GM's European Deal
Tony is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
A global alliance has been announced between General Motors (NYSE: GM) and France's PSA Peugeot Citroen ADR (NASDAQOTH: PEUGY.PK), with GM taking a 7% stake in Peugeot, that is interesting to say the least.
The combined unit sales would amount to 12.5 million vehicles a year and the alliance would claim the top spot in both the production of compact cars and upper-middle segment cars globally. Both companies said they would initially focus on small and mid-size cars, multipurpose vehicles and small sport utility vehicles.
The two car companies said the deal will generate $2 billion (split about evenly between the two) in cost savings annually within five years. GM and Peugeot will share vehicle platforms, components and modules, and begin launching vehicles developed jointly, starting in 2016. In addition, their global purchasing joint venture to buy commodities and parts necessary to build vehicles would have a combined purchasing power of $125 billion.
The alliance is the first for GM since it exited bankruptcy in 2009 and it is the closest tie-up with a rival Peugeot has ever undertaken. The CEO of General Motors, Dan Atkinson, said that this global alliance “will improve each company's competitiveness and will contribute to the long-term profitability [of the two companies].” But will it really do that?
The deal does make sense on one level in that both General Motors and Peugeot are losing a bundle of money in Europe thanks to structural overcapacity in the European industry. GM operates in Europe through its Opel unit which reported a loss of $747 million in the latest quarter. The partnership may help the companies to cut their losses somewhat due to their purchasing joint effort. Cooperation between the two in emerging markets such as India, Russia and Latin America also makes sense.
But alliances between automakers have a terrible track record. Just look at the alliances over the past few years between Japanese automaker Suzuki and Volkswagen AG ADR (NASDAQOTH: VLKAY) which is undergoing an acrimonious breakup, or between Chrysler and Daimler AG ADR (NASDAQOTH: DDAIF.PK) which dissolved after several years.
The problem with this alliance is that both companies are starting from a position of weakness in Europe. General Motors turned down an offer from Fiat SPA ADR (NASDAQOTH: FIATY.PK) for Opel in 2009. However, GM decided to keep Opel and to date, despite closing a plant and cutting 8300 jobs, has not been able to stem the losses at its European subsidiary.
Peugeot reported a second half loss on its operations of nearly 500 million euros and it would dearly love to close some plants. But since it received 3 billion euros from the French government during the financial crisis, it is hard for them to close plants and put people out of work. GM's Opel unit also has received 1.5 billion euros from the German government and, thanks to a previous restructuring agreement with German unions, it is barred from downsizing its way back to profitability until 2014.
So if one looks at the deal closely, it can be seen that some money will be saved by combining the two companies' purchasing for components, etc. But the deal does not tackle the key problem – production overcapacity in small cars in Europe. So it accomplishes little. Next time someone makes an offer to General Motors management to take over Opel, they should jump at the chance.
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