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If Peugeot Returns To U.S., “Columbo” May Trigger Memory

If Peugeot Returns To U.S., “Columbo” May Trigger Memory.

“Meanwhile the question remains, why did Lt. Columbo never remove the top from the convertible 403?”

Readers of a certain age will remember Peugeot cars in the U.S.

The most memorable Peugeot was an old 1959 403 convertible made famous by TV detective ‘Columbo’, played by the late Peter Falk. Peugeot’s nondescript sedans sold fairly well, perhaps in parallel with the TV series. This is surprising because Lt. Columbo was no style guru, famous for wearing a well-worn raincoat, badly fitting suits and polyester ties. The TV series peaked in the 1970s and slowly fizzled out in the 1980s, while struggling Peugeot finally shut up shop in America in 1991.

So it’s a quarter of a century since Americans have needed to be aware of France’s Peugeot, which last week jumped into their world by taking over General Motor’s European subsidiaries Opel and Vauxhall. And the newly emboldened Peugeot, now the second biggest seller in Western Europe behind Volkswagen and in which the French government holds a 14% stake, promises to return to the U.S. market.

So far it hasn’t said when, or with what vehicles, but has hinted at using the newly acquired Opel brand and its German heritage to lead this charge. If this is such a good idea, it might have occurred to previous owner GM, but there are many questions now emerging about the viability of the combined Peugeot-Opel-Vauxhall, not least because it brings together weak brands which sell as commodities and on price, overly concentrated in one vulnerable market, Europe.

Many observers say that the only way this can work is if much excess capacity is eliminated. Given that in Peugeot’s recent climb away from possible bankruptcy it closed French plants, and the company is partly owned by France’s socialist government, it isn’t hard to conclude that the cuts will fall on Opel and Vauxhall.

Overlapping
Investment researcher Evercore ISI has said PSA and Opel are overlapping businesses. 

“A successful integration is reliant on deep restructuring and industrial synergies,” Evercore ISI said in a recent report.

After the deal was announced PSA Chief Executive Carlos Tavares said this in a statement.

“We’re confident that the Opel-Vauxhall turnaround will significantly accelerate with our support,” 

PSA, the maker of Peugeot, Citroen and DS cars said it would return Opel and Vauxhall brand to profit, with an operating margin of 2% within three years and 6% by 2026, underpinned by €1.7 billion in joint cost savings.

GM will be saying good luck with that plan.

Matthias Holweg of the SAID Business School at Oxford University also questions the deal.

“The takeover of GME (General Motors Europe) by PSA raises the fundamental question of whether it is possible to create one competitive firm out of two relatively weak ones,” Holweg said.

Holweg said the main options are to consolidate central functions, use joint platforms (some already exist), and consolidate production. Cost reduction is the main avenue for improvement, which could involve moving central functions like engineering from Germany to France, closing marginal plants, with the most vulnerable being ones in the U.K., Portugal, Spain and Eisenach, Germany. There could be plant consolidation in Spain where PSA and Opel have plants.

Analysts initially though said the terms of the deal look good for PSA.

Philippe Houchois, analyst with investment researcher Jeffries said acquisition terms look better than expected for PSA. GM agreed to retain most of the pension obligations, he said.

But SAID’s Holweg paints a less happy picture for the future.

Existential crisis
“As it stands, the merger will create one very large car maker that is very exposed to the mature, saturated European market: PSA sells 2 out of 3 cars in Europe, GM Europe sells all of its cars here. It was PSA’s dependency on Europe that led to its existential crisis of 2013. This deal could exacerbate the problem of being reliant on a hypercompetitive, saturated market,” Holweg said in a report co-authored with Nick Oliver of the University of Edinburgh Business School.

Hamburg, Germany based Berenberg Bank doesn’t like the cut of the deal’s jib either.

Berenberg Bank analyst Alexander Haissl said the deal ignores crucial problems at Opel-Vauxhall, which has lost almost $20 billion this century while constantly promising to return to the balk next year.

