January 19, 2009 - French Government, Paris France

French Auto Maker Aid Hinges on Jobs

The French government is working on an aid package for domestic car makers Renault SA and PSA Peugeot Citroën, but the chief condition -- that they close no French factories -- remains contentious.

French Auto Maker Aid Hinges on Jobs

The French government is working on an aid package for domestic car makers Renault SA and PSA Peugeot Citroën, but the chief condition -- that they close no French factories -- remains contentious.

"We will not give the financing without concrete pledges from the auto makers," said Luc Chatel, the junior industry minister who is preparing recommendations for President Nicolas Sarkozy on how to save the French auto sector. He said the negotiations with the car makers on this point were "very difficult," but said the demand was logical and it was "in the public interest" to preserve jobs.

The condition shows the dilemma that rescue plans can pose to businesses. French car makers would like to keep the government at arm's length and make it through the downturn on their own. But car manufacturing is capital-intensive, and they are having trouble accessing credit on the financial markets at what they see as reasonable rates.

Analysts estimate that Renault needs some €9 billion ($12 billion) in working capital a year. It is 15%-owned by the French state, and has pushed hard in recent weeks for more help from the government.

"It's only fair for the government to ask for such assurances," said Renault spokeswoman Nathalie Bourotte, adding that Renault wasn't currently considering any plant closures in France.

Peugeot Citroën, which is controlled by the Peugeot family, appears to need less capital and is less inclined than Renault to compromise its independence. "We see no reason why a chief executive of an independent, publicly traded company should have to make these sorts of promises to the state," said Hugues Dufour, a Peugeot Citroën spokesman.

Promises not to close factories may be hard to keep: Demand for new cars has plummeted and few analysts expect European car demand to return to precrisis levels for at least five years. Credit Suisse estimates that the sector has as much as 15% too much production capacity in Europe, most of it in high-cost countries like France and Italy, and that Renault has the greatest overcapacity of any car maker in Europe.

The debate comes as the government plans a conference in Paris on Tuesday on how to preserve the long-term health of France's auto industry. Auto makers and their suppliers employ about 10% of France's labor force, but the industry has been hit hard as consumers put off spending on big-ticket items such as cars.

Even before the current downturn, Renault and Peugeot Citroën had begun to move more manufacturing to lower-cost countries in Eastern Europe and Asia. Their business model was in large part based on improving profitability by building mass-market cars in cheaper countries, while seeking additional sales growth in emerging markets such as Russia and Brazil.

Now the government seems to be calling that model into question, and is looking for ways to make French auto manufacturing more cost-competitive. "What can we do to make sure that a Clio is made in France and not in Turkey?" said Mr. Chatel, referring to one of Renault's top-selling small cars. "There must be ways to make the French automobile sector -- from suppliers to dealers -- more efficient and competitive."

Both Renault and Peugeot Citroën declined to comment on whether it would be feasible or desirable to bring production back to France from current manufacturing sites outside the country.

The government aid package could be unveiled as early as next month.

Original Story - Wall Street Journal