General Motors (GM) will take a 7% stake in PSA Peugeot-Citroën and the two will build cars, multi-purpose vehicles, and a global purchasing organisation under the arrangement.
IHS Global Insight Perspective | |
Significance | General Motors (GM) has announced that it and PSA Peugeot-Citroën have entered into an alliance agreement to create a global purchasing organisation and share platforms for small and mid-size cars, as well as crossover utility vehicles, multi-purpose vehicles, and potentially other future vehicles as well. |
Implications | GM CEO Dan Akerson stressed that this is not a merger or acquisition, just an alliance—cemented with GM taking a 7% stake in PSA, worth USD400–450 million. |
Outlook | It appears somewhat baffling that GM is willing to get involved in an alliance that it frankly does not need for size or complexity, while still avoiding any public plan to rationalise its European production, cut costs, or deal with labour rates. |
General Motors (GM) and PSA Peugeot-Citroën have inked a deal whereby GM will take a 7% share in the French automaker, cementing an alliance between the two that has been the subject of speculation for several days. The move will cost GM around USD400 million and will make the company the second largest shareholder in PSA behind the Peugeot family. According to executives at both companies, this is an alliance, not a merger—the main goal is ostensibly to focus on efforts to improve economies of scale. This means that the companies will set up a joint global purchasing operation for both organisations, and they plan on sharing platforms and components for a variety of vehicles. As part of the venture, Peugeot said that it will raise about EUR1.0 billion (USD1.3 billion) through a capital increase, in part to help fund the venture. That money will come from both the public markets as well as an additional investment from the Peugeot family, according to a company release announcing the deal. PSA chief executive Philippe Varin added in a conference call that the terms of this arrangement would be worked out today (1 March) and announced at the beginning of next week. Together through joint operations, the companies expect to begin generating savings worth as much as USD2 billion annually when the synergies of the alliance are fully realised, which will not be before the fifth year of the alliance. "This partnership brings tremendous opportunity for our two companies", GM chairman and CEO Dan Akerson said during a conference call for media and analysts yesterday (29 February). "The alliance synergies, in addition to our independent plans, position GM for long-term sustainable profitability in Europe."
GM vice-chairman Stephen Girsky also hinted that if the alliance goes well, there may be the possibility of expanding it to other platforms or vehicles in future. Small cars, mid-size passenger cars, multi-purpose vehicles (MPVs), and crossover utility vehicles (CUVs) will be where the companies initially focus, with the possibility of developing a new common platform and potentially a "low-emissions platform" as well. The companies further noted in a presentation that among the areas covered are the B segment (where PSA markets primarily the 206/207/208 and Citroën C3/DS3 and GM the Opel Corsa and Chevrolet Spark/Sonic) and the D segment (Peugeot 508/Citroën C5 from PSA and Opel Insignia/Buick Regal from GM, to name but two). However, both parties stressed that the two companies will still very much maintain their own brands, their own dealers, and their own operations. Girsky also said that there is sufficient flexibility in the deal to allow for partnering in specific geographic regions, sharing technology, or further sharing platforms. The first vehicle will be launched on a common platform in 2016, according to the companies. "This alliance is a tremendously exciting moment for both groups and this partnership is rich in its development potential", said Varin. "With the strong support of our historical shareholder and the arrival of a new and prestigious shareholder, the whole group is mobilized to reap the full benefit of this agreement." The alliance will be overseen by a steering committee made up of an equal number of executives from both companies, the two firms said.
Outlook and Implications
Analyst reaction to the announcement has been decidedly mixed, and rightfully so—it is somewhat perplexing why GM would want to enter into this kind of a deal with PSA, which it quite frankly does not need. GM's bigger problem, and the one most analysts had hoped to hear information about in the company's quest to right its European ship, is how its Opel unit plans to cut structural costs, deal with overcapacity, and resolve sky-high German labour costs. The GM-PSA alliance may provide some interesting benefits for scale of commodities purchasing, but GM is the biggest automaker in the world—scale is not nearly as much of a problem for it as it is for the much smaller PSA, which is the world's eighth largest automaker by volume. The alliance will not address either company's overcapacity, or the need to shutter plants and rationalise production capacity to meet flagging European demand. What then, might the alliance do?
It would seem that the goal is something similar to the Renault-Nissan Purchasing Organization, a global operation that oversees major commodity purchases, platform components, and other major joint operations between Renault and Nissan. Renault and Nissan are still very distinct companies, managed differently yet still sharing significant platforms, componentry, commodities, and more. GM may be interested in trying to duplicate this success through the combined potential of USD125 billion of purchasing requirements, but frankly it does not need to—it is already largely successful in its reorganised state. Perhaps GM hopes that ingraining itself further into the European landscape through tie-ins with another local company will help persuade local governments to help it fund a rationalisation of its production base in the region. However, although the EU is portrayed as a fair and equal trade bloc, governments are still very focused on national interests, not least two of the strongest in the region—Germany and France, which just so happen to comprise the bulk of these two automakers' manufacturing bases. Peugeot has been pressured by the French government not to close plants or lay off workers, just like the German government has similarly pressured Opel. Indeed, a statement from French industry minister Eric Besson following the announcement went some way towards underlining that the deal will not include production activities and that the alliance will be favourable for jobs and PSA's presence in France. He also added that the relationship between Peugeot and French suppliers will not be changed by the deal, which could in turn raise questions with regard to the level of cost savings.
Certainly, the deal seems to be more advantageous for PSA than it is for GM. However, one possible suggestion as to why GM would enter into this contract concerns Fiat-Chrysler. Fiat-Chrysler CEO Sergio Marchionne stated just yesterday, as news was breaking about the GM-PSA alliance, that he would also like to pursue a partnership with Peugeot. The two companies already collaborate on light commercial vehicles (LCVs). Fiat-Chrysler would also very much like help in accessing the Chinese market, in which Peugeot has been present for over 20 years. There are possible synergies between Fiat-Chrysler and Peugeot in South America as well, making the Italian-US conglomerate seem like a better fit for Peugeot than GM. This could explain GM's move—it may simply be a move to deprive Fiat of a potential alliance that it would really like to have. In the short term, however, this alliance does little to address the most pressing problems facing either GM or PSA, and the reaction to the announcement accurately reflects that.