Why PSA link-up is just the start of GM's European fix

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DETROIT -- General Motors' freshly inked alliance with PSA/Peugeot-Citroen raises a lot of questions that we won't be able to answer for years.

But there's one thing we know with certainty now: The pact is only the first big move by GM to fix its money-losing European operations.

That's because none of the $2 billion in annual savings that the automakers project they eventually will split evenly from joint purchasing and sharing platforms and capital expenditures will show up any time soon.

The first jointly produced vehicles -- mostly small and mid-sized cars -- won't arrive until 2016. Sure, there might be some capital savings leading up to that date. But any savings from the greater purchasing heft must wait until then.

(It's also too early to know what it means for GM's product lineup. Given that it's billed as a "global" pact, vehicles built on GM-PSA joint platforms could show up in U.S. showrooms as Chevys or Buicks, GM acknowledged.)

But it's clear that overcapacity is the biggest thorn in the side of Opel, GM's European unit. Leaders from both automakers made plain in comments to analysts and reporters Wednesday that their pact won't do anything to pare those costs.

"The most critical message we want to address here is that this alliance is not a replacement" for more-immediate European restructuring, said GM Vice Chairman Steve Girsky, GM's point man for fixing Europe as head of Opel's supervisory board.

"We look at this as adding additional tools to the tool kit," he says.

Translation: GM needs to stop the bleeding in Europe now, and closing plants and laying off workers are the likely next steps (if GM can push it through its European unions and public officials).

Opel's assembly plants operated at about 70 percent capacity last year, a figure that likely will fall to 65 percent this year, Morgan Stanley analyst Adam Jonas estimates. That compares to more than 90 percent capacity at GM's North American plants.

"It is not clear that a tie-up between GM and PSA would do anything to address this situation," Jonas concluded in a research note written last week as reports of the alliance swirled.

The capacity problem is the primary reason for the red ink that GM continues to spill in Europe: $747 million last year, and some $13 billion since the late 1990s.

Even before the pact announced Wednesday, naysayers were questioning the merits of the deal for GM:

• How does combining the efforts of two weak players in Europe help both?

• If a big chunk of the savings should come from purchasing power, won't that disproportionately benefit the much-smaller PSA?

• What about GM's spotty track record with past alliances, such as a 2000-2005 tie-up with Fiat that included a similar purchasing arrangement?

GM executives will have plenty time to answer those and prove the skeptics wrong. They have far less time to fix the more-pressing issue of GM's bloated cost structure in Europe.

You can reach Mike Colias at mcolias@crain.com.

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