Haissl said Opel-Vauxhall is a victim of a trend for consumers to eschew mass market models in favor of paying just a little bit more for a premium vehicle like a BMW, Mercedes or Audi.

“The structural problems are difficult to reverse and may even accelerate. Overall, we think the deal will be difficult to create value for PSA,” Haissl said.

Peugeot sells cars with its own brand and Citroen, the storied French car maker which now makes plan vanilla Peugeot echoes. Peugeot also has tried to move upmarket with its DS brand, a move which so far has been unsuccessful and promises to waste much money.

Peugeot has fought back from was the brink of bankruptcy and was saved by a $3.2 billion state-backed rescue plan after racking up more than $7.4 billion in losses over a couple of years. France and Chinese carmaker Dongfeng each bought 14% of the company in 2014. The Peugeot family stake was reduced to 14%. New CEO Carlos Tavares led a fast revival of the company’s profitability. Tavares has expressed the long term ambition to return Peugeot to the U.S. market.

Heroic comeback
While Peugeot was staging a heroic comeback, Opel-Vauxhall was stuttering. Last year was apparently the final straw for GM, when its latest promise to break even fell short again, but this time because it was hit by a big foreign exchange loss after Britain voted to leave the European Union. Opel-Vauxhall lost $257 million in 2016, blaming Britain’s Brexit vote for $500 million in foreign exchange losses.

GM management in the U.S. were probably wondering how the company failed to hedge against possible foreign currency losses, and would have noted Ford Europe, long a loss maker too but not on the scale of Opel Vauxhall, made a profit of $1 billion in 2016.

Haissl said Opel and Vauxhall’s highly uncompetitive residual values have led to market share declines.

“In Germany, Opel’s channel mix is heavily skewed towards self-registrations, which comprised 44% of sales in 2016, and rental another 15%, reducing the brand’s profitability. Mix has continued to deteriorate in recent months,” he said.

“Self-registration” happens when new cars fail to sell and are bought by dealers. They return to the market as second hand cars, with the price greatly reduced and profit probably eliminated.

So what did PSA CEO Tavares see in Opel-Vauxhall’s potential that GM missed?

Edinburgh Business School’s Oliver doesn’t see much.

“I can only believe that Peugeot sees it as an opportunity to drive more volume off a smaller number of architectures,” Oliver said in an interview.

The plan is to gradually move much of Opel Vauxhall production on to Peugeot engineering to save development costs. This cooperation already exists under an earlier agreement, and the first vehicle, the Crossland SUV, is currently being launched at the Geneva Car Show.

Wishful thinking
“This will allow PSA to meet a spectrum of customers that Peugeot and Citroen couldn’t. As for the plans in the U.S., I don’t buy the argument that Opel could have had a great market in the U.S. if only GM had pushed this. I can’t see any evidence why Opel should get a foothold in the U.S. This is wishful thinking. Why should a somewhat non-descript European brand suddenly start selling in large numbers in the U.S. That’s a triumph of aspiration over reality really,” Oliver said.

As for the future of the DS brand, Oliver doesn’t see much chance of success.

“Essentially they are the same underlying Peugeots and Citroens badged differently. Who’s prepared to pay a premium price for that? It’s really difficult convincing customers products are sufficiently different to command a premium price. VW does it with Audi, but I would be astonished if the DS brand made it,” Oliver said.

As the dust settles on the deal, questions about its viability mount, and GM begins to look clever for managing to find a willing buyer for this lame duck.

Berenberg Bank’s Haissl puts it this way.

“The transaction is unlikely to create value for PSA. With Opel’s underlying cash burn likely underestimated and some time before full savings can be realized, the value of the transaction hinges on the ability to deliver a highly positive terminal value,” Haissl said.

Americans’ view of Peugeot is stuck in the 1970s, and the likelihood of that relationship being renewed seems unlikely. Meanwhile the question remains, why did Lt. Columbo never remove the top from the convertible 403?

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