PSA Peugeot Citroen signs manufacturing deal with China Changan Automotive Group

PSA Peugeot Citroen announced that it has signed a 50-50 production joint venture with China Changan Automotive Group. The production deal relates to passenger vehicles and light commercial vehicles. The initial investment in the joint venture will be around $1.24 billion, and will focus on launching Citroen's DS line of premium small cars in China. There will also be a dedicated new brand designated for the joint production venture, as the deal allows for the venture to market further vehicles under Peugeot and Changan brands.

The first vehicle is scheduled to be launched in the second half of 2012. The plant in Shenzhen, southern china, will have a production capacity of 200,000 vehicles and engines, with two production lines and a research and development centre. PSA Peugeot Citroen is already making Peugeot 408 and Citroean C5 sedans in partnership with Dongfeng Motor Group Co.

China's automotive industry may have sustained its rapid growth heading into 2010 with production and sales both up over 70% in Q110, but we believe this kind of breakneck pace cannot be maintained for the whole year. We expect more restrained growth in 2010, of around 15%, although this is a slight upward revision of our previous forecast of 12%. We expect a slowdown during the second half of the year as a natural cooling off period will follow such a high. It is also unclear how long the extended government incentives will last, with a drop off likely to follow their withdrawal. However, as a result of the surge in sales, several carmakers in China are planning capacity expansions, which has fuelled concerns of overcapacity when sales growth slows.

The government has implemented a number of policies to ensure the industry's development and sustainable future. These include consolidation of carmakers to reduce the opportunity for overcapacity, as well as promoting innovation in the alternative fuel segment to provide new areas for investment and product development. Parts suppliers are undeterred by the threat of overcapacity, however, with major investment coming from TRW Automotive and Eaton Corp. As a safety systems supplier, TRW sees particular opportunities in the fallout from mass vehicle recalls.

Competition in the world's largest car market is still strong, however, and we expect the battle between General Motors Company (GM) and Volkswagen (VW) to heat up as both announce their strategies for the country. VW will increase in its Chinese investment to EUR6bn (US$7.9bn) by 2011, up from the EUR4.4bn (US$5.8bn) originally announced in September 2009, which will fund two new production plants and seven new or upgraded model launches. GM is equally keen to gain some ground in China and plans to launch 25 new or revamped models by the end of 2011.

Author: Paul Chapman, Analyst