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PSA Opel Plan Said Over-Optimistic; Only A Hint Of Harshness

PSA Opel Plan Said Over-Optimistic; Only A Hint Of Harshness.

Surprising Omission Of Capacity, Headcount Cuts.

Call To Dump Vauxhall Denied By Tavares.

“Many questions remain”

“Opel-Vauxhall loss-making is not just going to go away. Something quite dramatic and credible will have to be done”

PSA Group of France’s decision to buy chronic loss-maker Opel-Vauxhall from General Motors early in 2017 puzzled investors at first, but they quickly realised it might work if there were big cuts in capacity, costs and personnel.

But when Opel-Vauxhall revealed its long term goals, there was no talk of any harsh possibilities. 

Given that PSA had been near to bankruptcy before being rescued by CEO Carlos Tavares, and owed its survival to a tough regime of factory closures, job losses, and a cast iron commitment to end over- production, there had seemed only one sensible course of action if Opel-Vauxhall was to survive; short term pain would be needed for long-term gain.

PSA’s Peugeot and Citroen mass market brands had already been subject to this treatment, so investors, and employees too outside of France, were braced for bad news from Opel-Vauxhall

In the event, Opel CEO Michael Lohscheller outlined an ambitious plan with no forced layoffs or factory closures. Profits would be restored by 2020. They’d reach 6 per cent by 2026. Global sales would be sought, as though that didn’t involve a hugely expensive campaign. Electrification would be pursued. Costs cuts would reach millions of dollars.

Lohscheller pledged no forced redundancies, but then left open the door to voluntary ones.

Refrain from redundancy
“The plan is designed with the clear intention to maintain all plants and refrain from forced redundancies in Europe. The necessary and sustainable reduction of labour costs shall be reached with thoughtful measures such as innovative working time concepts, voluntary programmes or early retirement schemes,” Lohscheller said.

Nick Oliver, Professor of Management at University of Edinburgh Business School, said the announcement, which took place in Ruesselsheim, Germany, carefully avoided frightening unions, suppliers, and German politicians.

“When you put a large corporation in between a rock and a hard place surrounded by powerful stakeholders this is what happens,” Oliver said.

“Opel-Vauxhall has a huge production network in Europe including Ruesselsheim and Opel made a lot of soothing noises to calm German fears about the future. But it was all a bit disingenuous really, saying they will refrain from forced redundancies because in a few years time when harsh decisions have to be made they can say they meant it at the time. Opel-Vauxhall loss-making is not just going to go away. Something quite dramatic and credible will have to be done,” Oliver said.

He pointed out that in 2016, PSA and Opel Vauxhall had the capacity to make 4 million vehicles but sold about 3 million. He described the 6 per cent profit target for 2026 as wildly optimistic.

Professor Ferdinand Dudenhoeffer, director of the Center for Automotive Research (CAR) at the University of Duisburg-Essen, was also sceptical, saying a lot of necessary actions weren’t revealed in the presentation.

Many questions remain
“50% of the cards remain hidden in the Opel PSA plan. Although the goals of lowering production costs by €700 were mentioned, but with how many employees would be needed to reach these numbers was concealed. Whether voluntary severance packages will reach this “secret” figure, we will see. The same applies to the export offensive: in which markets do you want to go? Is it the Fiji Islands or is it India or China. Which volumes are expected, when. Which budgets are needed for this export offensive? Many questions remain,” Dudenhoeffer said.

“How many people can count on jobs with Opel-Vauxhall, which today has 38,000 employees, in 2020, 2022, or 2025,” Dudenhoeffer said.

“There are many “hidden” cards in the game. The direction is right. The plan will help Opel, but it will hurt,” he said.

Some investment bankers were more positive.

Bernstein Research analyst Max Warburton declared “PSA-Opel – Can they fix it? Yes they can”, although he acknowledged that Opel’s finances were worse than expected. Warburton wanted PSA to close down the Vauxhall brand, which sells identical Opel products in Britain with its own name.

“Dump the Vauxhall brand. PSA doesn’t know what it stands for. British car buyers don’t either: even the most jingoistic Brexiteers would rather buy a German car. Just get on and change it to Opel,” Warburton said.

Vauxhall stays for now
Later Tavares defended Vauxhall.

“I consider Vauxhall as an asset and not a penalty. I don’t see there’s a risk that Vauxhall doesn’t stay,” Automotive News quoted Tavares as saying.

Citi Research said the plan lacked detail, while mainly reiterating known goals.

“What’s harder to fathom is the path to these targets given there were neither details in terms of planned headcount reduction nor any indication of what the plan might cost,” Citi Research analyst Michael Tyndall said. 

IHS Markit said the plan appears sound as it seeks to exploit the potential synergies between PSA and Opel.

“However, perhaps Opel’s biggest strategic disadvantage is that it is a mid-market brand, which like other mid-market brands has battled to maintain pricing and mix in a hugely competitive Western European market, while it has a significant chunk of its production in one of the most expensive countries in the world in terms of labour costs: Germany,” said IHS analyst Tim Urquhart.

Professor David Bailey of the Aston Business School in Birmingham, England wasn’t convinced the plan was complete either.

“It says it won’t close any factories, but make existing ones smaller, that doesn’t stack up. It’s a good thing they are massively reducing platforms down to 2 and cutting purchasing costs. Good stuff there. But I don’t think the plan really shows how they are going to get costs down other than sharing development costs. And there’s no detail on how to reduce production costs,” Bailey said.

General Motors finally sold Opel-Vauxhall after it had racked up losses close to $20 billion this century.

PSA is Europe’s second biggest selling car maker behind Volkswagen with its Peugeot, Citroen and DS brands.


 

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