In Peugeot’s Troubles, a Test of Contradictory Campaign Promises for Hollande

Peugeot, one of France’s iconic companies, is in trouble, presenting President François Hollande with an early, telling crisis that is displaying the contradictions at the heart of his campaign promises to spur economic growth while shrinking the budget deficit with tax increases.

Protesters hold a banner during a demonstration of French car maker Peugeot PSA employees and unions against the planned layoffs and plant closing on July 25, 2012 in front of the PSA headquarters in Paris.
Pierre Verdy | AFP | Getty Images
Protesters hold a banner during a demonstration of French car maker Peugeot PSA employees and unions against the planned layoffs and plant closing on July 25, 2012 in front of the PSA headquarters in Paris.

Mr. Hollande, France’s first Socialist president since 1995 and a man who wants to lead the left’s battle against austerity politics in the euro zone, promised not only to restore growth but also to revitalize French industry, create jobs and save the French social model — all while vowing to find $40 billion in savings and tax increases to bring the government deficit down to 3 percent of gross domestic product in 2013.

He even created a whole Ministry for Industrial Recovery, led by Arnaud Montebourg, to stop factories from closing. But now Europe is in recession , and Peugeot , hemorrhaging money, has announced plans to cut spending by $1.85 billion by 2015, lay off 8,000 workers and shut a major factory at Aulnay-sous-Bois, near Paris. And Mr. Hollande is learning how hard it is to be a French Socialist in a European Union that demands budget cuts and debt limits, endorses free trade and has rules against favoring national manufacturers.

After the layoffs were announced, Mr. Hollande retorted that the plan “is not acceptable, and therefore it will not be accepted.” Mr. Montebourg, a foe of globalization and a fierce talker, accused the company of “lies” and “dissimulation,” and called the news “a shock for the nation.”

Yet it is not clear what the government can actually do. PSA Peugeot Citroën is a private company facing global competition in a cutthroat business with its main market in a recession, and France is an expensive place to make anything, let alone the low-cost cars that make up a large part of its business. Part of the company’s problem, in fact, is that it has tried to keep jobs in France.

So far the government’s response, a program aimed at supporting the French car industry as a whole, has been dismissed by critics as feeble. The party’s traditional answer would be to fortify PSA with state money or to protect the industry through import duties or quotas. But under European Union rules, that is no longer possible.

Already, with Mr. Hollande only 100 days in office and on a seaside vacation, public confidence is waning in his ability to square the circle, even as the economy worsens. France is now at zero growth, joblessness is at a 13-year high, the trade deficit is close to record levels and industrial confidence is at its lowest in three years.

Mr. Hollande has had a quiet start, keeping small promises like cutting ministerial salaries and slightly raising the minimum wage. But his effort to be “a normal president,” in contrast to his hyperkinetic predecessor, Nicolas Sarkozy, is beginning to look like lassitude. Even the left-leaning daily newspaper Le Monde said in an editorial that “after 100 days, Mr. Hollande has yet to assert his leadership.”

A French sociologist, Denis Muzet, told the newspaper that “the posture of a ‘normal president’ will not suffice to govern.” The French are willing to sacrifice, he said. “But for now people see no path to a promising horizon.”

Part of Mr. Hollande’s anger stems from PSA’s acknowledgment that it kept its job-slashing plans secret until after the May 6 presidential election in deference to Mr. Sarkozy. But Mr. Hollande also fears that other companies will follow PSA’s example. Already, Air France and Alcatel-Lucent have each announced 5,000 job cuts.

PSA, nearly 200 years old and the second-largest car company in Europe, is important all on its own, its extraordinary history laid out here in Sochaux, where Peugeot was founded, in a museum called L’Aventure Peugeot. The company employs about 100,000 people in France, while the auto industry as a whole still employs nearly 10 percent of France’s workers.

PSA’s critics say it has made strategic errors, dependent on Europe for 75 percent of its revenue and too slow to find a global partner, finally allying with General Motors this year. But in the recession, PSA is burning cash, losing more than $1 billion in the first half of 2012. The European car industry as a whole is having its worst year since 1996, with an estimate of 12.4 million vehicles sold in the European Union, 3 million fewer than in 2007 before the global economic crisis.

Answering the government, PSA’s C.E.O., Philippe Varin, defended the closing of the Aulnay factory, which is 40 years old, saying that “we cannot have a plant that works at half capacity” when “the European market has shrunk by 25 percent in five years.” Like many French executives, Mr. Varin insisted that the cost of labor was too high, which the government disputes, but he has promised to try to find jobs in other factories for some of those laid off and an alternate use for the factory in Aulnay, where Mr. Hollande got 62.5 percent of the vote.

Limited by the budget, the government’s response has been weak. “France is not abandoning its automotive industry,” vowed Prime Minister Jean-Marc Ayrault. The government will increase bonuses for those buying electric and hybrid vehicles. It promised more help for subcontractors, more electric charging stations and more research and development.

Mr. Montebourg, the minister of industrial recovery, insisted that all but $208 million of that expenditure would be made up by new taxes on cars that are more polluting, though others are skeptical.

But the roughly $820 million in aid for all manufacturers in France is less than what PSA lost in six months, and it is only the latest in a decade-long series of government efforts to subsidize French car companies and develop cleaner technologies. The future remains a hard sell. Of roughly 2 million cars sold in France in 2011, only 13,600 were hybrids and 5,000 were electric.

There is little in the government’s response that will alter the fundamental problems of French car companies or soften the global industrial competition. And the government is continuing to add to corporate taxes, making it harder for companies to compete.

Given the realities, even the ideological debate has a dutiful feel.

The decision to shut Aulnay “feeds, as expected, the rhetoric of social warfare, of the stigmatization of the boss and an appeal to the protector state,” said Élie Cohen of France’s National Center of Scientific Research and economic adviser to the prime minister. But the crisis of PSA and overcapacity has been long coming. “Any policy that tries to share out the poverty and multiply Potemkin factories would be counterproductive,” he wrote in Telos.

There is not much the state can do for PSA, Mr. Cohen says. It can only ensure that negotiations with workers are carried out fairly, promote better investment and innovation and, in the short term, try to lessen the cost of labor on companies.

But the last point is precisely what the Hollande government is opposed to doing, instead increasing corporate taxes and social charges.

The CGT union, one of the most militant, blames the company for mismanagement. “We want to stop the closure of Aulnay,” said Bruno Lemerle, 55, a CGT leader at Sochaux. He says the issue is not really the cost of labor or the 35-hour week. Labor costs are only about 10 percent of the cost of a car, and German workers are not much cheaper than French ones, he said. But in general, German workers are making luxury cars with high profits, while Volkswagen builds Skodas in the Czech Republic.

Nevertheless, he said, the government is too new and sympathetic for unions to confront too harshly, at least not yet. “Our first demand is to preserve Aulnay,” he said. “If the battle is lost, then we want a solution for each worker, but we’re not there yet.”