Morocco -- a low-cost play

PSA's Kenitra plant rises in Morcco, a low-cost production strategy for both Europe and Middle East markets

Ten months might not seem like enough time to build an automotive assembly plant from scratch. But that's the timeframe PSA Group needed in Morocco, where the group's new factory in Kenitra has just completed its first prototypes ahead of the start of production in 2019.

How did PSA go so quickly from greenfield to a plant factory capable of eventually producing 200,000 cars and 200,000 engines annually? The answer, PSA says, lies in maximizing competitiveness and efficiency, two of CEO Carlos Tavares' favorite buzzwords.

"To be the most competitive is key," said Jean-Christophe Quemard, PSA's executive vice president for Africa and the Middle East, who was involved "from A to Z" in the plant's construction.

He refrains from providing too many details about the new operation: "We don't publicize how nice our equipment is or how many robots we have," says Quemard. "This isn't our way of thinking."

Nor was the plant designed to make an architectural statement, and PSA doesn't expect to win any design awards for it.

But what PSA did achieve, with the help of Morocco's economic development authorities, is the establishment of a low-cost manufacturing base for mass-market models, just off the European mainland, in a region that is one of Tavares' crucial targets for growth and profit.

Most of the cars and engines built in Kenitra, a port city of 430,000 near the capital, Rabat, will be exported to other countries in the region - and potentially to South America and Europe. It's part of PSA's recent push into emerging markets, including India.

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Complementing the plant, PSA is opening a technical center that will employ 500 engineers.

PSA's Quemard

For Morocco, the PSA plant has cemented the country's place as an up-and-coming player in the global auto industry. The project will create 5,000 steady jobs, from blue-collar assembly-line workers to technicians and university-trained engineers, in a country that is seeking to diversify its economy beyond tourism and agriculture. An ecosystem of small and large suppliers is now springing up to serve the plant, generating as many as 20,000 indirect jobs over the next few years.

"The Moroccan automotive industry is quite young, but we've had high-speed growth in the last six or seven years," said Khalid Qalam, the senior adviser for the automotive industry at Invest in Morocco, the government agency charged with luring foreign businesses to the North African kingdom.

GOALS THAT DOVETAIL

Both PSA and Morocco speak of the key figure of "1 million." Not long after taking the top job at PSA in 2013, Tavares set a goal of selling 1 million cars in Africa and the Middle East by 2025, an increase of 40 percent from 2017, and growing profits fourfold by 2021. Perhaps not so coincidentally, Morocco wants to produce 1 million cars annually by 2025, including all manufacturers. Last year, local production totaled 341,802 cars, and 34,484 commercial vehicles - leaving the country ranked in the mid-20s among auto-making nations globally. But the potential is there to crack the Top 20.

Tavares and Quemard, a former head of purchasing at PSA, envisioned making 70 percent of those vehicles within the region. "Clearly, to sell that many cars in the Africa-Middle East region, you need to have them locally produced," Quemard said.

That idea is what began the automaker's hunt for a production site.

Quemard said PSA evaluated other options in the area, including Turkey, which has a strong automotive base but is subject to rising wages and political volatility. Iran has been a PSA stronghold but is now vulnerable to U.S. economic sanctions. And South Africa offered the prospect of a developed country, but it is geographically remote.

All signs pointed to Morocco. In its favor: France has deep historical ties to its former protectorate. Most government and business transactions are carried out in French, and Peugeot and Citroen cars have been a presence on North African roads since the dawn of the motoring age.

"In some countries in the region," Quemard reflects, "when you are talking about a taxi, you don't say 'taxi' - you say 'Peugeot.'"

PSA had even relied on a Moroccan plant to assemble vans in a joint venture with Renault until 2010. And PSA already was buying significant amounts of parts from Moroccan suppliers.

"This was a very rational decision," he said. "It wasn't emotional at all."

In June 2015, PSA signed an agreement to invest $650 million in the plant.

