Does the Peugeot GM alliance make sense?

Peugeot logo Peugeot's prowl for an alliance partner to help it chase profits has resulted in an alliance with the world's largest carmaker by volume, General Motors

The strategic alliance between PSA Peugeot Citroen and General Motors (GM) fits neatly with two key trends that are emerging in the global motor industry.

The first trend is the changing nature of carmakers' relentless search for economies of scale.

In the past, their efforts tended to focus on outright acquisitions, often presented as "mergers of equals", such as the long-since collapsed deal between Chrysler and Mercedes-owner Daimler.

These days, rivals are instead increasingly entering into alliances, often in relation to specific ventures such as engine sharing, battery production or platform sharing.

Indeed, Peugeot is already involved in several alliances of this kind with Ford, Toyota, BMW and Fiat.

Deeper alliances, which might be backed by small cross share ownership deals, are also beginning to emerge.

The oldest and most firmly-established alliance of this kind is that between Nissan and Renault - the two companies share one chief executive, own stakes in each other and co-operate in many areas including research and development.

Peugeot and GM are currently talking about an alliance structured around two main pillars:

  • the sharing of vehicle platforms, components and modules and
  • the creation of a global purchasing joint venture for the sourcing of commodities, components and other goods and services from suppliers, with combined annual purchasing volumes of approximately $125bn.

This should enable "both companies to execute Europe-specific programs with scale and in a cost effective manner", according to a company statement about the deal.

As part of the deal, GM will take a 7% stake in Peugeot, thus becoming the second largest shareholder after the Peugeot family, which owns 30% of the shares but control just under 50% of the votes.

Flexible sharing

The alliance could make sense, given that the second trend is driven by technologies that have made sharing platforms and parts much more flexible.

An employee on PSA Peugeot Citroen assembly line Sharing technologies and components while retaining distinct cars has become easier

In the past, rival carmakers would at times share the same chassis, resulting in rather similar cars competing against each other.

These days, platforms have become modular, so they can be modified to fit a wide range of engine solutions or car bodies.

The same goes for engines. Different models sharing the same engine can still be distinct from each other, as a result of the engines being tuned differently or by the addition of different types of turbo chargers.

The two trends support each other, in that flexible business deals and adaptable vehicle architecture are drawn up in order to cut costs and thus boost profits.

But for this to work, the chemistry between charismatic and powerful top executives must work, and the invisible, under-the-bonnet solutions most be stitched together without compromising the integrity of either of the brands involved in any alliance.

Consequently, alliances require both a great deal of diplomatic as well as technical skills - though more than anything, alliances require a great deal of desire to make them work.

Mutual benefits?

There should be plenty within both Peugeot and GM.

Peugeot Citroen workers and union members demonstrate on February 18, 2012 Both Peugeot and GM want to cut costs in Europe, though doing so is never easy

Peugeot has had to cut back its research and development activities, reduce its marketing budgets and scale back its international ambitions after enduring a 500m euros ($661m; £422m) loss during the second half of 2011.

Europe's second largest carmaker, which already relies on European markets for more than half its sales, has in effect had its wings clipped.

Without cash to spend on growth strategies, the carmaker will quite simply find it almost impossible to halt the decline.

GM's problems are somewhat different.

The carmaker has returned as the world's largest by volume - less than three years after it was rescued from bankruptcy by a US government cash injection - on the back of strong performance in both North and South America, as well as in Asia, including the buoyant Chinese market.

But its European division Opel, which includes Vauxhall, has been losing money for years - last year's losses came in at $700m (£446m) and a return to profitability remains illusive in spite of massive efforts to make it happen.

In other words, GM is strong all around the world, but not in Europe. Peugeot, in contrast, is weak all around the world, though in Europe it has done much to cut costs, improve manufacturing processes and diversify with new products.

Besides, its brands Peugeot and Citroen remain reasonably popular with European customers, while GM's Opel and Vauxhall brands have been losing their lustre in recent years.

A problem facing both companies is the way the European markets are expected to be under pressure for some time yet.

Combining the two companies in whichever form could at best help the two automotive giants gain access to each other's markets or, under the sort of more limited alliance that is currently being entered into, at least to each other's technologies.

Bringing together production in Europe could also enable both firms to cut costs by reducing the number of factories they operate - though at this stage the alliance does not include production activities.

Reducing capacity?

But that is not to say the alliance will not involve in this direction over time.

Both companies know full well that closing down plants invariably proves hugely controversial, though there is also a growing understanding across both the industry and within various European governments that it might be necessary.

Last time, Opel tried to do it, it was met with massive resistance from unions and governments across Europe. But that was during the credit crunch when the industry as a whole was in dire straits.

This time it might be different, given the relative health of many of GM's and Peugeot's rivals. Both GM and Peugeot will be keen to reduce capacity in Europe. In time, they may well find a way to do so.

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