1. 104
PHOTOGRAPHS BY BENOIT DECOUT/REA-REDUX
‚In a darkened auditorium in PSA Peugeot Citroën’s Poissy
factory west of Paris in February, Robert Peugeot addressed
800 company engineers from Europe, Argentina, Brazil and
China. Peugeot, head of design and quality control at the com-
pany his family founded almost two centuries ago, called the
unusual meeting because, he said, too many mistakes were
being made in the manufacture of Peugeot’s new models.
“We have plenty of examples in stamping, painting and
assembly, where a lack of focus on getting the specifications
right from suppliers means there are problems in the field
that take time to be identified,” Peugeot recalls telling the en-
gineers. One immediate cause of his concern was a series of
engineering and assembly glitches that had just resulted in a
six-month delay in the rollout of the company’s new Citroën
C6 luxury sedan. Peugeot explained to the technicians that he
was instituting new processes to make sure designers, engi-
neers and suppliers communicated more clearly.
Peugeot, 56, regards the Poissy meeting as a call to arms.
His company has had a troubled three years, and he and Chief
Executive Officer Jean-Martin Folz, 59, are determined to fix
it. Their plan is to reduce defects and recalls on the Peugeot-
and Citroën-brand cars they sell, to push down costs by using
more common parts and moving more manufacturing to
Eastern Europe and to create a new lineup of cars as popular
as the Peugeot 206, for seven years the best-selling subcom-
pact in Europe. If the plan doesn’t work, Peugeot is faced with
more of what it has seen in the past three years: stagnant sales
and unhappy investors. No one is predicting Peugeot will dis-
appear; it made 1.03 billion euros ($1.31 billion) in profit last
year on ¤56.3 billion in sales, and the Peugeot family, which
has a 30 percent stake, is determined not to be bought out.
What some investors fear is that Peugeot will slowly
By Alan Katz
ENGINE
PEUGEOT
Bloomberg Markets
July 2006
STALLED

2. 105
The French carmaker, once Europe’s star performer, is
suffering from a breakdown in quality plus competition from
Asia. Investors wonder whether it can get back in gear.
Peugeot 206 and 207 models in production
at the Poissy plant near Paris
’S
Bloomberg Markets
July 2006

3. 106
decline into irrelevance as more-aggressive European and
Asian car companies take away its market share.
Peugeot’s dilemma is emblematic of the larger European
auto industry. The mass-market auto companies, including
the region’s leaders, Fiat SpA, Renault AG, Volkswagen AG
and Peugeot, are fighting harder than ever for market share
in Western Europe and in the new markets of Eastern Eu-
rope and Asia. At the same time, Asian automakers such as
Toyota Motor Corp. and Hyundai Motor Co. are selling more
cars in Europe than ever. They now control 17.4 percent of
the Western European market, up from 14.2 percent three
years ago, according to the European Automobile Manufac-
turers Association. Hyundai and its Kia Motors subsidiary
are building factories in the Czech Republic and Slovakia
that will each churn out 300,000 vehicles a year.
As the Asians’ market share grows, there’s bound to be a
shakeout among the European carmakers, says Stefan
Bauknecht, a fund manager at DWS Investment GmbH in
Frankfurt who focuses on automotive stocks. Unless its man-
agers can pull off a rapid turnaround, he says, Peugeot could
be a loser. “A restructuring takes at least five years: two years
to cut costs and three years to see if the new models are sell-
ing,” he says. “Volkswagen, Renault and Fiat are all acting
faster than Peugeot.”
Robert Peugeot, an engineer who has worked in the fam-
ily business since 1975 and been executive vice president
since 1998, is the first to admit that the company needs to
shift into a higher gear. From 1998 to 2002, it was Europe’s
star performer. Sales in those years grew at an average an-
nual rate of 9.5 percent, profit surged an annual 37 percent
and its share price doubled. In those five years, Peugeot’s
European market share rose to 15 percent from 11.4 percent,
the biggest increase by far of any carmaker. Today, Peugeot
remains Europe’s second-biggest automaker, after Volks-
wagen, and the seventh largest in the world.
I
n the past three years, however, Peugeot’s performance
has soured. Global sales rose an average of 1.2 percent
from 2002 through ’05, and just 0.4 percent last year,
to 3.39 million vehicles. Sales in Western Europe fell 2.7 per-
cent to 2.36 million. Net income dropped 37 percent last
year from 2004, and it’s been in steady decline since 2002,
company reports say. “Our management in 2005 didn’t gen-
erate a lot of enthusiasm,” Folz says.
