General Motors' main weakness in Europe is its money-losing Opel/Vauxhall unit, which needs a quick and radical restructuring. To make the fix, GM CEO Daniel Akerson should borrow from Ford boss Alan Mulally's One Ford strategy rather than join forces in a loose tie-up with a struggling PSA/Peugeot-Citroen.
By doing this, GM would use its massive size to its advantage rather than embark on a complex, time-consuming cross-cultural alliance that initially appears more beneficial to PSA than to the world's largest automaker.
Let's consider some key facts.
1. Although Europe accounted for 87 percent of Opel's 1.13 million global sales last year, it is not an isolated regional carmaker. Opel is part of GM's global network of platforms and powertrains so its products can be built and sold anywhere in the GM empire. GM could do a better job taking advantage of this as Opel's current product range is stronger than ever.
2. Opel already shares engineering costs with other GM brands and gets economy-of-scale benefits from Chevrolet and Buick models built around the world. Additional synergies with PSA would definitely help, but with the first joint product coming in 2016 at the earliest, the help won't come fast enough.
3. Adding PSA into the GM Europe equation would add volume - the French automaker built 3.5 million vehicles last year - but would drastically increase complexity and reduce the speed of decision-making at GM, which is not regarded as a global leader at acting fast.
4. GM has had little success making the right deals with automakers in Europe. After 20 years of trying to fix Saab, GM basically gave away the company in early 2010. In 2005, GM's five-year partnership with Fiat ended with the U.S. automaker being forced to pay Fiat $2 billion to avoid having to purchase 80 percent of the Italian company's automotive operations. In total, GM invested $4.4 billion in Fiat, which is much less than it got from the five years of synergies.
When Ford restructured in the last decade it got smaller rather than bigger. CEO Alan Mulally sold Aston Martin, Jaguar, Land Rover and Volvo, shut down the Mercury brand and concentrated globally on the Ford brand as part of the One Ford strategy. Despite a radical restructuring, GM still focuses on multiple brands, with Opel being the least profitable and most vulnerable.
A key to One Ford is that the same product is built with just minor tweaks all over the world. The new Fiesta subcompact was the first One Ford vehicle, followed by the new Focus last year. The Fusion/Mondeo replacements will get the same treatment next. By doing this, Ford leverages the volume of truly global architectures, reaching adequate scale and it does so without having to discuss every move with a partner. GM uses global architectures but produces slightly different products for different brands around the world, which adds complexity and reduces standardization.
GM is the world's largest automaker and should use this advantage more than ever as it restructures in Europe. PSA, which is not present in the United States and is behind rivals in China and Russia, needs GM's scale and the global reach more than the other way around.
GM also has to ask itself whether PSA is the right partner, especially since it already has a vast array of agreements with automakers such as Fiat, Toyota and BMW. It will take years for GM and PSA to developed a true, 360-degree cooperation.
Too much capacity
In addition, Opel and PSA have the same problems in Europe: huge investment and production costs as well as too much capacity. While a tie-up might save the automakers money, each would still have to cut capacity.
According to Morgan Stanley, last year Opel used just 67 percent of its installed capacity and PSA did marginally better at 77 percent. An automaker needs to use at least 80 percent of installed capacity to break even. Since the European market is not expected to rebound until 2015 at the earliest, closing plants is the only way for PSA and Opel to achieve better utilization. Sweeping plant closures in Germany, France and Spain, however, would spark a firestorm with the unions and politicians.
In the 2000s, Ford took bold steps to reduce its production capacity in Europe. The move was crucial to the company because as Ford's U.S. operations were bleeding cash in the past decade, its European unit was printing money. Despite an escalating price war last year, Ford's European unit lost $27 million while selling 1.6 million vehicles.
GM Europe - which includes Opel and Chevrolet - sold a similar number of vehicles, 1.73 million, but lost $747 million last year.