Peugeot bulked up with GM Europe could leave VW looking nervously in the rear-view mirror

A banner deal for the auto sector? EPA/RONALD WITTEK

Why is one of the world’s resurgent car companies trying to buy a troubled, loss-making division from one of its rivals? PSA Group, the maker of Peugeot, Citroen and DS brands, is in advanced talks to buy General Motors’ European arm. A deal would add the Opel and Vauxhall marques to its stable.

The deal poses a serious challenge to Volkswagen, still the king of the European car market. According to figures from 2016, Volkswagen had 24% of the sector, but last year’s emissions-cheating scandals have made that dominance look fragile. A combined Peugeot and GM Europe would be snapping at its heels with a 17% European market share.

But of course there are risks involved. Most obvious is the fact that GM has for years struggled to make a profit in Europe, losing a total of US$15 billion in that market since 2000. It had previously looked at offloading the division during the global financial crisis, but eventually decided to hang on.

However, GM Europe failed to meet its own breakeven target last year. It ended up posting an adjusted loss before interest and tax of US$300m and warned that it faced a US$300-400m financial headwind in 2016, and again in 2017, after the Brexit vote sparked a depreciation of sterling.

Taking a pounding. 0meer/Shutterstock

Model for success

Peugeot might, however, have a solution to GM’s key European weakness. Much of the US firm’s troubles have been put down to its failure to get speedily to market a range of the trendy crossovers vehicles that have proven so popular with motorists. Think of the Nissan Qashqai, Renault Kadjan or, indeed, the Peugeot 3008. GM, like Honda, has largely missed out this sector in Europe and watched as its market share has shrunk.

Interestingly, that product range failure is about to be sorted thanks in part to an existing tie up with PSA that will deliver a raft of new models. You see, GM and PSA already share development of sports utility vehicles and commercial vans, as part of an earlier attempt to cooperate.

PSA CEO Carlos Tavares will be hoping to bag a firm which is about to turn the corner. After all, his company has been there, done that.

The French group has done relatively well of late. It bounced back from its own “near death” experience in 2013-14 on the back of state support and a shift away from its reliance on a then-sluggish European market. And its new range of crossover models have delivered decent operating margins – at 6.8% for the first half of 2016). It has even appeared to move on from the relentless mockery of British TV car show Top Gear.

And so Tavares may shrewdly see that GM Europe could stage a comeback quite quickly, just like PSA itself did, and spies the chance to pick up something on the cheap.

PSA firms sold 3.15m units last year. A deal with GM Europe would see that jump to 4.35m. That’s still less than half the size of Toyota or VW, which sell around 10m units globally a year. Like Sergio Marchionne, the CEO over at Fiat Chrysler, Tavares wants scale.

And crucially, that scale would leave PSA better placed to invest in new technology such as electrification, hybrids, connected and autonomous cars. PSA invests less in R&D than other major car makers, and GM Europe could offer it some appealing electric car technology.

Charging into a lead. An Opel Ampera gets juiced up. mariordo59/Flickr, CC BY-NC-SA

Headwinds

There will be a price to pay, however. PSA would be under serious pressure to cut costs. Plant closures look pretty much inevitable in such a situation, leading to the question of where the axe might fall.

GM plants in Germany might be vulnerable owing to high costs but GM has already closed a plant at Bochum and the German government (like that in France) is going all out to protect jobs. So despite fighting talk from UK Business Secretary Greg Clark, it is British plants that look most vulnerable to cost-cutting moves. That’s not because they are inefficient. Indeed, 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 there), uncertainty over the UK’s trading position with Europe and the post-Brexit referendum sterling depreciation that leaves them exposed. Major components 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 has form in the UK, of course. It shut its (profitable) Peugeot plant at Ryton, in the Midlands of England almost ten years ago, shifting production to Slovakia. If the deal goes ahead there is a serious risk it will axe UK operations once more.

Workers leave Peugeot’s Ryton plant in 2006. EPA/SAM STEPHENSON

The deal is not guaranteed to succeed, however. That perennial M&A disincentive, pensions, may yet get in the way. And of course, GM may belatedly realise its European operations are about to turn around as new crossover models come on stream.

There may also be unease from GM’s Chinese partner Shanghai Automotive. You see, when GM sold a 7% stake in PSA back in 2013 it wasn’t just the French state that came in to help support it during those dark days. Chinese group Dongfeng – Shanghai Automotive’s fierce rival – also snapped up a large stake and could now be getting its hands on GM Europe’s electric technology.

There are always roadblocks to overcome on the way to a merger of this size. But if they can be overcome, it will be Volkswagen looking over its shoulder as it struggles through its own difficulties.