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James Bryant

GM, Peugeot form alliance

by James Bryant | Dun & Bradstreet Editor

February 29, 2012 | 2 Comments »

General Motors and France’s Peugeot have announced a plan to form an alliance aimed at annual savings of $2 billion within five years, according to Automotive News (sub required). GM will take a 7 percent stake in Peugeot as part of a share issue by the French car company. The stake in Peugeot should cost GM between $400 million to $470 million, depending on market conditions when the deal happens.

The alliance aims to accomplish two main goals: sharing vehicle platforms, components, and modules, and establishing a global purchasing joint venture. The sharing aspect of the deal would first focus on small and midsize cars, MPVs, and crossovers. The two companies might also work on a joint platform for low-emission vehicles. GM says the deal is expected to be finalized in the second half of 2012.

I have to admit, when I saw this story the first thing that came to mind was “Oh boy! Here we go again!” GM doesn’t have the best track record when it comes to forging alliances with other carmakers. Its hook-ups with Fuji Heavy Industries (Subaru) and Suzuki Motor wound up on history’s scrap heap when it sold off those stakes right before going bankrupt. GM never got much out of its $2 billion investment in Fiat in 2005; the relationship was dissolved five years later.

Guggenheim Securities analyst Matthew Stover took the words right out of my mouth when he said the plan is risky because it is “introducing complexity at a time when GM is at a very delicate point in its restructuring.” Just when things are going pretty well — rising market share, sales, and profits — GM starts messing with a good thing.

GM’s Opel division in Germany has been a sore spot in an otherwise impressive comeback story. Opel, like Peugeot, suffers from overcapacity and money-losing operations. GM lost $747 million in Europe in 2010 and Peugeot’s core auto group lost $664 million in the second half of 2010.

GM’s alliances of days past also centered on costs savings through platform sharing and saving money by combining buying power. But none of those deals ever lived up to the optimistic promise of the original press announcements. Given the available information at this moment, it’s hard to fathom how two heads will be better than one, when independently neither head has figured out how to stop the bleeding in Europe.

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Photo by Hussein Alazaat, used under a Creative Commons license.

Do I smell a sale coming on, James? Opel is so similar to Vauxhall that, certainly under present circumstances, it seems one of them should go. They quit competing with Lotus’ Elise in the small, higher-end sports car class a few years back. That car (Speedster/VX220) fared pretty well with critics, but it never really threatened Lotus’ brand dominance. Vauxhall family cars had been something of a whipping boy among critics, but the brand had — at least last time I was aware — made significant strides in improving its quality and image since. Seems like Opel is begging for the chopping block.

It has tried to sell before. GM wanted to unload Vauxhall and Opel but the deal fell through in 2009 – Magna International was the potential buyer. GM Europe’s share of GM’s global sales fell to 16% in 2011 compared to 23% in 2009. I dug around in GM’s 10K (filed Feb. 27) and found this tidbit.

GME Planned Spending Guarantee

As part of our Opel/Vauxhall restructuring plan agreed to with European labor representatives, we have committed to achieving specified milestones associated with planned spending from 2011 to 2014 on certain product programs. If we fail to accomplish the requirements set out under the agreement, we will be required to pay certain amounts up to Euro 265 million for each of those years, and/or interest on those amounts, to our employees. Certain inventory with a carrying amount of $209 million and $193 million at December 31, 2011 and 2010 was pledged as collateral under the agreement. Through December 31, 2011 spending was sufficient to meet the current requirements under the agreement and the specified milestones have been accomplished. Management has the intent and believes it has the ability to meet the future requirements under the agreement.

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