What Does GM Want From Peugeot?


Here's what General Motors (NYS: GM) and potential partner PSA Peugeot Citroen (OTC: PEUGY) have in common: Both of them are losing a lot of money on their auto operations in Europe.

Apparently I can't take credit for that line, as Bloomberg said something similar last night. It's the obvious observation to make: Both Peugeot's auto division and Opel, GM's European subsidiary, are losing money because of structural problems that affect nearly every automaker in Europe to some extent. But those issues are affecting them worse than most.

And tying these two troubled operations together probably won't do much to solve those problems.

It's clear what Peugeot wants from GM...
According to reports that started appearing on Wednesday -- most of which originated in the French business press -- Peugeot has been in talks about some sort of "partnership" with GM for several months. Sources, apparently within Peugeot and the French government, have suggested that the partnership being discussed would include the joint development and production of engines, transmissions, related systems, and even entire vehicles.

News of the talks sent Peugeot shares sharply higher on Wednesday. It's not hard to see why: Peugeot is a troubled regional automaker whose prospects are closely tied to Europe and Europe's problems. It's at a disadvantage competing against rivals like Volkswagen (OTC: VLKAY), Ford (NYS: F) , and even French rival Renault -- all of which have a much larger global presence, and thus much better economies of scale.

This is important. The fact that cars like Ford's Focus and VW's Golf are sold all over the world means that their makers can justify (and afford) massive investments in their development, making them (at least in theory) more competitive products. In addition, the manufacturing economies of scale mean that each car should cost a bit less to produce, making for more profitable products in a business where margins are thin and competition on price is fierce.

It follows that adding scale to Peugeot's operations might make it more competitive by lowering its costs and improving the quality of its offerings. That's why Peugeot investors were excited about the news.

...but what does GM want from Peugeot?
That's a tougher question to answer. Turning Opel around is one of GM's highest priorities at the moment, and the company's executives have been putting a lot of time and effort into coming up with a turnaround plan. GM is known to be in discussions with leaders of Opel's unions, presumably negotiating the deep labor cuts and structural changes needed to ensure Opel's profitability going forward.

Those cuts and changes are what Opel needs, and when all is said and done that's what it's likely to get. GM CEO Dan Akerson and other executives have clearly expressed the view that cutting manufacturing capacity is an important part of addressing Europe's problems. That's why it's hard to see where Peugeot comes in. Adding Peugeot's overcapacity to Opel's hardly makes sense, and GM -- the world's largest automaker -- won't get much benefit from any incremental added economies of scale.

Indeed, it's hard to see how GM gets any benefit from a tie-up with Peugeot, which remains a seriously troubled company. GM hasn't commented on or even confirmed the negotiations, saying only that the company "routinely talks with others in the industry." (Officially, Peugeot has confirmed that it is in talks with another automaker, but won't confirm that it's GM.)

It's possible that GM simply sees Peugeot as a way to add some incremental scale to any product investments it makes in Opel. It's also possible that the General has something less obvious in mind. The French rumor mill has suggested that any agreement between the two automakers would be announced at the Geneva auto show in March. We're unlikely to see the General's full turnaround plan for Opel by then, but if an agreement is struck with Peugeot, we might see the first piece of it.

Is a return of GM's dividend possible in 2012? It might be, but you don't have to wait to charge your portfolio with the power of reinvested dividends. In a special new report, Motley Fool analysts identify 11 rock-solid dividend stocks, all great additions to a long-term investor's portfolio. This new report is completely free for Fool readers, but only for a limited time. Get instant access by clicking here.

At the time thisarticle was published Fool contributor John Rosevear owns shares of Ford and General Motors. The Motley Fool owns shares of Ford. Motley Fool newsletter services have recommended buying shares of Ford and General Motors, as well as creating a synthetic long position in Ford. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.