MOROCCO'S OFFERINGS

Morocco laid the groundwork to develop its industrial sector about 15 years ago, designating several free trade zones that included a standing offer of generous incentives to foreign companies, and promises to increase its pool of skilled workers. One of those zones, Tanger Med, in the north, already had landed a Renault factory with annual capacity of 400,000 vehicles annual that started operations in 2012, as well as a host of suppliers and related businesses. Another zone, the Kenitra Atlantic Free Zone, half-way between Tangier and Casablanca, would be PSA's new home.

Benefits offered to PSA and other automotive businesses to locate in the Atlantic Free Zone start with five years' exemptions from corporate taxes, with a rate of 8.75 percent over the following 20 years. Companies also are exempt from value-added tax and customs duties. The government will subsidize up to 20 percent of total capital expenditures. In the Kenitra factory's case, PSA holds 95 percent of the shares of the company that is operating the site, which was financed by a combination of company equity, subsidies and private banks.

"We have flexibility and we have no constraints from the EU," said Qalam, referring to European Union limits on the amount of incentives that member countries can offer to woo industry.

Still, the bedrock on which Morocco's attractiveness rests is its low labor costs. Fawad Ahmad, an analyst with IHS Markit who has studied the region, says automotive wages are 73 percent less than in Spain and considerably lower than in Eastern Europe. Ahmad adds that wages have been on the rise in Eastern Europe as very low unemployment put pressure on employers.

"We'll have no difficulty finding resources," Quemard said, noting that a number of French universities have set up branches in Morocco. "Hiring and training was a little challenging, but it wasn't any different than any other emerging market. It takes time."

PSA Group CEO Carlos Tavares (right) tours the Kenitra site, scheduled to launch production in 2019.

PSA'S PART OF THE DEAL

To take advantage of Morocco's incentives, PSA had to agree to export 85 percent of the vehicles it builds there. They are most likely to be subcompact and compact models built on the group's new CMP architecture, developed with its Chinese partner Dongfeng. Quemard would not confirm which models they will be, but analysts say the next-generation Peugeot 208 will be the flagship model, possibly followed by new versions of the Peugeot 301 and Citroen C-Elysee sedans for emerging markets. Production lines will be up and running in spring 2019, with initial annual output of 90,000 units.

"This plant will start with a new car, so the timing will be led by the launch of the product," Quemard said. "If the product had been launched earlier, we would have been ready to build it." The first prototypes will be assembled this summer to verify quality, processes and equipment.

Its engine - likely to be the EC5 1.6 liter naturally aspirated 4-cylinder - begins production soon. "We'll start exporting the engines this year," Quemard said.

The vehicles initially will be earmarked for sale in Africa, but Quemard did not dismiss the possibility that some could be exported to South America or even Europe.

In the end, the plant was completed months ahead of schedule.

SUPPLY BASE

Practicing just-in-time production means that an auto assembly plant must have a network of suppliers close at hand. For the Morocco project, some already were in place. Last year, PSA imported 500 million euros ($586 million) worth of Moroccan-made parts for its European factories, Quemard said.

"Renault opened the way," he said of his competitor's local supply chain. "And when we decided to do this project, it was the deciding factor for a number of suppliers. They had been considering Morocco, but they jumped because there are now two OEMs localizing there."

PSA will draw from a network of 50 suppliers in the country, he said. The vehicles' local parts content will start at 60 percent and increase to 80 percent. To reach that level, PSA will be required to purchase at least 1 billion euros ($1.17 billion) worth of parts by 2022, according to its sourcing agreement with the Moroccan government.

Big names moving into the Kenitra industrial park include Adient, which opened a fabric-coating facility there at the end of May. Nexteer broke ground last month. Other new operations are coming from Faurecia, Lear and Mecaplast.

"Building a plant using local resources takes some adaptation," Quemard said, "But what I can tell you is that we are absolutely on track."