VZCZCXRO8661
PP RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV RUEHSR
DE RUEHFR #0212/01 0421456
ZNR UUUUU ZZH
P 111456Z FEB 09
FM AMEMBASSY PARIS
TO RUEHC/SECSTATE WASHDC PRIORITY 5526
INFO RUCPDOC/USDOC WASHINGTON DC
RUCNMEM/EU MEMBER STATES COLLECTIVE
RUEHGV/USMISSION GENEVA 2992
RHEHAAA/WHITE HOUSE WASHDC

UNCLAS SECTION 01 OF 02 PARIS 000212 
 
STATE FOR EEB/TPP/MTAA/ BRIAN NAFZIGER 
STATE PASS USTR FOR ROY MALMROSE 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ETRD PREL WTO FR
SUBJECT: FRANCE ROLLS OUT AUTO SUPPORT PROGRAM 
 
REF: STATE 004753 
 
NOT FOR INTERNET DISTRIBUTION 
 
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SUMMARY 
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¶1.  (SBU) President Sarkozy announced a 9 billion euro aid package 
for France's struggling auto sector. The sector provides direct and 
indirect jobs for nearly 10 percent of the work force.  The GOF plan 
includes loans for Renault, Peugeot, Renault Trucks (Volvo) and 
their suppliers and incentives for consumers to use "greener" 
vehicles.  Participants are required to keep production in France, 
forego bonuses, and assist struggling suppliers by contributing to a 
special fund.   An important aspect of the government's efforts is 
to help the French auto industry adapt to demand for cheaper and 
more environmental-friendly models.  Central to the French economic 
stimulus and recovery plan, the auto package has grown by nearly 2 
billion euros since it was first sketched out on January 20 in a GOF 
briefing to the French auto sector.  End Summary. 
 
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The Government Package 
 
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¶2.  (U) President Nicolas Sarkozy announced February 9 that Renault 
SA and PSA Peugeot-Citroen will each receive government-backed loans 
totaling three billion euros over five years.  Renault Trucks, which 
is owned by AB Volvo of Sweden, is to receive 500 million euros. 
The government loans will allow Renault and Peugeot-Citroen to 
"prepare calmly for the future" the President noted. "This is not a 
gift. It is not a subsidy. It is a loan offered at an interest rate 
of 6 percent," Sarkozy said.  Media commentary suggests market rates 
on similar terms would be as high as 10 - 12 percent. 
 
¶3.  (U)  The GOF will also double its support to auto industry 
suppliers, to 600 million euros, through the suppliers' fund set up 
on January 20 during a summit co-organized by the GOF and industry 
to address plunging demand.  The fund is designed to serve as a 
source of long-term capital for equipment makers.  Sarkozy also 
announced a doubling (to two billion euros) of government guarantees 
for RCI Banque and Banque PSA Finance, the financing arms of Renault 
and Peugeot. 
 
¶4.  (U) Sarkozy also announced that loan guarantees of up to 5 
billion euros for small, medium and intermediate sized companies 
under France's previously announced stimulus package, would be 
dedicated to companies in the auto sector.  The President stated 
that in addition to the "bonus/malus" incentives instituted last 
year for carbon-efficient new cars, France will provide further 
incentives of up to 1000 euros for car buyers who scrap higher 
emitting older vehicles. 
 
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AID TIED TO KEEPING JOBS IN FRANCE 
 
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¶5. (SBU) As part of what French authorities call the "Auto Pact," 
Peugeot-Citroen and Renault have pledged "to close no sites in 
France for the duration of the loan and to do everything possible to 
avoid job losses," Sarkozy explained.   Family-run PSA 
Peugeot-Citroen is traditionally highly independent of the GOF and 
reportedly had trouble with the terms but preserved some margin to 
restructure operations through voluntary buyouts in France.  The GOF 
has a 15 percent stake in Renault and reportedly will not increase 
this stake, despite previous rumors to the contrary. 
 
¶6.  (U) Both French car makers have also pledged to use the 3 
billion euros of new, low-interest loans to develop fuel-efficient, 
low-emission vehicles.  PSA will continue research on a range of 
cleaner technologies, such as stop-start systems, hybrid 
powertrains, plug-in hybrids and electric cars.  Renault says it 
will use the fresh funds "to survive the crisis and finance its 
strategic projects in France, particularly the development of 
vehicles with zero or very low CO2 emissions."   Both companies have 
also promised to build new vehicles in their French factories in the 
coming years.  PSA said it will launch "one or more" new models in 
each of its five assembly factories and will keep employment in 
France at current levels.  Renault also said it will build five new 
models as well as a new engine in its French factories by 2012. 
Executives at both firms have agreed to forgo their bonuses. 
 
PARIS 00000212  002 OF 002 
 
 
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Improving Competitiveness of the French Auto Sector 
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¶7.  (SBU) Junior Industry Minister Luc Chatel stated  that in 
addition to a "two-pronged problem of demand and financing," the 
auto sector is facing "a structural challenge in terms of 
competitiveness."  Even before the current downturn, Renault and 
Peugeot had begun to move manufacturing to lower cost countries in 
Eastern Europe, Turkey and Asia.  Renault CEO Carlos Ghosn contended 
earlier this year that the production cost of a small Renault car is 
1,400 euros higher in France than in Turkey or Eastern Europe 
because of labor costs.  The two auto companies' business model has 
largely been based on greater profitability through mass market 
cheaper cars produced in low labor cost countries and sold across 
the European market.  During his February 6 television interview, 
President Sarkozy criticized such activities, terming it "improper 
for French car manufacturers to produce cars in the Czech Republic 
for export to France."  Responding to Renault CEO Ghosn suggestion 
to suspend the French "professional tax," a costly local business 
tax levied on company assets, Sarkozy has announced his intention to 
repeal the tax by the end of 2010 "to keep factories in France."  He 
added that the resulting budgetary shortfall of some 8 billion euros 
would have to be replaced by other taxes, such as a carbon tax. 
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Saving Jobs and Industry 
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¶8.  (SBU) During the presentation of his 26-billion-euro economic 
stimulus plan earlier this year, President Sarkozy had singled out 
the automobile sector as being in need of state help.  There are 
some one million unsold cars in factory and dealer inventories in 
France.  With slumping demand, Peugeot and Renault have cut 
production, eliminated 4,000 jobs and temporarily shut factories. 
In response, in addition to banning plant closures in France for the 
time being, President Sarkozy has also introduced a "social" 
dimension to his auto plan: an increase in short-term unemployment 
benefits and a loosening of restrictions on partial employment that 
will help to keep more car workers employed, at least part time. 
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Comment 
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¶9.  (SBU) The auto rescue plan has been long in coming.  Peugeot has 
tried to put on the brakes to minimize GOF interference in the 
industry as much as possible.  However, as it stands now, both 
French car manufacturers will be subject to government review of 
most operations for as long as they receive government assistance. 
President Sarkozy is likely to remain unapologetic for his 
suggestion that French carmakers should not invest elsewhere in the 
EU and re-export to their home market.  After something of a lull in 
Commission - France and France - member state spats during the 
French EU presidency, the strong reaction by the Czech Government, 
the current EU President, indicates we may gearing up for a dust-up 
over auto sector aid. 
 
PEKALA