Europe's carmakers look to SUV sales for profits

The new Peugeot 2008 at the 2013 Geneva motor show
Image caption Carmakers are hoping small SUVs like Peugeot's 2008 will continue to be popular with buyers

While times are tough for almost all of Europe's carmakers, this week's Geneva motor show has seen firms scramble for the one segment of the market still defying economic gravity - compact sport utility vehicles (SUVs).

Europeans are expected to buy almost 290,000 small SUVs this year according to IHS Automotive, which is nearly double the number that were sold last year.

Nissan's existing model, the Juke SUV, is being joined in Europe by the likes of Renault's Captur and Peugeot's 2008 - both of which were unveiled at the Geneva show.

For PSA Peugeot Citroen, the launch of the 2008 is a key plank in its recovery plan to break away from its moribund European markets and concentrate instead on Asia and South America.

"We were too Europe-dependent," says Frederic Saint-Geours, the company's executive vice-president of brands.

"In 2009 we were selling only 24% of our cars in Europe. With the 2008 clearly we want to have a global car."

Falling sales

The reason car firms are switching to SUVs is simple - profit margins are higher. Even though these SUVs' production costs are largely the same as traditional small hatchbacks, they command a higher retail price.

For instance, Peugeot's 2008 SUV will cost upwards of 15,000 euros (£13,000) while the company's 208 hatchback starts at 12,000 euros. So far, it is a price some of Europe's consumers seem happy to pay.

The new car has been created with a world market in mind, the product of designers in France, China and Brazil and it will be built in all three countries.

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Media captionThe BBC's Christian Fraser reports from a Peugeot assembly line

"It's a global car because it's the same technical basis, but adapted to each customer in the world," Mr Saint-Geours told BBC World News's World Business Report.

Yet apart from SUV sales, Europe's car firms are struggling.

Across Europe customers have been delaying purchases, worried about rising prices, falling real wages - and whether they will still be in work this time next year.

Car sales across the European Union fell 8% last year to a 17-year low, and manufacturers do not expect things to be any brighter this year with EU car sales expected to drop a further 6%.

Plant closures

Cost-cutting and global alliances are the other parts of car companies' survival plans. For its part, Peugeot has already linked up with the US firm General Motors, making the two jointly the world's largest buyer of automotive parts and potentially saving large sums of money.

"We'll be able to have $1bn synergy in 2017. It's necessary because if you are too small you can't speak to the suppliers with enough power, so we need volume," says Mr Saint-Geours.

It is in its home market of France that Peugeot faces some of its greatest challenges.

Like Ford in Belgium and General Motors in Germany, the company is trying to close a plant it says is surplus to requirements.

The French car industry employs almost 600,000 workers, with almost 100,000 employed by Peugeot and the company wants to cut some 8,000 jobs.

But its factory at Aulnay, just outside Paris, has become the focus of protests and opposition by some in its workforce to its restructuring plans.

Peugeot wants to shut the plant, transferring half the workers to other jobs and laying off the rest. The plans have divided trade unions and led to protests and stoppages at several of its factories.

Now, the CGT union has succeeded in temporarily blocking the proposed plant closure in court. The union says the company should increase the payoff to those workers losing their jobs to 130,000 euros. Peugeot is currently offering a maximum of about half that.

Mr Saint-Geours insists that despite the protests, the majority of the workers back Peugeot's plans.

"Three-quarters of the unions are OK with our proposals, it's only a few people that are not OK with what we are proposing."

Rising unemployment

Car companies like Peugeot say they have little choice but to close plants if they are to remain competitive.

This year European car plants are expected to work at 63% of their maximum capacity - down from 66% last year - which means more losses for manufacturers because of the fixed costs of maintaining factories.

"The French government has to reduce the labour costs by changing the way we are financing social security. It has to do more to reduce the labour costs in France," says Mr Saint-Geours.

Image caption Peugeot is still clashing with workers over plans to close its Aulnay factory

"Clearly the government and our group have to work together because we are producing two-thirds of the car production in France, so we have to work together to find the best solution to what's happening in France."

The French government is trying to reform the country's labour market. The aim is that if it's easier to get rid of workers, companies may be more inclined to take them on in the first place.

This week it proposed changes that would offer struggling firms more flexibility in terms of wages and working hours, hoping to lessen the chances of French firms closing their factories or shifting production elsewhere.

It comes against a background of rising French unemployment, which is now at its highest level in 13 years. President Francois Hollande's government faces a big challenge in making good its promise to reverse the rise in jobless numbers by the end of this year.

"What is very interesting is the flexibility that this agreement gives to the company. We will be able to discuss with our unions to see how we have the right balance between the work hours, the wages and the number of employees," says Mr Saint-Geours.

Long road to recovery

Mr Saint-Geours insists that Peugeot is on track to recover from its 2012 losses of 5bn euros.

"We have the financial security to go on with our rebound plan and to break-even in terms of cash-flow at the end of 2014," he says.

But despite Peugeot's optimism, no car company is predicting a quick turnaround in European car sales.

Indeed, many industry executives say it could take four or five years for sales in Europe to recover - and that could mean more factory closures and more job cuts to come.

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