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Chinese automaker Dongfeng, French government to each invest $1.1 billion in France's Peugeot

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BEIJING, China - Loss-making French carmaker PSA Peugeot Citroen is getting a 3 billion-euro ($4.1 billion) lifeline backed by Chinese investors and the French taxpayers in a deal that will see the company's founding family hand over control after more than two centuries at the helm.

Chinese automaker Dongfeng and the French government are each investing 800 million euros ($1.1 billion) in Peugeot, bailing out the struggling French auto brand and possibly expanding its global presence.

Plans call for Dongfeng Motor Co., the French government and the Peugeot family each to own equal 14 per cent stakes in PSA Peugeot Citroen and to have equal voting rights, Dongfeng said in a statement Wednesday. More cash will come from a share offering, in which stakeholders will be able to buy three new shares for each 10 they own.

Outgoing Chief Executive Philippe Varin called the change in Peugeot's ownership "a new page in the history of the company." It's one that could hardly have been predicted a few short years ago, when the proudly independent Peugeot family resisted a previous government bailout that was quickly snapped up by rival Renault, itself partly government owned.

Investors welcomed the operation, bidding up Peugeot shares 2.6 per cent by midday in trading on the Paris stock exchange.

Varin is being replaced at the end of March by Carlos Tavares, a former top executive at Renault. At a news conference, Tavares thanked Varin "for creating the conditions for our rebound," which partly depends on plans to position Peugeot and Citroen as more upmarket brands.

Squaring that ambition with the simultaneous arrival of new Chinese owners will be one of the new CEO's principal challenges.

The deal reflects an increasingly popular strategy among Chinese companies, which are buying stakes in established foreign brands to improve their competitive edge in their fast-growing home market.

China's auto market is the world's biggest by number of vehicles sold but is crowded and competitive, with every global brand and two dozen indigenous automakers jostling for sales.

Dongfeng said it and Peugeot will expand co-operation in technology, research and development, manufacturing and overseas distribution. They will sign a formal agreement in March and continue work on their strategic partnership.

Wednesday's brief announcement gave no additional details, including about how the owners will manage a potentially unwieldy structure with ties to both the French and Chinese governments.

While it is clear Peugeot gains much-needed capital, "from the Dongfeng side, the objective still is a little bit vague," said industry analyst Yale Zhang of AutoForesight in Shanghai. "We don't know if there are clear terms about transfer of technology."

Peugeot, which manufactured its first gasoline-powered automobile in 1890, is France's biggest automaker and Europe's second-biggest after Volkswagen AG, but has little presence in the United States or East Asia. It has developed models for China, including its 408 sedan, and has a joint venture with Dongfeng, but barely ranks among the country's top 10 brands in sales.

Dongfeng, on the other hand, is one of China's biggest producers of cars and trucks but is largely unknown abroad. Founded in 1969 and headquartered in the central Chinese city of Wuhan, it currently has a small joint venture with Peugeot and assembles vehicles for Japan's Nissan Motor Co. and Honda Motor Co.

Illustrating its need for help, Peugeot's earnings figures — which were also released Wednesday — showed a net loss of 2.3 billion euros in 2013, following a record 5 billion-euro loss in 2012.

Earnings were hammered by new restructuring costs and impairment charges to account for the diminishing value of Peugeot Citroen's assets.

The automotive division posted a 4.8 per cent drop in revenue, as the sales of new Peugeot and Citroen badged cars and light trucks slumped nearly 5 per cent.

Peugeot says it expects the European auto market to expand about 2 per cent this year and about 10 per cent in China.

Sales by the Dongfeng Peugeot Citroen joint venture rose 25 per cent last year to 554,000 vehicles, for a 3.5 per cent share of the market, according to LMC Automotive Ltd., a research firm. By comparison, VW and its main Chinese partner had a 9.9 per cent market share last year and GM and its main partner had 9.8 per cent.

Total auto sales in China rose last year by 15.7 per cent despite a steady decline in growth in recent years. Growth is expected to fall further this year to 8 to 10 per cent, still well above levels forecast for the United States, Europe and Japan.

The Dongfeng statement's reference to co-operation with Peugeot in overseas distribution raises the possibility their joint venture might export vehicles, an unusual step in China.

Global automakers that want government permission to manufacture in China are required to work through local partners. Such ventures usually focus on China's domestic market and avoid exports that would compete with the global brands' operations abroad. The only major exception is a venture by GM and its main Chinese partner in India to sell cars developed in China.

The Dongfeng-Peugeot ownership ties might help clear the way to exports by reducing potential financial conflict with the French partner's factories abroad, said Zhang.

"Once their shareholding is closer, they can share profits because they are one big family," he said.

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Associated Press writer Greg Keller in Paris contributed to this article.

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Online:

Dongfeng Motor: www.dfmc.com.cn

Peugeot: www.psa-peugeot-citroen.com/en

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