French President Francois Hollande says PSA Peugeot Citroen’s plan to close a factory and slash 14,000 jobs won’t be tolerated. History suggests otherwise.

In the last major clash between a sitting French president and a company over corporate downsizing, Hollande’s predecessor Nicolas Sarkozy vowed in 2008 that an ArcelorMittal plant in northeastern France would never close and jobs would be saved. A year later, the world’s biggest steel company shut the factory.

Hollande, elected in May after pledging to block a “parade of firings,” said he would lean on Peugeot to rework a plan intended to stem losses and trim production capacity. The government will report the findings of a review later this month, as well as measures to prop up the French auto sector.

“The state has no means to put pressure on Peugeot,” Florent Couvreur, an analyst at CM-CIC Securities in Paris. “We’ll see the plan they will present on July 25.”

Peugeot doesn’t have much wiggle room to amend its plan. Europe’s second-largest carmaker is burning through 200 million euros ($245 million) of cash each month and Moody’s Investors Service placed its Ba1 rating, already junk, on review for a possible downgrade on July 13. The stock fell 7.7 percent to a new 23-year low that day on concern the government will try to dilute the plan and possibly end up taking a stake in company.

A representative for Peugeot declined to comment on Hollande’s remarks. Chief Executive Officer Philippe Varin said in an interview on RTL radio on July 13 that he’s ready to “open the books” to the government to show that French labor costs are too high. Another round of car-scrapping incentives isn’t the answer, Varin said.


Shares Drop

The shares rose as much as 3 cents, or 0.5 percent, to 6.51 euros and traded at that level as of 9:27 a.m. in Paris Monday. The Paris-based automaker has plunged 75 percent in the last year, valuing Peugeot at 2.3 billion euros.

The company’s reliance on France and southern Europe for sales has made it more vulnerable to the economic slump than Renault SA, which has a partnership with Nissan Motor Co., and Fiat SpA, whose ownership of Chrysler LLC in the U.S. has compensated for widening losses in Europe.

Hollande, who took office on May 15, is squeezed between the demands of his union supporters and plans by some of France’s largest companies to reduce their workforce to adjust to slower economic growth. Air France-KLM Group, Europe’s largest airline, is eliminating more than 5,000 positions. Drugmaker Sanofi may reduce staff by more than 2,000.


High Unemployment

“This is a case that goes far beyond Peugeot politically,” said Bernard Jullien, an industrial economist with French automotive think-tank Gerpisa.

The French economy, Europe’s second-biggest, failed to grow in the first three months of the year. The Bank of France estimates that it probably shrank in the second quarter for the first time since 2009. The number of people looking for work in France was 2.92 million in May, more than at any time since 1999. The unemployment rate is 10 percent.

Hollande said that the state can’t be “indifferent” to Peugeot’s woes and that the carmaker’s current plan, which includes 8,000 more job cuts than announced last year, is “unacceptable.” Peugeot’s plant in Aulnay near Paris could continue to exist as an industrial site, Hollande also said in a televised interview.


Mounting Losses

The government’s goal is to save more of Peugeot’s jobs, ensure there are no forced firings and soften the blow for the workers involved. It may also provide incentives to spur sales of environmentally friendly cars. Peugeot, which last year paid back a 3 billion-euro loan from the French state, said last week its automotive division will post a first-half operating loss of 700 million euros.

After ArcelorMittal in 2009 closed a plant at Gandrange in northeastern France, a decision that cost 571 jobs, a tombstone was placed in front of the factory with the inscription “Here lie the promises of Nicolas Sarkozy.”

Sarkozy had asked ArcelorMittal’s Chief Executive Officer Lakshmi Mittal to revise the plan and his government said it was ready to “temporarily” take over plants that the company planned to close in France. Gandrange produced steel for the auto and construction industries.

The French state doesn’t own a stake in ArcelorMittal or Peugeot, reducing its potential influence over the companies. The government is the largest shareholder in Renault, the country’s second-largest carmaker.


French Paradox

Hollande said that generating jobs is his top priority, even as his popularity shows signs of waning. Support for the new president has dropped 7 points in the past month to 56 percent, according to an Ifop poll published July 11.

Coming to the rescue in a bid to reduce job cuts will only reduce France’s competitiveness in the longer term, analysts said.

“The paradox is that this puts pressure on the government to address a short-term problem when what is required is long- term solutions,” said Antonio Barroso, an analyst at Eurasia Group in London. 

(Bloomberg)