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Peugeot Citroen looks to take over GM Europe?

Professor David Bailey on PSA Group holding advanced talks with General Motors about buying its European division

Cynon Valley Leader Peugeot 308
Peugeot 308

PSA Group, owner of the Peugeot, Citroen and DS brands, is holding advanced talks with General Motors about buying its European division (which includes Opel and Vauxhall).

PSA stated that it is "exploring a number of strategic initiatives with GM with the aim of increasing its profitability and operating efficiency, including a potential acquisition of Opel."

GM and PSA already share production of sports utility vehicles and commercial vans, as part of an earlier attempt to cooperate.

GM sold its 7 percent stake in PSA back in 2013 after disappointing joint venture savings, a move which paved the way for a bailout of the then ailing PSA by the French government and investment by the Chinese firm Dongfeng Motor Corp.

Both hold 14 percent stakes in PSA (as does the Peugeot family).

Combined, PSA and GM Europe would have a 17% share of the European car market, second only to Volkswagen's 24% (2016 figures).

GM might keep a stake in the combined operation, it is thought, opening the door to technology sharing.

PSA has done relatively well of late, bouncing back with state support from a ‘near death’ experience in 2013-14 to post decent margins last year (6.8% operating margin for the first half of 2016).

The firm sold 3.15m units last year. Its CEO Carlos Tavares – like Sergio Marcione of Fiat Chrysler - has indicated a desire to tie-up with other car firms to increase PSA's scale and be better placed to invest in new technology (think electrification, hybrids, connected and autonomous cars).

Meanwhile, GM has for years struggled to make a profit at GM Europe, losing some US$15bn in Europe since 2000. It had previously looked at off-loading the division during the global financial crisis (the Canadian supplier and contract assembler Magna being in the frame to buy it) but eventually decided to hang on to its European division.

GM Europe failed to meet its own breakeven target last year, losing over US$250m, warning that it could face a $400m financial headwind from the post Brexit vote depreciation of sterling.

Both carmakers have gone through painful restructuring in recent years. GM has closed a factory in Bochum, Germany while PSA shut its Aulnay plant near Paris.

But after shutting plants and scrapping the budget Chevrolet brand which cannibalised Opel/Vauxhall sales in Europe, the operation is still making losses even though the European car market has picked up of late.

GM might anyway have to look at further reducing capacity in Europe to try to get back in the black, and with Brexit induced currency headwinds may have simply decided pull the plug and sell out - rather than face the negative publicity of closing plants.

Given such losses at GM Europe, why is PSA interested in a takeover?

It hopes to achieve economies of scale, gain access to GM Europe’s technology (its engineering centre at Russelsheim has a key role in GM's powertrain development work) and to achieve cost savings through procurement.

Further cost savings would likely come through plant closures which raises the question of where the axe would fall.

On first inspection GM plants in Germany might be vulnerable owing to high costs but GM has already closed a plant at Bochum. Rather, it’s the UK plants that would look most vulnerable to cost cutting moves. That’s not because they are inefficient – far from it; the workers and management at both Ellesmere Port and Luton have pulled out all the stops in recent years to work flexibly, get costs down and win contracts to build new models.

Rather, it’s the combination of the UK flexible labour markets (it’s easier to fire workers here), uncertainty over the UK’s trading position with Europe and the post-Brexit referendum sterling depreciation that leaves them exposed.

On the latter, major components such as engines are imported to GM’s UK plants from the continent. The weaker pound makes such imported components more expensive, pushing up assembly costs in the UK.

PSA of course, shut its (profitable) Peugeot plant at Ryton, near Coventry almost ten years ago, shifting production of small cars over to Slovakia. If the deal goes there is a serious risk it will axe UK operations all over again.

Not surprisingly, the Unite union Chief Len McCluskey has said that "while this has come out of the blue, we are absolutely determined - UK plants will not be allowed to close. The UK and the EU are among GM's biggest markets - if they think that they can walk away from dedicated workers and loyal consumers without a care, they need to think again."

It should be stressed that this is far from a done deal. As noted, GM Europe has been here before before GM did a u-turn and decided to hang on to its European operations. The same could happen again.

And quite how would GM’s key Chinese partner Shanghai Automotive would feel about its rival Dongfeng (which has a stake in PSA) getting its hands on GM Europe’s technology? Such issues could yet scupper the deal.

In many ways it might be better for GM’s UK auto plants if this deal doesn’t go ahead.

* Professor David Bailey works at the Aston Business School.

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