The Problem With GM's New Partnership
It turned out to be both more and less than we expected: While General Motors' (NYS: GM) new partnership with PSA Peugeot Citroen (OTC: PEUGY) does feature a major new joint-purchasing initiative, it doesn't, at least on the surface, appear to do much to solve the very real problems facing both companies.
The market didn't love the news, sending Peugeot's shares down sharply -- though GM's were up in early trading on Thursday. Clearly, Peugeot investors were disappointed by the scope of the announcement, which turned out not to be the lifeline some had anticipated.
But from the perspective of GM investors, is there anything here to get excited - or worried - about?
The big problem with this deal
On the surface, there's nothing wrong with GM's modest investment in Peugeot. And there's nothing wrong with the key provision of the "partnership" arrangement, which forms a new joint venture to conduct worldwide purchasing for both automakers. That seems like a reasonable way to pursue some cost efficiencies, except that GM tried a similar arrangement with Fiat (OTC: FIATY) a decade ago that ended up being an expensive boondoggle.
The automakers said on Wednesday that they expected the arrangement to save them $2 billion dollars a year five years from now, split roughly between the two companies. There's nothing wrong with that, either -- cost savings that don't impact product quality are always welcome -- but five years is a long time from now, and GM's losing a lot of money in Europe today.
That's the big problem with this deal: It doesn't appear to do much to help with GM's European crisis (or Peugeot's, for that matter). GM subsidiary Opel has lots of problems, but one big problem is overcapacity: Too many factories making not enough cars. That's a problem shared by Peugeot, and by most other players in the European market - and it's a problem that this agreement does nothing to address.
Hopes of consolidation dashed
Everybody is having trouble in Europe, with a challenging economy exacerbating the auto industry's structural problems. Outgoing Ford (NYS: F) CFO Lewis Booth recently predicted that the Blue Oval would lose $500 million or more in Europe this year -- and Ford's operation is in considerably better shape than GM's. Euro market leader Volkswagen (OTC: VLKAY) has made no secret of its ambitions to expand its U.S. presence aggressively, in part to offset what it sees as chronic, systemic problems in Europe.
Fixing those systemic problems is going to require closing a bunch of factories, plain and simple, and that might effectively require one or more automakers to go under -- or at least, to dial back its presence in Europe. The strength and political power of unions in countries like France and Germany have made those plant closings very difficult to negotiate. No automaker has wanted to be the one to take the heat, but the pressure is mounting as losses continue.
As I said earlier this week, it's possible that the real benefit to this deal, at least from GM's perspective, is that it increases the pressure on Opel's unions and their allies in the German government to accept real restructuring. GM CEO Dan Akerson's goal is to make GM Europe (which includes Opel, as well as a sales network for GM's "global" brands, Chevrolet and Cadillac) into an operation that, like GM North America, can turn a profit even during a severe economic downturn.
Akerson has made fixing Europe one of his company's highest priorities, putting key members of his brain trust on Opel's board and charging his right-hand guy, Vice Chairman Steve Girsky, with coming up with a workable plan. Akerson and CFO Dan Ammann said last month that progress was being made, but that negotiations with the unions and other stakeholders could take "a couple of months."
The clock is ticking. Whether the Peugeot deal was made with the Opel negotiations in mind or is just (from GM's perspective) an incidental alliance that could prove beneficial remains to be seen. But it's clear that it isn't the restructuring masterstroke that shareholders of both companies had hoped for, and so the waiting -- and hoping -- will continue.
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