver to our people.
WSJ: Which factories most needed improvement?
Mr. Tavares: Most of our European plants. They are 30 to 50 years old. Back then, the plants were big, big, big. Now, in some cases, it’s better to be compact and efficient.
WSJ: Peugeot’s inventory levels declined significantly. How did you reduce them?
Mr. Tavares: Raw materials, semiproduced goods, complete cars, even replacement parts. We reduced €1.6 billion (US$1.7 billion) of inventory, with no impact on the business.
If you have two plants that are apart by 50 miles, you don’t have to duplicate all your spare parts for the equipment. You can use one and send it to the other plant if they need it. It’s not rocket science; it’s about good sense.
WSJ: Some analysts applauded the cost cuts but expressed concerns about revenue growth. How do you respond to that criticism?
Mr. Tavares: It would be unfair to say that we didn’t grow. Our volumes grew by 4.3% in 2014. We sold 120,000 more cars. Our progress was 32% growth in China and 8% growth in volume in Europe. We restructured deeply without losing growth in volume.
There’s huge overcapacity in Europe, which has destroyed pricing power. Growth can be generated at the expense of profit, but if there’s no recurrent profit, there is no future.
Many people look at the top-line improvement as more important than profitability. But we are not a startup. There around 200,000 employees. It’s a three-million-car company. It’s a fine balance in the financials. Growth, yes. But only if it’s profitable.
WSJ: Where is Peugeot in its development of autonomous cars and how big is the competitive threat from Google, or other tech companies, in the auto business?
Mr. Tavares: I consider automated drive very important. We will bring back more quality time to the driver. For instance, we want to give you the opportunity on a Sunday night when you come back from the countryside to talk with your wife and kids without being completely focused on the driving.
Tech companies will soon realize that the cost of entry into the auto industry is extremely high. It’s not only about intensive investments but the accumulation of expertise. At one point in time, they’ll realize it’s better to collaborate with auto makers.
WSJ: Are you working with Google or Apple now?
Mr. Tavares: We don’t have discussions with them at this stage. But that doesn’t mean we won’t one day.
Source : WSJ