The lack of enthusiasm can be read in Peugeot’s stock
price. As of May 8, it was up 7 percent for the year compared
with 55 percent for Fiat, 35 percent for Renault and 32 per-
cent for Volkswagen. The reason Peugeot’s stock price is lag-
ging, Bauknecht says, is that its competitors are perceived to
have more momentum. Volkswagen has more global reach, is
working to slash its German labor costs and plans to more
than triple pretax profit to ¤5.1 billion by 2008. In the fourth
quarter of 2005, Fiat ended 17 consecutive quarters of losses
at its car unit on demand for the Grande Punto subcompact.
Fiat’s parent company projects that profit will more than
double in 2007 to as much as ¤2 billion.
As for Peugeot’s archrival Renault, investor zeal for the
stock, says Pia Hellbach, a fund manager at Union Investment
GmbH in Frankfurt, can be summed up in a name: Carlos
Ghosn. He took over as Renault CEO last year after turning
around Renault-controlled Nissan Motor Co. in Japan. Ghosn
says he plans to raise Renault sales by a third by 2009 and in-
crease operating profit margin to 6 percent from 3.2 percent
last year. “Ghosn’s reputation is high with the turnaround he
oversaw at Nissan, so many people are putting their faith in
him that he will make the hard choices at Renault,” Hellbach
says. Ghosn moved Nissan to five straight years of record earn-
ings from 2001 through 2005 and an operating profit margin
‘OUR MANAGEMENT IN 2005
DIDN’T GENERATE A LOT OF
ENTHUSIASM,’ SAYS PEUGEOT CEO
JEAN-MARTIN FOLZ.
Bloomberg Markets
July 2006 PEUGEOT STALLS

4. 108
of 9.2 percent compared with a loss of 684.4 billion yen
($6.2 billion) in the year ended on March 31, 2000.
Nissan also helps make Renault a more global company. It
sold 1.08 million vehicles in the U.S. last year, and Nissan con-
tributed 68 percent of Renault’s profit. Peugeot stopped sell-
ing cars in the U.S. in 1991 and hasn’t decided whether to go
back, Folz says.
Folz has his own targets: to raise vehicle sales 20 percent
by an unspecified date and achieve a 6 percent profit mar-
gin. Hellbach isn’t reassured. “I’ve met
with Mr. Folz several times, and while
he is very open, he’s also so cautious and
modest about meeting those goals,” she
says. Union Investment oversees ¤133
billion, including shares in both Peugeot
and Renault.
Others have more faith in Peugeot. “It
is certainly going to be challenging for
Peugeot to meet its targets, but it has
good management, and the models it is
coming out with now look pretty good,”
says Peter Braendle, a fund manager at
Swisscanto Asset Management in Zur-
ich. He drives a five-year-old red Peu-
geot 206 in addition to investing in the
company’s shares.
Bruno Catoire, a fund manager at Cholet-
Dupont Gestion SA in Paris, expects Peugeot
to pull itself out of its slump. “Peugeot has a
history of being able to respond very well to
adversity,” he says. Cholet-Dupont oversees
$2.9 billion in assets, including Peugeot and
Renault shares.
O
ne of Peugeot’s short-term challenges
is replacing its 206 subcompact, which
saw global sales through 2005 of 5.4
million. The model is eight years old, and its
successor, the 207, began reaching the mar-
ket only in April. Sales of the 206 dropped 19
percent, to 673,000, in 2005 from 832,000
in 2002. In mid-April, Peugeot announced it
would shutter its 206 factory in Ryton, Eng-
land, by next year, cutting 2,300 jobs, because
it’s too expensive to produce the minicars there.
Peugeot also dismissed more than 2,000 work-
ers at three plants in France by letting tempo-
rary work contracts expire. The 207 is being
manufactured at a new plant that opened this
year in Trnava, Slovakia, as well as at factories
in Madrid and Poissy.
The move to Eastern Europe is one leg of
Folz’s larger plan to rejuvenate the company.
He wants to cut costs by as much as ¤600 mil-
lion a year. He’s also updating Peugeot’s model
lineup, plans to bring down average vehicle age to 3.3 years in
2008 from 4.5 years in 2005 and will double the number of cars
built using just three basic underbodies to 3.2 million in 2008.
Skeptics cite both Peugeot’s quality issues and its Asian
competition as reasons to be pessimistic. “Peugeot has a
convincing strategy, but it hasn’t been able to translate it
into earnings, partly because of weak brands,” says Jens
Schattner, an auto analyst in Dresdner Kleinwort Wasser-
stein’s Frankfurt office. “And competition is getting harder.
Hyundai isn’t building two plants for
fun. They want to sell those cars to
Western Europeans.” Schattner has a
“hold” rating on the stock.
