Joy Abounds In Detroit As GM Dumps Loss-Making Opel.
But What If PSA Turns It Around?
“two drowning men don’t make a swimmer“
They will dancing in the streets of Detroit today as the news sinks in. Or will they?
General Motors has finally managed to dump its chronic European loss-maker Opel-Vauxhall on PSA of France. PSA confirmed the news Tuesday, about three months earlier than expected.
There has been a tsunami of red-ink for GM shareholders to pay for. Opel-Vauxhall has lost almost $20 billion this century, while constantly promising to return to the black next year. This was always justified by excuses like GM needs the small car expertise and technology edge that German-based Opel provided.
But at the Geneva Car Show in March, GM and PSA announced the takeover deal which valued Opel-Vauxhall at $2.2 billion. GM has been steadily withdrawing from markets it reckons won’t be profitable in the long term including Russia and Indonesia, and pulled the Chevrolet brand out of Europe.
The GM-PSA deal was greeted by widespread derision given that both parties were both struggling to survive. This wasn’t the first attempt at a merger. In 2012 they were negotiating a deal but were criticised because it would have combined two big loss-makers. At the time the late Garel Rhys, emeritus professor of Motor Industry Economics and director for Automotive Industry Research at Cardiff Business School, said this of the possible deal -“two drowning men don’t make a swimmer.“ GM held a 7% stake in Peugeot before the talks began about a more formal merger, but sold it in 2013.
PSA – which includes the Peugeot and Citroen mass market brands, and the wannabe upmarket DS – survived a near-death experience in 2014. Peugeot fought back from 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. The Peugeot family stake was reduced to 14%.
While champagne corks are popping in Detroit though, there is another theory emerging as PSA under the leadership of CEO Carlos Tavares has been staging a remarkable financial turnaround. By cutting costs and keeping margins healthy by refusing to buy sales, profits have been demonstrating premium sector qualities. The worry in Detroit might be that this formula might actually turn Opel-Vauxhall into a profitable operation. That would be very embarrassing.
Last month PSA reported a record automotive profit margin of 7.3 per cent in the first half compared with 6.8 per cent in the same period last year.
“I have honestly never seen anything like this”, Bernstein Research analyst Max Warburton said.
“We can all list the (manufacturers) turnarounds that have worked, but nearly all of them have involved big volume growth – driven by new products, and, typically, a helpful macro backdrop. But PSA is different. The volume growth at this company in recent years has been minimal. Yet PSA keeps growing margins,” Warburton said.
“PSA will soon take control of Opel and will apply the same techniques there. The opportunity is big and we have confidence Opel can be fixed,” Warburton said.
Citi Research analyst Michael Tyndall wonders if the Tavares formula can work on Opel-Vauxhall. In the past, Opel sold its products in mainland Europe, while Vauxhall sold the same products in Britain under its brand.
Unions hold the answer
“The burning question is can the same be achieved at General Motors Europe? We think the unions hold the answer,” Tyndall said.
Tyndall said unions are crucial because in the past they and regional governments have resisted radical change. The Tavares plan is assumed to include some harsh cost cutting and job shedding at Opel-Vauxhall, not least because he did the same at PSA.
When the deal was first announced, investment researcher Evercore ISI said PSA and Opel were overlapping businesses.
“A successful integration is reliant on deep restructuring and industrial synergies,” Evercore ISI.
PSA then 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 euros ($2 billion) in joint cost savings. In its announcement Tuesday it reiterated the cost saving figure, and said Opel and Vauxhall will present a new strategic plan in 100 days.
The PSA-Opel-Vauxhall combination ranks 2nd in Europe behind Volkswagen with a market share of about 17%. VW is close to 23%.
So why did GM finally run out of patience with Opel Vauxhall?
Apart from the obvious financial problems, Europe has become a hard market to operate in because of its tight government regulation, intrusive labor union influence and the resulting high cost of doing business, selling small cars with little or no profit margin. It clearly felt the chances of reform were minimal.
GM will be feeling smug today to have extricated itself from seemingly never ending losses. Will the results of the merger a couple of years from now show it was right?