Opel’s astonishing recovery since PSA Group bought the ailing automaker just lst year from General Motors has left analysts swooning.
Opel/Vauxhall made 502 million euros ($587 million) of profit during the first six months compared with a loss a year earlier, PSA said on Tuesday. Opel's return to the black wasn’t supposed to happen until 2020. Opel’s margin was 5 percent, a respectable number for a healthy automaker, but remarkable for a company that had generated billions in red ink for a generation under GM ownership.
Opel's cost per vehicle produced has already come down by 250 euros, with a 2020 target of saving 700 euros.
“These numbers exceed our wildest dreams,” Max Warburton of Bernstein wrote in a note to investors.
“This is simply the quickest turnaround I have seen in the auto industry in many years,” Jose Asumendi of JP Morgan said.
“Clearly [PSA] management execution has been exceptional,” said Harald Hendrikese of Morgan Stanley.
PSA CEO Carlos Tavares was humble when he announced the results to investors on Tuesday. "It is quite clear that we are far from achieving operational excellence,” he said. "We didn’t execute everything as properly as we should."
Note of caution
Tavares has silenced the doubters who said that purchasing the perpetually money-losing brands of Opel and Vauxhall was a losing proposition. But some of the levers that Tavares pulled to haul Opel into the black in the past year won’t be available much longer.
For one, Tavares has been attacking legacy costs and inefficiencies left over from GM’s stewardship. Of the 681-million-euro swing from losses to profits in the first half of 2018 almost two-thirds of the gains came from savings on fixed costs, which are down 28 percent. That has been accomplished by combining functions such as purchasing, marketing and IT, and lowering development costs of new models.
New contracts favorable to PSA have been signed with workers in Germany, the UK, Spain, Hungary, Poland and Austria, but those deals will be in force for the next four or five years -- and Tavares has said on numerous occasions that he was to avoid firing employees. It will be difficult to win future concessions.
The remainder of the gains came from improved pricing -- reducing sales in unprofitable channels and selling more highly optioned models -- and purchase price accounting, which is tied to Opel/Vauxhall assets and liabilities at the time of the acquisition but is not a recurring profit -- part of what Warburton called “helpful post-acquisition accounting and sizeable restructuring charges.”
There are some real challenges facing Tavares at Opel. Sales and market share are down, especially for models developed solely by GM, and the European auto market is expected to flatten. Some factories still remain underutilized, and Opel’s wages to revenue ratio, at 13.5 percent, is three percentage points behind PSA’s other brands. Opel’s huge technical center in Ruesselsheim, Germany, has excess capacity and staff, and PSA is exploring a sale or lease.
But after the astonishing first-half numbers -- both at Opel and PSA, which Tavares resurrected from near-death in 2013 using the same strategies -- few would doubt that he will find a way to overcome them.