A good percentage of Peugeot’s prof-
its—the company won’t say how much—
comes from what Folz describes as the
most extensive string of joint ventures in
the auto industry. Peugeot and Ford
have spent ¤2.2 billion in Europe since
1998 to develop a series of four- and six-
cylinder diesel engines. Peugeot builds
minivans and utility trucks with Fiat,
small gasoline engines with Bayerische
Motoren Werke AG and 300,000 small
hatchbacks a year with Toyota that are
marketed under the Toyota, Peugeot and
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ROBERT PEUGEOT
SITS AT THE WHEEL OF A DIESEL-
ELECTRIC PROTOTYPE THE COMPANY
PLANS TO BEGIN SELLING IN 2010.
PEUGEOT
Bloomberg Markets
July 2006 PEUGEOT STALLS

5. 110
Citroën brands. Folz says the
number of cars and engines
built through joint ventures
should almost double by 2008.
Analyst Michael Tyndall of
Nomura Securities Co. in Lon-
don, however, questions the
joint venture strategy. “Those
partnerships are quite produc-
tive,” he says. “But my question
is, How many girlfriends can
you keep happy at the same
time? Renault and Nissan from
day one started acting as one
buyer. Peugeot has separate
purchasing organizations for
Fiat, for Ford, for Toyota. Sup-
pliers don’t see them as unified.” Tyndall has a “reduce” rating
on Peugeot stock.
P
eugeot and Folz are convinced the company is on the
right track. To convince investors, though, they need to
sell themselves as well as their cars.
Peugeot was raised in the town of Seloncourt in eastern
France. He earned his engineering degree at École Centrale de
Paris and his MBA from Insead business school. He slips into
Latin when describing his family’s feelings about the car
company, whose origins date back to a steel mill started by Jules
and Émile Peugeot in 1810. He
calls it an affectio societatis—
an idea to which his brother
and all his cousins are commit-
ted. Robert and his cousin
Thierry, Peugeot’s chairman,
lead the family’s involvement
with the carmaker. Robert is
chief of Société Foncière Finan-
cière & de Participations, the
holding company that oversees
the family’s shares.
Though Folz, an 11-year
Peugeot veteran, is in the odd
position of being the boss of an
owner, he says he has complete
authority to run the company
on a day-to-day basis. “The family has a strategy of long-term
growth for two car brands, and that is the same as manage-
ment’s, so we haven’t butted heads,” he says. He’s a graduate
of France’s elite École Polytechnique and the Corps des Mines
graduate school.
Peugeot’s and Folz’s top priority is to improve the quality of
the vehicles they manufacture. Part of that is the “mastering
conformity” project that was the subject of Peugeot’s February
speech. He blames a lack of precise coordination for years of
defects, including breakdowns in the electrical systems that
control heaters and air conditioners and flaws in window and
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Bloomberg Markets
July 2006 PEUGEOT STALLS
Those Were the Days
On Aug. 22, 1962, would-be as-
sassins opened fire on Charles
De Gaulle in Paris. Fortunately,
the French president was riding
in a Citroën DS car: Because
of the DS’s suspension system,
the driver was able to main-
tain control and speed away
even after the two rear tires
were blown out, according to
the Paris-based Charles De
Gaulle Foundation.
The Citroën DS, produced
from 1955 to ’75, before Citroën
was acquired by Peugeot, was a
paragon of style and engineer-
ing, says Peter Schmidt, manag-
ing director at Automotive
Industry Data, a Warwick, Eng-
land–based consulting company.
“The styling was unconventional
while functional; the ride was su-
perb,” Schmidt says. “That car is
what really gave Citroën its rep-
utation for innovation outside
of France.”
It also brought in custom-
ers. Citroën sold 1.46 million
DS models, according to the
company’s 50th-anniversary
statement. Citroën’s next-
best-selling luxury model, the
CX, managed to find only 1.04
million buyers in its 15-year
run until 1989.
Designed by
Italian Fla-
minio Ber-
tone, the
DS, with its
flat, sleek sil-
houette, was
a favorite of European movie
stars such as Brigitte Bardot
and Alec Guinness. The De
Gaulle assassination attempt
was later dramatized in the
film The Day of the Jackal.
Citroën is trying to rekindle
a bit of the DS’s magic with
the C6, a ¤41,900 model re-
leased this year.
The C6 has a
much more
modest sales goal: 20,000 units
a year, Peugeot CEO Jean-Mar-
tin Folz says. “This is our answer
to people who have asked us if
we could ever make a comeback
in the luxury market,” he says.
Schmidt is skeptical. “There’s
no way Citroën can bring back
the DS days,” he says.
