UPDATE: Peugeot Citroen Open To Broader Alliances As Sales Contract

PSA Peugeot Citroen (UG.FR) would be interested in forging a deeper alliance with another automotive group under certain conditions as it struggles to increase sales and eke out profits in Europe's over supplied car market, but there are no talks currently underway, France's largest car maker said Thursday.

"We don't exclude the possibility of accelerating what we're doing through a broader alliance," Frederic Saint-Geours, head of the group's Peugeot and Citroen brands told journalists.

Earlier Thursday, Peugeot said slack demand for small cars and tough price competition in Europe contributed to a 1.5% fall in vehicle sales to 3.5 million units in 2011. Sales in Europe fell 6.8% but were up 11% in Latin America, 7.7% in China, and 35% in Russia.

"We're more focused on developing outside Europe than defending our market share in Europe," Saint-Geours said. The group's European market share fell 0.9 percentage point to 13.3% in 2011. Saint-Geours said European demand will remain subdued for at least three to four years.

Peugeot's performance contrasts with booming sales at European rivals with higher-margin luxury line-ups, less exposed to Europe's weak southern economies, such as BMW AG (BMW.XE), Daimler AG (DAI.XE), and Volkswagen AG. Peugeot derived 61% of last year's sales from Europe whereas China has become as an important market for the VW brand as Europe.

Saint-Geours said allying Peugeot to another automaker would have to fulfil three criteria: It must be coherent with Peugeot's strategy; it must create real synergies; and can't jeopardize the company's independence and finances. The Peugeot family controls the group through a 30% stake.

"We are quite open to the idea provided these conditions are met, but we have to find the right partner," he said.

Fiat SpA (F.MI) chief executive Sergio Marchionne said earlier this week that Fiat is open to the idea of bulking up with another volume car maker to create economies of scale. Marchionne met with Peugeot Citroen chief executive Philippe Varin on the sidelines of the show, stirring speculation about some kind of link-up between the two auto makers.

Peugeot has industrial partnerships with several other auto makers, including Fiat, BMW, Ford Motor Co (F), and Japan's Mitsubishi Motors Co. with which it had talks about a more far-reaching tie-up. Those talks ended in 2010 when the two sides couldn't agree on financial terms. Mass-market car makers have become increasingly dependent on partnerships to help defray the industry's high capital costs.

Peugeot has said its automotive division's losses in the second half of 2011 would more than offset the EUR405 million profit in the first six months. In October, Peugeot mapped out plans to slash costs by an extra EUR800 million involving thousands of job cuts in Europe.

That still may not be enough to restore the group's automotive division's operating profitability this year. "We anticipate a loss in autos of EUR500 million (in 2012)," David Lesne, an analyst at UBS said in a note Thursday.

Peugeot shares were up 3.6% around 1050 GMT at EUR13.43.

-David Pearson, Dow Jones Newswires; +331 4017 1740, david.pearson@dowjones.com

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