To fix Opel, Tavares wants to avoid simple solutions

Closing plants and laying off workers would be the quickest and easiest way to fix Opel problems, but PSA Group CEO Carlos Tavares wants to avoid that. When asked how he plans to end decades of losses at Opel and its UK sister brand Vauxhall without taking those steps he said, "The only honest answer is to say, if we increase the level of performance [at Opel] then we are safe." Tavares was speaking to reporters in Geneva last month.

The CEO also does not plan on micromanaging Opel as it restructures, instead he wants PSA to help the automaker's team, led by Opel Group CEO Karl-Thomas Neumann, to reach the necessary benchmarks. "[We are not entering] Opel with a precooked plan," Tavares said. "We intend to create a framework within which -- with the appropriate methodologies -- the Opel and Vauxhall employees and management can build their own turnaround plan that they will hopefully successfully implement, and they will be the winners of this turnaround." Opel will get to make its own decisions regarding brand management, product, design and pricing. "But that does not mean that we are not going to have conversations about these topics," Tavares said.

'High risk'

Analysts see Tavares' turnaround ambitions for Opel, which has lost a combined $9 billion since 2009, as challenging but achievable. "PSA's planned takeover of Opel is massively high risk, enormously complex and involves taking on two very weak brands, but we believe it has a significant chance of success," said Max Warburton, a London-based auto analyst at Sanford C. Bernstein. "Opel margins can rise toward PSA's levels in a few years." PSA's automotive operating profit widened to 6 percent last year from 5 percent in 2015.

Stuart Pearson, chief financial analyst at Exane BNP Paribas in London, noted that "PSA gave a very confident account of how Opel can benefit from applying PSA's manufacturing and cash management best practices," adding that the next Opel Corsa, expected in 2019, will be built on a PSA platform. "Engineers have been working together on it for the past six months and this can save on r&d starting today."

In Pearson's estimation, EU sourcing went from less than 50 percent in Opel-only vehicles to more than 90 percent on models jointly produced with PSA such as the Opel/Vauxhall Crossland X and Grandland X. "Jointly produced vehicles are profitable projects," Pearson added.

Arndt Ellinghorst, a financial analyst at ISI Evercore in London, believes that PSA will be a better parent to Opel than GM because it has a superior understanding of the dynamics of operating in Europe. He's also positive about the deal because the two automakers already work together.

Turnaround success

Tavares' success with turnarounds is well documented. He reduced PSA's breakeven point to 1.6 million units in 2015 from 2.6 million in 2013. He also swung the French automaker to a 1.2 billion operating profit from a 1.3 billion loss in just 24 months. He plans to follow a similar playbook with his new acquisitions. "We want to help Opel and Vauxhall become stronger as quickly as we can by sharing all the best practices, by giving them the appropriate benchmarks and making sure that they can win in the same way we did [at PSA]," Tavares said.

During PSA's revival Tavares habitually underpromised and overdelivered. He appears to be planning a similar approach with Opel's restructuring by setting achievable targets. "With a 2 percent, operating margin target for Opel by 2020 and 6 percent by 2026, we feel the targets are achievable and likely conservative," ISI's Ellinghorst said. He added that a change in accounting standards could provide a tailwind to Opel. "Under International Financial Reporting Standards Opel could have achieved a positive operating margin of around 1 percent to 1.5 percent in 2016," he said. GM, however, applies U.S. Generally Accepted Accounting Principles, under which it treats r&d expenditure as a cost with no future benefit and expenses it fully. This was one reason why Opel last year reported a 1.3 percent operating loss.

German engineering

When Tavares takes stock of the strengths that the combined automaker has, r&d it high on the list. "We are going to be an enlarged company that will use all its r&d resources in the most efficient way for our five brands," he said. "There are a lot of things that we can do." Examples of this are starting to be seen as Opel rolls out a trio of models that were jointly developed with PSA as part of their four-year partnership. Tavares says those three models will represent 20 percent of Opel’s volume. "And those three models, which already carry PSA's intellectual property, could be exported out of Europe," he said. At the same time, he acknowledged that Opel's influence on the end product will remain strong because the automaker's cars will continue to be "engineered by the Opel people" and that "[design] is up to the brand CEOs to decide."