PARIS -- PSA Group's rationale for seeking to acquire General Motors' chronic money loser, Opel, has many industry watchers puzzled but it has potential benefits for both sides, analysts and experts say.
The deal for PSA to acquire GM's European operations was announced on Monday morning. The move vaults PSA into the No. 2 spot in Europe by sales, behind Volkswagen Group and ahead of its French rival, Renault.
For GM, the benefit of a deal seems clear: An opportunity to offload a company that has hemorrhaged hundreds of millions of dollars annually and redirect those resources to markets with more profit potential (an analysis by Barclays called it Business Strategy 101).
For PSA, however, which itself was teetering near collapse during the recent European recession, the likely benefits are much less certain, analysts and experts say.
Nonetheless, the thinking goes, the deal represents an opportunity for PSA on a number of levels. PSA and Opel already have a "mature" agreement, said Isabelle Chaboud, an associate professor at the Grenoble Ecole de Management (Grenoble School of Management) in France who focuses on financial analysis of companies. "They know each other and they are working fine together. That could be where they get synergies."
PSA's gain from the deal could include:
- An immediate, huge and relatively inexpensive boost in PSA’s share of the fiercely competitive European market, potentially unlocking an array of synergies, profits and cost savings. A combined PSA-GM Europe entity would have had 16.8 percent of the European market in 2016, according to Exane BNP, versus 9.7 percent for PSA and 6.6 percent for Opel. A restructured Opel could boost earnings per share by up to 30 percent by 2020, Exane BNP suggests.
- The ability to find savings quickly by building on PSA’s 2012 agreement with Opel on joint platforms, shared manufacturing, purchasing and logistics. The first fruits of that collaboration will be on display at the Geneva auto show this week when the Citroen C-Aircross and Opel Crossland X models have their debuts. Both are subcompact crossovers that share a PSA platform and will be built in the same Opel factory in Spain. Next in the pipeline is the Opel Grandland X, which shares its platform with the recently launched Peugeot 3008 and 5008 crossovers.
- A way for PSA to expand, making the company into a leader in the lean manufacturing of lower-cost, high-volume automobiles while staying in CEO Carlos Tavares' comfort zone. The Exane BNP analysis found that a combined company would have had 36 percent of Europe's compact segment sales and 37 percent of the region's subcompact sector in 2016. Scale is important in these low-margin segments. "Tavares seems content for PSA to simply do more of what it now seems to be good at," Exane BNP says.
Challenges ahead
On the other hand, analysts said, the deal poses challenges for PSA, including making the new group even more reliant on Europe than it is now. Europe accounted for 61 percent of PSA's 3.15 global vehicle sales last year. Opel is a largely European-only brand because GM has restricted its Germany-based subsidiary from selling outside of Europe, where it would compete with Chevrolet, pulling the brand out of Russia and China in recent years.
A larger share of unit sales in the European market would leave PSA less of a hedge against another economic downturn in the region at a time when its rivals are becoming more heavily weighted in global markets. Indeed, European automakers and analysts are projecting the region's sales will be nearly flat in 2017 after growing more than 6 percent in 2016. Chaboud said that restructuring Opel could take time and money away from PSA’s anticipated investments in high-potential emerging markets such as Southeast Asia, Iran and India.
PSA will face labor issues, with the workforce of Opel and its UK sister brand, Vauxhall, mainly in the high-cost German and British markets. Reports have said that 6,000 jobs could be eliminated after an acquisition, though it is unclear whether that would happen through buyouts, attrition or layoffs.
“At some point they will have to do something,” Chaboud said about workforce reduction. “They have to get back to profitability.” An effort to close underutilized or duplicative plants would also be fraught with difficulty, analysts noted.
Bruce Belzowski of the University of Michigan Transportation Research Institute said: "The labor issues are so entrenched in Germany that it would be extremely hard to close plants.”
Tavares will have to figure out how to handle overlapping, and similarly priced, models from Peugeot, Citroen and Opel in Europe's saturated market. He does not see Opel cannibalizing sales of PSA's brands. "There is almost no cross-shopping between PSA brands and Opel," Tavares said on February 23 at the company's 2016 financial results press conference. Tavares has said that PSA would ensure Opel remains strongly identified as a German company in an effort to reach buyers who “will not consider French brands,” but Exane BNP noted that PSA now competes directly in all nine of its vehicle segments, which it described as a “key challenge.”
Chaboud said an acquisition of Opel’s capacity and sales volume runs somewhat counter to PSA's successful Push to Pass plan, which runs through 2021 and notes that “performance matters more than size.”
“The numbers are quite amazing,” she said, referring to the company’s results in 2016, when it reported an 18 percent increase in earnings, and automotive operating profit rose to 6 percent of sales from 5 percent. “I think they should stick to this path." Chaboud's take on PSA taking on Opel: “I think it’s a very risky move.”
