Europe's No. 2 automaker, PSA Peugeot Citroën, took Europe by storm a decade ago, pioneering clean-diesel engines and churning out a raft of chic models, such as the 206 subcompact, that put market leader Volkswagen to shame. Sales soared, generating some of the loftiest margins in the business. As Peugeot's European market share rose to 15.5%, some even talked about the French carmaker passing European leader Volkswagen.

But the flow of new models at Peugeot and Citroën began to slow in 2004, and last year the group's operating margin sagged to 1.9% as sales went into reverse. With pressure mounting for a comeback, Peugeot Citroën's new Chief Executive Officer Christian Streiff laid out a bold plan Sept. 4 to boost car sales by 19%, to 4 million vehicles by 2010, and restore margins to a lofty 6% of sales.

Streiff's Strategy

The strategy includes rolling out 29 new models, including five entirely new concepts, by 2010. The new product offensive will cut the average age of Peugeot Citroën's model line to three years in 2010 vs. 4.5 years now. That's a key improvement, because aging models have been a key factor in Peugeot's recent slump. "This will be a forceful comeback," said Streiff.

To feed a profit rebound, Streiff also is kicking off a three-year drive to reduce fixed costs by 30%, shorten product development time by nearly one-third, and reap 4% to 6% per year in lower purchasing costs. At the same time he aims to slash warranty costs by 50% through improved quality. No layoffs are planned, but a voluntary leave package should cut staffing by about 5,000 workers this year, Streiff says.

Unlike French rival Renault, which sparked a global wave of low-cost car projects with its $6,000 Logan and has vowed to make another model priced at only $3,000, Streiff is steering clear of the race to build supercheap cars. Instead, Peugeot will compete in China, India, and Brazil with lower-cost versions of existing models. At the same time, Streiff aims to take some of Peugeot's cars upscale. "The priorities Streiff is setting are absolutely right. He's banking on his strengths," says Christopher Stürmer, senior researcher at Global Insight in Frankfurt.

Competition in a Slow Market

Meeting Streiff's targets won't be easy. The 53-year-old exec, who joined Peugeot Citroën in February after a short stint as CEO of Airbus, is just the latest automotive boss in Europe to announce ambitious growth targets despite a mature car market forecast to grow only 0.7% a year. Renault Chief Executive Carlos Ghosn, for example, vowed in 2006 to boost global sales by 800,000 within three years. And after years of painful restructuring, both Volkswagen and Fiat are on the rebound with hot-selling models such as the VW Eos and the Fiat Grande Punto. Even sales at GM's European Opel unit are on the rise.

Peugeot and Citroën made strong gains in the past at the expense of those competitors. But now "it's going to be very, very tough," for Peugeot to regain its lost ground," says Jürgen Pieper, analyst at Metzler Bank in Frankfurt. "In the late 1990s, Renault wasn't teamed up with Nissan. The competitive environment is absolutely a different game than five to seven years ago."

Peugeot and Citroën still rack up 70% of their sales in Western Europe, where Streiff bets he can grow by 2.5% per year from now to 2010—a plan he calls "conservative." But to reach his target of four million annual units the CEO is counting on doubling sales outside Europe to 800,000 by 2010. Peugeot is scouting for a factory site in Russia, where it sees big potential for sales growth. Streiff also is betting big on China, where he aims eventually to sell a million cars per year. He's investing in a second factory by 2010 with partner Dongfeng and also studying a potential joint venture with Chinese carmaker Hafei, which would provide Peugeot with a third plant in the south.