Dongfeng Motor's purchase of a stake in French firm will allow it access to new technology and markets, report Li Fangfang in Beijing and Li Xiang in Paris

China's second-largest vehicle producer, Dongfeng Motor Corp, has purchased a 14.1 percent stake in French automaker PSA Peugeot Citroen for 800 million euros ($1.09 billion), the largest foreign acquisition so far by a Chinese State-owned company.

According to Dongfeng's statement to the Hong Kong stock exchange on Wednesday, the two parties have signed a memorandum of understanding.

Under that MOU, the Chinese company will subscribe to shares to be issued by Peugeot to increase its capital reserve at 7.5 euros per share, for a total subscription price of 524 million euros.

Dongfeng also agreed to spend another 276 million euros to buy shares pursuant to a Peugeot rights issue.

The French government is also expected to acquire 14.1 percent of Peugeot's shares.

A new committee overseeing development in Asia will be established within the supervisory board of Peugeot, with a representative of Dongfeng to serve as chairman.

The deal ends the Peugeot family's dominance of the company. Dongfeng, the French government and the family will each hold the same number of shares and have the same voting rights at the company's general meetings.

Although the capital injections from Dongfeng and France still require approval by regulators in their respective countries, Peugeot said that the agreement will be signed on March 26, and the deal will be concluded before April 30.

Peugeot also announced during a news briefing in Paris on Wednesday that the company's net loss had narrowed from 5.01 billion euros in 2012 to 2.32 billion euros last year.

"We have gone through some very challenging years for the European automotive industry, which have added to the group's structural difficulties, notably its over-dependence on Europe.

"We vigorously implemented difficult restructuring measures, which are now starting to bear fruit," said Philippe Varin, chairman of the PSA Peugeot Citroen managing board.

"The globalization process is proceeding apace, with in particular an excellent performance in China. With today's announcements, we are giving a new impetus to our group, with an ambitious industrial and commercial plan and solid financial resources."

In 2014, Peugeot expects growth in automotive demand to be about 2 percent in Europe and about 10 percent in China.

The company aims to increase its production capacity to 750,000 units in China by 2015 and to double its network of dealers in the Chinese market, according to Varin.

"China will be the No 1 market for us in 2015," said Varin.

He noted that there is the possibility of building a fourth production plant in China to achieve the company's goals in the world's largest and fastest-growing auto market.

He added that Peugeot will establish an export joint venture with Dongfeng for the sale of its own brands (Peugeot and Citroen) and joint venture brands produced with Dongfeng in key markets in Southeast Asia.

A joint research and development center in China for products and key technologies dedicated to fast-growing markets will be established by Peugeot and Dongfeng.

Peugeot's market share in China stood at 3.6 percent in 2013, according to the company's 2013 annual results.

"We will continue to increase our market share in China through the extension of our product range and the launch of new products," said Jean-Baptiste de Chatillon, chief financial officer of Peugeot, at the news briefing.

The company will launch its new models - the DS5 LS and DS CUV - in China in 2014.

Analysts said that the alliance will give the French automaker access to cash and the Chinese automaker a path to become an international player.

"PSA and Dongfeng both stand to gain from the deal, with a strategic emphasis on raising sales in emerging markets, while using their production bases in China to offer competitively priced models," said Namrita Chow, a senior analyst with the United States-based consulting firm IHS Automotive.

"For PSA, the benefits of the deal and access to funds are quite straightforward. The automaker will avoid bankruptcy in 2015 following the new capital injection, while the deal with Spanish bank Santander will keep it afloat after its state guarantee expires next year," said Chow.

"The alliance will not only help PSA extend its presence in markets beyond Europe but it will also give Dongfeng greater access to international markets," she added.

"Stagnant and declining markets in Western countries not only helped China overtake the US as the world's largest vehicle market, they also supported improvements in Chinese automakers' capabilities and revenue," said Zhong Shi, an independent auto analyst in Beijing.

"We can see in recent years that more Chinese automakers are capable of competing with foreign rivals in global markets."

Zhong said these trends will also help the Chinese automotive industry in terms of products.

"Local production will no longer mean the simple transfer of existing models to Chinese plants. New models will be jointly developed by foreign and Chinese auto manufacturers," said Zhong.

In the next three years, the partners' 50-50 joint venture - Dongfeng Peugeot Citroen Automobile Co Ltd - aims to ramp up annual production capacity in China to 1 million units. That will support growth in sales in emerging markets in Asia and Africa, starting with Nigeria, using kits from China, according to IHS.

"The change in structure will greatly benefit their Chinese joint venture, as the tighter partnership will increase the efficiency of formulating strategies and bring more resources to Dongfeng Peugeot Citroen," said Zhong.

Varin said Dongfeng Peugeot Citroen will launch two to three new models a year globally under the three brands of Peugeot, Citroen and Dongfeng's own brand.

Contact the writers at lixiang@chinadaily.com.cn and lifangfang@chinadaily.com.cn

(China Daily USA 02/20/2014 page16)