February 29, 2012. Copyright 2012, Graphic News. All rights reserved

GM, Peugeot alliance would not address Europe's overcapacity problem
By Neil Winton

LONDON, February 29, Graphic News:  General Motors plans to extend a $335 million lifeline to struggling French auto maker PSA Peugeot Citro‘n as part of a development alliance that each hopes will aid turnarounds at their struggling European car operations.

An alliance between GM Europe and France's Peugeot would certainly lead to economies of scale, but would make little difference to European mass car manufacturers' over-riding problem -- too many factories churning out too many cars which sell at knockdown prices.

The mooted deal -- GM Europe's German Opel and British Vauxhall subsidiaries linking up with Peugeot and its Citroen sibling to form an alliance to share vehicle engineering and manufacturing -- would certainly provide more efficient and cost effective ways to make cars.

But that's not the main problem. The big problem is chronic overcapacity of perhaps more than 30 percent, which can only be solved by shutting factories and firing workers. Europe requires action along the lines seen in America after the 2008 crunch, when GM and Chrysler closed plants and brands and slashed the workforce.

Last month at the Detroit Auto Show, Fiat-Chrysler CEO Sergio Marchionne warned that further consolidation of the European automobile industry was necessary to combat German manufacturer Volkswagen's dominance, adding that his company was open to a merger with another European manufacturer.

Analysts say that "consolidation" means merger, not an agreement to make a few engines together.

According to London-based Bernstein Research analyst Max Warburton, the kind of deal apparently talked about between GM Europe and Peugeot would only be a temporary solution.

"It might work in the end but a loose alliance could only be a temporary solution", Warburton said.

"Something needs to happen in European autos given chronic overcapacity, terrible pricing and near-zero gross margins in small cars. But putting European auto companies together, while logical on paper or power-point, is incredibly hard to execute and to make functional", he added.

Together GM Europe/Peugeot-Citroen would have close to 20 percent European market share, putting them very close to the leader, Volkswagen. But the barriers to these companies making money, including political influence stopping rationalisation, poor brands and pricing, would not be addressed.

Deutsche Bank analyst Gaetan Toulemonde was also unimpressed with the idea that GM and Peugeot might form an alliance. He reckoned that any purchasing synergies and research and development savings would quickly disappear as both companies chased sales in the same countries.

Peugeot already makes diesel engines for Ford and Jaguar Land Rover, and petrol engines for BMW and Toyota. In the last half of 2011 Peugeot's car operation lost about $650 million. GM Europe lost $700 million over the whole of 2011.

Car companies are seen as more than just manufacturers in Europe. They are regarded more as national virility totems by politicians, not least because of the huge numbers of workers employed, both directly and indirectly. If the problem of overcapacity in Europe is to be solved, and inefficient factories closed, it is only likely to follow chronic loss making, rather than a rational decision to fold an operation clearly superfluous to requirements.
/ENDS