The alliance between General Motors and Peugeot Citroën (PSA) was met with a resounding shoulder shrug by the financial markets, and some skepticism from analysts. PSA’s stock closed almost 4% down on 1 March, the first day of trading after the announcement, while GM’s share price was flat on the day the deal went public.
The Financial Times’ Lex column listed the alliance’s supposed shortcomings: not dealing with GM Europe (GME) and PSA’s excess European production capacity; major savings being a couple of years away; and the risk that management might get distracted implementing the alliance. Basically, critics say the GME-PSA house has ruinous dry rot, yet the pair are responding by building an extension.
I put this view to Peugeot’s UK managing director, Tim Zimmerman, who emphasised that PSA was taking separate actions to stem the automotive division’s operating losses. ‘We’ve announced a package of economies we are making on our own to cut costs in Europe. We know the medium term growth forecasts are flat at best here and profitability is going to be difficult. We’ve already announced €800m savings in Europe in the short term, and the additional purchasing [savings with GM] should kick in quickly.
‘The terms of the alliance should be clear by the end of the year, and at the start we’ll make savings on commodities like steel. As the alliance progresses further, there’ll be savings on components, modules and platforms.’
GM and PSA are predicting joint savings of $2 billion a year within five years, as they pool their $125 billion purchasing power and 12.5 million units. PSA’s current annual build is 3.5m vehicles, compared with GM’s 9 million.
The pair’s first major platform collaboration will be in D-segment cars – Insignia, C5/C6, 508 – in 2016. In Europe, this market has been cut in half over the last decade, so the extra economies of scale will help PSA stay in the game, potentially with more model variants, better quality and more technology.
Fixing the European industrial machine
But what of the overcapacity problem? European car plants have a total capacity of 24m units, yet last year some 16m cars were sold in the EU27 and Russia. As Fiat boss Sergio Marchionne continually urges, the European industrial machine needs fixing.
GME/PSA’s critics appear to assume that the alliance will either supplant plans to cut capacity, or be a distraction. However, speculation is rampant that GM is considering shutting Ellesmere Port in the UK and Bochum in Germany, while two French plants and a Madrid facility are in PSA’s sights. And the thousands of employees at these factories wouldn’t be the only losers from such a shake-up of the European car industry.
The GM deal must ultimately draw a line under some of PSA’s alliances, which include the Ford and BMW powertrain deals, the commercial vehicle collaboration with Fiat and the Mitsubishi electric vehicle and SUV alliance. ‘All of these alliances are living and breathing, and agreements have a life span. As time goes on we will look at these. But the GM deal doesn’t bring the existing alliances into question [right now],’ said Zimmerman.
One thing’s for sure: the deal closes off a couple of avenues for Sergio Marchionne, who continues his quest to find another partner for the Fiat/Chrysler group. Perhaps now his focus heads east to Asia…