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General Motors Won’t Extend Flirtation With France’s Peugeot

Peugeot Might Seek Deal With Dongfeng Of China

“I don’t think GM is the right (global) partner for Peugeot-Citroen. Their partnership is quite limited to European platforms”

“I can’t see GM doing anything so stupid”

Back in the bad old pre-bankruptcy days, General Motors investors might have worried that the chance to merge with Peugeot-Citroen of France might have been too tempting to miss.

Never mind that the French company is tottering on the financial brink. Forget that the mooted vehicle for the combination, GM Europe’s value-munching Opel-Vauxhall, is slowly pulling itself up by its bootstraps. The lure of lording it over a massive new company with getting on for 20 per cent of the Western Europe market (Peugeot-Citroen’s just over 11 per cent and Opel-Vauxhall-Chevrolet’s nearly eight per cent) would have been irresistible, despite the combined losses of more than $5 billion in 2012. The prestige resulting from the creation of a massive new combine which would approach Volkswagen of Germany’s nearly 25 per cent share would have been impossible to forego. Remember the temptations succumbed to at Fiat of Italy, and the Japanese companies Fuji Heavy Industries otherwise known as Subaru, Suzuki and Isuzu, alliances long since dumped or diluted after initial starry eyed embraces.

So news last month via a speculative story from Reuters that Peugeot-Citroen’s owning family might want to finally give up control and could seek to merge with GM Europe, or if that failed, Dongfeng Motor Group of China, put the U.S. company firmly in the spotlight, not least because it already has a seven per cent stake in the French company.

Since then the story has gone off the boil, but the consensus is that GM shareholders can relax. The lessons of the past have been learned. Peugeot-Citroen is more likely to seek a relationship with a Chinese company, while a deeper tieup with GM Europe is said to be a dead in the water.

Nothing in it for GM
“Two drowning men don’t make a swimmer,“ said Garel Rhys, emeritus professor of Motor Industry Economics and director for Automotive Industry Research at Cardiff Business School.

“I can’t see GM doing anything so stupid. They want to survive (in Europe) and they are doing quite well. I can’t see how linking relatively failed operations would make any sense. Why would GM want another set of problems. If you’ve got two in trouble you don’t just double the problem, but often get something far worse. If they did get together, it would take about a decade to do it. If they do decide to merge, all the other boardrooms (of mass car makers in Europe) would be opening up the champagne as Peugeot and Opel committed Hara-Kiri,” Rhys said.

Opel-Vauxhall’s revival plan includes the introduction of 23 new models and 13 new engines as part of its Drive 2022 strategy. The plan is to break even by 2015/2016 and raise factory use to 90 per cent by 2022.

But doesn’t the fact that GM bought a seven per cent stake in Peugeot-Citroen for $1.34 billion in February 2013 mean it might want to go for a deeper relationship?

“I think Opel-Vauxhall are happy with the joint ventures they have with Peugeot,” Rhys said.

 Narrow objectives
When GM announced it had bought its stake in Peugeot, the companies unveiled plans to produce a small gasoline engine, and develop three new vehicles together. There was a cost-cutting plan too, which would yield $2 billion annually in purchasing savings by 2016.

“Many alliances like this don’t lead to mergers, and often show by closer contact why they could never get on together anyway,” Rhys said.

Rhys said Peugeot-Citroen might be attractive to a Chinese bidder, as companies there seek to raise their profiles outside of the homeland and get ready for the expected sales onslaught in Europe and America. He said the Peugeot family, which owns 25 per cent of the equity and 38 per cent of the votes in the company, faces an uncertain future, alongside its compatriot Renault. Both companies have, unlike the Germans, failed to restructure operations at home. Their higher priced family cars have been losing out to encroachment from above by the likes of BMW, Mercedes and VW’s Audi, while their bread and butter small cars have been assailed from below by competition from Korea and Japan.

John Wormald, analyst with British consultancy Autopolis, agrees that Peugeot-Citroen needs a partner, and if were Opel-Vauxhall this would be unlikely to emerge before the German elections on September 22.

“A Chinese partner would be a lot less painful, as they would put money in to Peugeot-Citroen to help it continue to fight the competition. It would certainly enable Peugeot-Citroen’s management to keep a much greater degree of control. A Chinese partner might enable Peugeot-Citroen to reposition itself a bit upmarket, getting back to where the Peugeot brand used to be. Even so there would need to be restructuring. The family might be able to stay in more easily than in a GM scenario,” Wormald said.

Tactical ploy?
IHS Auto analyst Carlos Da Silva wondered if the anonymous story from Reuters suggested a tactical ploy which would allow Peugeot-Citroen to force through more plant closures in France which it needs to restore profitability by the target date of 2014. Touchy unions might be more likely to accept harsh measures if the alternative was control from the U.S. or China.

“I know Peugeot-Citroen is in dire straits but is it so bad that they (the family) would give up its freedom and independence to GM or even the Chinese? My understanding is that perhaps they want to make things seem worse than they are to maybe have more leeway in other action they would need to do,” Da Silva said.

This might mean more layoffs and plant closures.

“Everything depends on how the year will end. Everything is linked to selling sufficient numbers of cars to raise a bit more money from operations, or will they need to go to financial markets for more credit lines,” he said.

If that’s the case, sales will have to perform a bit better in the second half. Peugeot Citroen announced global sales fell 9.8 per cent in the first half.

Paris-based Da Silva sees the possible attraction that Peugeot-Citroen might have to a Chinese company seeking a fast track entry into the European market, but says it is difficult to see this actually happening. He sees no point in Opel-Vauxhall and Peugeot-Citroen getting together.

“That’s one of the weakest points in a potential merger; would that solve anything? The German problem and the French problem would remain. Just getting together doesn’t mean you forget your nationality and shut down plants,” he said.

Going nowhere

Stefan Bratzel, director of the Center of Automotive Management at the University of Applied Science in Bergisch Gladbach, Germany reckons the GM-Peugeot story is going nowhere.

“I don’t think GM is the right partner for Peugeot-Citroen. Their partnership is quite limited to European platforms,” Bratzel said.

But Peugeot-Citroen is in big trouble.

“I don’t see how Peugeot can survive mid and long term independently. It needs an alliance partner that helps it in the U.S. and to increase market share in China. I think speculation about Dongfeng or a Chinese partner is more realistic because the Chinese urgently need European brands to get into other markets. If, say, Dongfeng bought 25 per cent of Peugeot that would bring advantages. But as we all know, the Chinese are hesitant to spend money without controlling companies so I’m not sure this will happen,” Bratzel said.

Another theory explaining Peugeot-Citroen’s tactics says this is all about triggering European Union (E.U.) finance for the long awaited restructuring of the European industry, which according to Morgan Stanley is currently losing between $5.2 billion and $6.5 billion a year.

CAP on wheels
According to Cardiff Business School’s Rhys, French companies which have failed to follow German examples of painful cost cutting and reorganization want a European financed plan, along the lines of the U.S. bailout of GM and Chrysler.

Rhys doesn’t like this idea.

“This is not European at all but a device to get the French off the hook. If Peugeot-Citroen and Renault are in trouble why should plants in other countries close? This is barefaced though, nobody is going to buy into this one. French companies have been the slowest to move production away from Europe; why should others help them for their entrepreneurial failure? If this went through it would be a four-wheeled version of the E.U.’s common agricultural policy (CAP),” Rhys said.

The CAP scheme is a hugely expensive long-term tax-payer funded scheme which supporters say is vital to help European farmers maintain living standards. Critics say it is trade protection in disguise to raise mainly French farmers income, keeps prices too high, and costs $75 billion a year.

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