PSA Peugeot Citroen’s dealers in China give away French wine and perfume to prospective customers, sending the message that a country that produces such fine luxuries must also make good cars.

Connecting the Paris-based company’s vehicles to the allure of its homeland has become even more critical for Peugeot in the world’s largest auto market as it prepares to shift upmarket and challenge the likes of Bayerische Motoren Werke AG.

It’s a bet that needs to pay off for the cash-strapped manufacturer, which will start production of upscale DS models at a new factory in Shenzhen tomorrow, part of an 8.4 billion-yuan ($1.37 billion) joint venture. With growth in other emerging markets flagging or non-existent, China is key for Peugeot, as it seeks to stem losses and reduce its reliance on Europe’s recession-battered car market. The push faces consumer apathy toward French autos.

“When I think German cars, I think reliable; when you mention American brands, it’s muscle cars and design,” said Herbert Rong, a 34-year-old who lives in Shanghai and owns a Buick Regal from General Motors Co. (GM) “But French cars don’t have key selling points to me.”

China represents one of Peugeot’s last bastions of growth outside Europe and critical to the company’s goal of selling a majority of its vehicles overseas for the first time by 2015. Peugeot, the second-largest carmaker in Europe, forecasts sales to decline this year in Russia and Brazil, while Indian operations aren’t yet up and running.

Doubling Up

With the addition of the factory in Shenzhen, Peugeot will have capacity to build as many as 950,000 vehicles in China a year, more than double 2012’s sales of 442,000 autos. Still, that trails peers.

Volkswagen AG (VOW), Europe’s biggest carmaker, sold 2.81 million vehicles last year in the country. As part of its expansion, the German carmaker opened a 300,000-car factory in Foshan this week and plans to double capacity at the site in the coming years.

The introduction of the DS line in China is part of Peugeot’s goal of raising its share to 5 percent in two years from about 3.8 percent now.

Sales of the DS5 wagon, the first model that will be produced in Shenzhen, could also pad profit margins. The car will start at 235,000-yuan, more than double the price of the best-selling Citroen C-Quatre sedan. The company will flank the DS5 with a high-end sedan and a sport-utility vehicle next year.

French Romance

To support these models, Peugeot has opened 34 Chinese DS dealers after introducing the brand in June last year and plans to increase the number to 100 by the end of 2014. The company unveiled the world’s first flagship DS World store in Shanghai in March, which features vintage cars and the latest models in a sleek glass-front boutique. Peugeot’s French heritage is at the forefront of its efforts to woo Chinese consumers.

“France is a romantic, fashionable place,” said Xue Zhitao, brand manager of Peugeot imports in Chengdu in southwest China. “When you mention France, you think of red wine and perfumes, so we use these at promotional activities,” where wine is served and given away along with perfume.

Peugeot’s business in China needs to rely on local production, because its vehicles don’t have the cachet to demand prices to offset import tariffs. The French carmaker will have four factories in China by the end of the year.

The first three, part of a joint venture with Dongfeng Motor Corp. (489), are in Wuhan, capital of the central province of Hubei. The most recent plant was inaugurated in July and will increase the company’s annual production capacity in China by two-thirds to 750,000 vehicles by the end of 2015.

Decade Needed

The Shenzhen plant is part of a new joint venture with Chang’An Automobile Group. It will have capacity to make as many as 200,000 vehicles a year. Getting a return on funding the 50/50 venture, which included an initial outlay of 2 billion yuan for Peugeot, may take years.

“You need at least a decade to establish a new luxury brand in a market,” said Florent Couvreur, an analyst at CM-CIC Securities in Paris, who recommends selling Peugeot shares. “DS products are alright for Western markets but not adapted to the Chinese market,” where consumers are looking for sedans rather than the brand’s slate of hatchbacks.

China could take on an importance for Peugeot above and beyond sales. The French manufacturer, which is expecting to burn through about 1.5 billion euros in cash this year, is in preliminary talks on selling a stake to Dongfeng, three people familiar with the matter said Sept. 18. The share sale could cause the Peugeot family, which currently owns 25.5 percent of the company, to lose control, the people said.

German Lead

Such a move could dilute Peugeot’s French heritage in the eyes of Chinese consumers and complicate its uphill fight to challenge entrenched German rivals.

Volkswagen’s Audi entered the market in the 1990s, and BMW and Daimler AG (DAI)’s Mercedes-Benz opened their first factories in the country almost a decade ago. Combined, the three German luxury brands, buoyed by a global reputation for automotive engineering, will sell 1.05 million vehicles in China this year, compared with 10,600 DS cars for Peugeot, market researcher IHS Automotive forecasts.

Getting a bigger slice of the lucrative luxury-car market means changing consumer opinion of Peugeot as a supplier of bread-and-butter transport, which may prove trickier than opening new factories.

“If I were looking to upgrade my car, I’d rather get a Jaguar or Audi, not the Peugeot or DS brand,” said Cao Ning, a 29-year-old financial professional from Chengdu. “Peugeot to me is a mid-tier brand at best, definitely not high-end.”

(Source: Bloomberg)