ALAN KATZ
The Citroën DS was a favorite of
Brigitte Bardot and Alec Guinness.

6. 112
door lock mechanisms. In the case of the C6, the front windows
pulled away from their seals at high speeds, making the in-
terior of the car noisy. “When we look for the origins of our
quality problems, we find them at all levels: how we design
cars, our assembly process, a lot in our suppliers’ processes for
designing,” Folz says.
Peugeot’s new quality control program is on full display at
its plant in Rennes, France, where the C6 is under produc-
tion. The company started with a ¤46 million oak assembly-
line floor laid on top of the gray concrete of the rest of the
factory. “We found that workers treat that floor like they
would a wood floor in their own home,” says plant director
Yvan Plazanet, adding that the extra care translates into
more attention to the car moving above the floor as well. As
the cars move down the line, they’re subject to rigorous
checks by three “gatekeepers,” who use laser devices to mea-
sure the cars for flaws and defects. After the car comes off the
line, workers spend an additional 78 minutes doing one last
inspection, according to company documents.
Peugeot executives say most of the flaws in Peugeot’s cars
are in the parts that make up 70 percent of the content of a
vehicle, so management has assigned more than 300 engi-
neers to work with parts suppliers on improving the quality
of their work. The company faces an uphill climb, however,
to bring back the buying public’s confidence. In a 2005 cus-
tomer satisfaction survey by J.D. Power & Co. in France, Peu-
geot cars ranked 10th and Citroëns 14th. Honda took first,
and Toyota was third. Peugeot and Citroën did even worse in
2005 customer surveys in the U.K. and Germany.
In Robert Peugeot’s view, family control gives the com-
pany the time it needs to repair its reputation. “Sometimes
I get questions like, ‘You must be quite unhappy because your
stock price for the last two months has done this or done
that,’” he says. “I don’t care. I’m looking long term.”
In the current environment, however, few investors are
optimistic about Peugeot’s prospects. “Europeans like Peu-
geot are ceding much of the low end to the Asians,” says
Michael Fredericks, an auto analyst at San Diego–based
Nicholas-Applegate Capital Management, which manages
$15 billion. “On the very upper end, they’re limited by Mer-
cedes, BMW and Audi.” He sold Nicholas-Applegate’s entire
stake in Peugeot, about 280,000 shares, late last year after
Peugeot lowered its 2005 profit goal.
Robert Peugeot is undaunted. “The wheel goes around,
which means sometimes you have to focus on things that aren’t
totally new,” he says. “From the drawing to the actual execution,
you have to give the employee the proper tools to do the work as
efficiently as possible. This is an old message but one that has to
be reinvented in every generation.” The message was delivered
anew to those 800 engineers at the February meeting. Com-
pany executives now hope they’ll go to work and prove that the
venerable French company can still compete.„
ALAN KATZ covers transportation at Bloomberg News in Paris.
akatz5@bloomberg.net
Bloomberg Markets
July 2006 PEUGEOT STALLS
How Do Analysts Rate Peugeot?
To track analysts’ sentiments on PSA Peugeot Citroën shares
using the Analyst Recommendations function, type UG FP <Eq-
uity> ANR <Go>. The recommendations of the individual stock
analysts that follow Peugeot appear at the bottom of the screen,
along with each analyst’s price target for the shares, if the ana-
lyst provides one. To display a graph of the company’s historical
stock price that also shows the dates of changes in a particular
analyst’s recommendation on Peugeot, click on the number in the
Chart column that corresponds to the analyst. B indicates the
date of a “buy” rating, H signifies a “hold” rating and S indicates
the date of a “sell” recommendation. Press <Menu> to return to
the main ANR screen.
Twelve-month consensus
analyst ratings appear in the
upper-left section of the
screen along with the total
number of buys, holds and
sells. As of mid-May, 10 ana-
lysts recommended buying
Peugeot shares, 10 advised
holding them and nine said
clients should sell the stock.
Peugeot shares had a consensus rating of 3 in mid-May com-
pared with a 3.82 consensus rating for the CAC 40 Index of
40 companies traded on the Paris stock exchange. For details
on how the consensus ratings are calculated, type ANR
<Help> 9 <Go> 5 <Go>.
To evaluate trends in Peugeot’s sales growth and profit
margin, type FA <Go> and click on Profitability. To display
graphs of the historical data, which could make it easier to
pick out trends, type 1 <Go>, as shown below. Type 1 <Go>
again to return to the tabular data.
JOHN DIXON
BLOOM B ERG TOOLS
For a table of fundamental financial data on Peugeot, type UG FP <Equity> CH1 <Go>.