The Economist - 19_25 April 2014

54 Business The Economist April 19th 20142 state-owned enterprises (SOEs) to shunjets. An aviation-industry veteran says SOEexecutives once made up perhaps 15% ofthe local jet-leasing market before thecrackdown, but that figure today is 5%.Still, the government now seems readyto unleash business aviation’s potential. Itis promising to build 10-15 new airports ayear. China has fewer than 400 airports forcivil use today, whereas small jets can landat 18,000 fields across America. The latestofficial five-year plan explicitly promotesthe development of non-airline aviationand calls for reforms to improve the efficiencyand allocation of air space. Thismatters, because China’s air force blocksan inordinately large amount ofit.The armed forces have recently givenup some big blocks of air space they hadpreviously reserved fortraining, and handedover about a dozen military airfields forcivil aviation. In half a dozen local trials,regulators are allowing paperwork-freeflights at low altitudes. Faku, a county nearShenyang, the capital of Liaoning province,is one ofthese experimental zones aspiringto become a “light-air capital”, with1,000 small planes within five years.Edward Bolen of the National BusinessAviation Association, an American industrygroupthatorganised thisweek’sconference,observes that Faku’s experimentpoints to an important difference in theway the business is developing in China.The rise of business aviation in the Weststarted with a proliferation of smallplanes, typically propeller-driven, andonly later moved on to bigger, jet-poweredcraft. Since it first started in China in 2003,the industry has been dominated by bigjets costing tens of millions of dollars; theswarm of smaller turboprops buzzing overFaku is a new phenomenon.That suits Scott Neal of Gulfstream, anAmerican manufacturer of big businessjets. His firm has sold over 100 in China,many of them top-end models, and holdsthe biggest market share. The mainland’sprivate-jet fleet has more than doubled inthe past three years, and grew by roughly afifth last year. Bombardier, a Canadianbuilder of business jets, forecasts that from2013 to 2032 Chinese customers will takedelivery ofmore than 2,400 ofthem.A sign of the market’s maturation is theshift away from buying only new jets. Localsused to turn up their noses at usedplanes, but now sales of “gently preowned”jets make up nearly half of the total.A number of new charter operators aresetting up shop. NetJets, a firm partlyowned by America’s Berkshire Hathawaythat offers fractional ownership of jets, isabout to dip its toes into the market. OnApril 15th Gulfstream and MinshengFinancialLeasing, the aviation-finance arm of aChinese bank, trumpeted a deal to ship 60new corporate jets to China—one of thebiggest deals yet seen worldwide.Nope, not big enoughThere is another sign of rising sophistication.Jason Liao of China Business AviationGroup, another consultant, says thatwhen the market opened in 2003, buyerswere chiefly fat cats: they bought the biggestand blingiest jets, often plonkingdown cash, but flew them only rarely, toimpress friends. Now, the chief buyers areprivate companies, typically using financingor leasing schemes, and utilisationrates are soaring as the jets are put to businessuse. This is a market that looks, at longlast, set for take-off. 7Peugeot’s revival planStriving for thepodiumPARISA new boss seeks profits by making anarrowerrange ofpriciercarsTHE Peugeot group (PSA) won the MarrakechWorld Touring Car Championshipon April 13th, with Citroën C-Elyséescoming first, second and third. Thatcheered its new boss. Carlos Tavares, a racingfanatic, joined Peugeot’s archrival, Renault,as a test driver in 1981, rising to becomethat company’s number two beforetaking the wheel at PSA on March 31st. Henow wants to see his new company enjoyingthe same success financially as it hashad on the racetrack.The second-largest European carmaker,in volume terms, is struggling to escapefrom losses topping €7 billion ($9.7 billion)in the past two years. A €3 billion capitalincrease agreed on in principle in March,which hands both Dongfeng, a Chinesecarmaker, and the French state 14% stakesin exchange for €800m apiece, will helpPSA secure its future. On April 14th Mr Tavaresset out how he proposed doing it.Mr Tavares is seen by many as the firstgenuine “car guy” to run PSA for sometime. His real forte may be on the numbersside, however. “Back in the Race”, as his recoveryplan is called, has four broad goalsbut one overwhelming message: forgetabout volume and market share, focus onprofits and cashflow. The first aim is to distinguishmore clearly Peugeot’s high-endfamily cars from Citroën’s cheaper, trendyones, pulling out Citroën’s DS range as astand-alone premium brand. The idea is toreduce the percentage price gap betweenPSA cars and their best-in-class rivals,which runs to double digits in some cases.The second is to concentrate on globalwinners, dropping niche models. Thenumber ofmodels will fall from 45 to 26 by2022 and seven production platforms willbecome two. The third is making worldwideoperations profitable. PSA thinks carsales will grow by 38% globally betweennow and 2022 but by just 20% in Europe,where it now makes almost three-fifths ofits sales. Riding this wave means above allthat PSA must follow its rivals and expandin China, already its second market. TheBRICS have proved challenging: MrTavares aims to break even in Russia andLatin America in 2017 but it is a tall order.The fourth target is the whopper: improvingcompetitiveness. PSA has to sell2.6m cars outside China to break even andwants to lowerthis to 2m (in 2013 it actuallysold 2.3m). That means reducing costs—wages will fall from 15.1% of revenues toless than 12.5% in 2016, for example—andmanaging cash, suppliers and stockbetter.Mr Tavares expects to make profits in2018, with operating margins at the corecarmaking business of 2%, rising to 5% by2023. Analysts were dismayed by such timidtargets and PSA’s shares, having revivedrecently, slipped a bit.PSA is already on an upward swing financially.Sales are looking brighter as theEuropean market recovers. Peugeot’s 308hatchback won the European Car of theYear award; extra shifts are being laid on toproduce more of them, and of the new2008 mini-SUV. Much of the hard cost-cuttinghas already been agreed on: a plantnear Paris was closed last year and a jobsheddingcontract negotiated.The motor industry is studded with storiesof ailing firms whose fortunes were revived.One is particularly relevant. Nissanwas a sad case when Renault took a stakein 1999 and whipped it into shape, closingplants and cutting costs. Mr Tavares spentseven years at Nissan, in Japan and inAmerica. He knows how to end up on thewinners’ podium. 7