A Possible Solution for GM's Money-losing Opel Division

Earlier this year, French carmaker PSA Peugeot Citroen SA and General Motors Co. (NYSE: GM) created an alliance to pursue joint development and supply chain synergies in the European automobile market. Today, reports French newspaper La Tribune, the two companies are considering the creation of a joint venture that would be equally owned and include GM's Opel division and the automotive division of privately held Peugeot.

GM currently holds 7% of Peugeot as a result of last Spring's alliance and would clearly benefit from a joint venture of the type being discussed. The Opel division has lost money for years and GM has yet to come up with a plan to turn the division around.

It is less clear why Peugeot would want to participate in such a joint venture. There are economies of scale, of course, but it would be years before the first joint product would see the light of day.

Add to that the declining market for cars in Europe and manufacturing over-capacity on the continent, and the fact that both companies are located in high cost countries (France and Germany). For a joint venture to succeed, it would have to do what the two companies have been unwilling or unable to do separately -- cut workers, slash manufacturing capacity, and lower procurement costs. Two heads rather than one will not make these actions easier to accomplish.

Paul Ausick