GM, Peugeot alliance would not address Europe's big problem: overcapacity

It didn’t take long for the rumor that GM might get together with France’s Peugeot to be seen as unlikely to provide the kind of radical shakeup Europe’s car manufacturers need.

The mooted deal – GM Europe’s German Opel and British Vauxhall subsidiaries linking up with Peugeot and its Citroen sibling to form an alliance to share vehicle engineering and manufacturing – would certainly provide more efficient and cost effective ways to make cars.

But that’s not the problem. The problem is chronic overcapacity of perhaps more than 30 percent, which can only be solved by shutting factories and firing workers. Something along the lines seen in America after the 2008 crunch, when GM closed plants and brands and slashed the workforce.

Last month at the Detroit Auto Show, Fiat-Chrysler CEO Sergio Marchionne warned that further consolidation of the European automobile industry was necessary to combat Volkswagen of Germany’s dominance, adding that his company was open to a merger with another European manufacturer. (Peugeot was quickly spotlighted as a favored candidate for a deal with Fiat.)

“Consolidation” means merger, not an agreement to make a few engines together.

According to Bernstein Research of London analyst Max Warburton the kind of deal apparently talked about between GM Europe and Peugeot would only be a temporary solution.

“It might work in the end but a loose alliance could only be a temporary solution,” Warburton said.

“Something needs to happen in European autos given chronic overcapacity, terrible pricing and near-zero gross margins in small cars. But putting European auto companies together, while logical on paper or power-point, is incredibly hard to execute and to make functional,” Warburton said.

Together the companies would have close to 20 percent European market share, putting them very close to the leader Volkswagen of Germany. But the barriers to these companies making money for years, including political influence stopping rationalization, poor brands and pricing, would not be addressed.

Deutsche Bank analyst Gaetan Toulemonde was also unimpressed with the idea that GM and Peugeot might form an alliance. He reckoned that any purchasing synergies and research and development savings would quickly disappear as both companies chased sales in the same countries.

IHS Automotive analyst Ian Fletcher also thought a possible loose alliance wouldn’t achieve much.

“While an alliance may go some way towards reducing the investment required by each company in its core products, they will still need to look at ways of making their production bases more efficient, something which each are likely to have to deal with alone,” Fletcher said.

Peugeot already makes diesel engines for Ford and Jaguar Land Rover, and gasoline engines for BMW and Toyota. In the last half of 2011 Peugeot’s car operation lost about $650 million. GM Europe lost $700 million in all of 2011.

Car companies are seen as more than just manufacturers in Europe, they are regarded as national totems by politicians, not least because of the huge numbers employed. If the problem of overcapacity in Europe is to be solved, and inefficient factories closed it is only likely to follow chronic loss making, rather than a rational decision to fold an operation clearly superfluous to requirements.