About a year ago General Motors sold its European business of Opel and Vauxhall to the PSA Group who own the Peugeot and Citroen marques. It was an interesting deal because Peugeot and Citroen have had their financial difficulties in the recent past and the GM Europe business has had 16 years of losses and only managed to take 6% of the European market.
For General Motors it was a good plan because it rid them of a loss making business and their own strategy had meant that Vauxhall’s were only sold in Britain (and some protectorates) and Opel was only sold mostly within mainland Europe, although there was a pitiful attempt to sell them in Australia. General Motors needs to market their core brands everywhere else, so the European business was problematic.
For the PSA Group, it meant that they could grab more market share and they overtook Renault in the process to become #2 behind the VW Group. The PSA Group CEO has turned the business around quite quickly and there was speculation that he couldn’t do the same with Vauxhall or Opel due to Government pressure in Britain and Germany. Job losses during Brexit wouldn’t go down well on either side!
The deal was worth $1.4B for the purchase of two marques and another $1B for the finance arm of the business. However six months later PSA demanded a refund of 50% of the purchase price because they believed they were mislead on the state of the technology with respect to the Opel engines not being able to meet tougher emissions regulations that are due to be phased in from 2020. The problem is that if a manufacturer fails to meet these regulations, there are hefty penalties.
This means that the Opel engines will have to be scrapped in favour of Peugeot/Citroen motors that will meet the regulations and this has meant that PSA has decided to replace the older engines with their own hybrid motors far quicker than they expected. This will put pressure on all factories to either increase production or retool to cater for the increased volume.
Some reports stated that during the sale negotiations, PSA were not allowed to talk with Opel directly and had to deal with GM headquarters in Detroit. There is a claim that HQ mislead PSA on the state of the technology. In one report, a PSA said that they had been advised that the Opel engines would absolutely meet the new regulations, yet it was an open secret in Europe that they wouldn’t.
Last week, it was announced that Carlos Tavares, the CEO of PSA Group was likely to get a fat bonus if he can turn Vauxhall/Opel around by 2020. He was credited with doing this for the PSA Group. GM Europe were making about $1.2B in losses a year and had cut that to $320M in 2016. PSA want positive cash flow and a 2% operating margin within 2 years. That will be quite an achievement if they can do it although it helps having a big juicy carrot on offer!
The plan is to get the break even point to 800,000 cars, a reduction in costs of $850 per car and to review where the sales are coming from. In other words, try and reduce the least profitable sales channels. There must be a lot of synergies between all the brands because they were competing in the same sub-markets and so that should mean reduced development costs at the very least and if the Vauxhall/Opels all get the PSA engines, that should help immediately. Expect to see more badge engineering for a while.
What I found quite interesting was that PSA believe that their manufacturing plants are far more efficient that the ones acquired in the UK, Spain and Germany. If these plants cannot match the metrics of the French factories, then one option would be to trim the humans – the fastest way to reduce costs. That would be a political disaster in the current climate.
The big focus for PSA at the moment is actually expansion into the Middle East and Latin America – and they may benefit from the impending trade arguments that the US is starting. The other area of expansion could be with Holden who have an existing agreement to localise the Opel Insignia as the current Commodore and then who knows what will happen – whether the imported vehicles will be Opels or Peugeots, or will Holdens simply become a rebadged Chevrolet. To compete, they need small cars, so it would be logical to source them from Europe.
This is an ever evolving story and hopefully will not be the demise of two more marques from the industry.