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PSA Eyes Big Savings in Potential Opel Deal

Negotiations on sale are ongoing.

by on Feb.24, 2017

PSA CEO Carlos Tavares believes the acquisition of Opel could net $2 billion in savings.

PSA Group’s proposed acquisition of Opel would create savings of as much as $2 billion from the General Motors’ European division’s turnaround, the French carmaker’s Chief Executive Carlos Tavares said during a session with reporters and analysts.

Tavares said adding the German Opel and British Vauxhall brands to PSA’s portfolio would bring new customers to the company who have been reluctant to buy French cars, Tavares told said, while generating savings from shared technical underpinnings.

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“There is significant complementarity in terms of customer consideration between the German Opel brand and our three French brands,” Tavares said, referring to the French group’s Peugeot, Citroen and DS badges.

One of the areas Tavares has apparently targeted for swift change is the development of a new small car for Opel.

He apparently wants to build the next Corsa mini on the same architecture as its Peugeot 208 and Citroen C3 models, several sources told Reuters.

Tavares outlined the plan at a PSA board meeting on Wednesday, one source said. The aim would be to fuse the small car categories that PSA and GM failed to combine when the companies talked about a potential alliance in 2012.

Tavares wants to consolidate the Opel Corsa with PSA's small vehicles to gain synergies and cost savings.

The PSA CEO declined to elaborate on the details of possible PSA-Opel vehicle programs as he presented record PSA earnings to reporters and analysts, noting that the acquisition had yet to be agreed with GM.

But he said the combined company would aim to sell more than 5 million vehicles annually within “a few year.” PSA and GM Europe delivered a total of 4.3 million vehicles between them last year.

“When you look at the product plan you see that you can, in a quite speedy way, implement significant synergies,” Tavares said.

(GM stock could benefit from Opel sales. Click Here for the story.)

The next Corsa and related Mokka X mini-SUV are among a wave of small Opel cars already in development for launch in 2019. The two models represent 40% of GM’s European sales, according to LMC Automotive data.

The earlier small car plans foundered because GM chose instead to develop the Corsa using its own architecture, pursuing economies of scale between its Opel and Chevrolet brands. GM ultimately never sold an Opel-designed Chevrolet in Europe and GM withdrew the Chevrolet brand from the European market at the end of 2013.

“It’s completely different now,” PSA’s engineering chief Gilles Le Borgne said on Thursday, adding that engineering teams were ready to move fast. “It would be stupid to miss another cycle,” he said, adding that it normally takes more than three years to develop a new model.

A swift convergence of small car design and production, however, could deepen concern over possible job losses, especially in Germany — home to about half the 38,000-strong GM Europe workforce.

The competing PSA and Opel small car and SUV line-ups are currently spread among no fewer than five European plants: Opel Eisenach, Germany, and Zaragoza, Spain; and PSA Poissy and Mulhouse, France, and Trnava, Slovakia.

German Chancellor Angela Merkel has been pushing Opel, GM and PSA executives to guarantee jobs in the event the deal is completed.

Tavares has promised to honor existing GM plant and job guarantees, but many of those expire in 2018-2020 — around the time the first jointly-developed products would be arriving.

“Given the massive overlap of the two businesses, there should be no illusion as to what will need to happen,” Evercore ISI analyst Arndt Ellinghorst said in a recent note.

(GM, PSA getting pushback on potential Opel deal. For the story, Click Here.)

“It’s about hard restructuring in Germany, the UK and Spain resulting in at least 5,000 manufacturing job cuts,” he predicted. Evercore expects three plants will close by 2021.

While PSA will honor past deals, the company insists no new plant or job commitments are on the table. “We’d discuss those at a later stage,” a spokesman said, declining further comment.

The proposed deal would create a “European champion” and offer lifeline to Opel after 16 consecutive years of losses, CEO Tavares said on Thursday. “This company needs help.”

It would also tap future technologies such as PSA electric and plug-in hybrid transmissions due in two years, he said.

John Colley, of Warwick Business School is Professor of Practice in the Strategy & International Business group, noted PSA has the upper hand because its profits have been improving, while Opel continues to lose money. “It still is not clear why Tavares wants the two brands, Colley added.

“Accessing the US market with the Opel brand to avoid the stigma attached to French car brands seems unlikely. Although it is another argument for retaining the high cost German plants, which are expensive and politically difficult to close.

“Integration benefits with PSA look to be minor, so cost savings remains the most likely strategy. The promise to develop the Vauxhall brand has an ominous ring about it.

(GM considers sale of struggling Opel to France’s PSA. Click Here for the story.)

“The branded cars do not need to be made in the UK,” Colley added in an e-mail. “Promises made to achieve deal approval usually have finite lives. Expect the UK to feel the brunt of the savings.”

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