Making financial sense of the PSA plan to buy General Motors Europe (GME) is not easy according to city analysts.
GME lost money from 1999 to 2016. The company estimated that it would have crept into the black last year, but the Brexit vote and the fall in the value of the UK Pound clobbered the bottom line.
Analysts at Evercore ISI say that there are good reasons why General Motors might want to sell - or even effectively give away - its European arm over and above recent losses, which ISI estimates at £1.3bn over the last three years alone.
GME is estimated to be using around just 72 percent of its factory capacity, which is another money-loser in a market that offers super-tight margins for mass-market brands.
But cutting jobs and factory space is very difficult in Germany and both the French and German governments were quick to demand meetings with GME and PSA bosses to try and stop any merger or buy-out turning into a jobs rout. Without a big leap in car sales, GME overcapacity remains close to unfixable.
But ISI have identified another reason why General Motors might want to off-load its European arm. GME’s German engineering base has been responsible for both diesel engine development and the creation of high-value compact car architectures, such that underpinning the new Astra.
The problem, says ISI, is that the cost of cleaning up diesel engines will probably make them too expensive for post 2020 superminis and hatchbacks. This will result in a serious shrinkage of diesel development at Opel.
Also, vehicles such as the new Astra are more expensively engineered and contain higher level of content than in any other global market. The upshot is that European superminis and compact cars are just inherently too expensive to be sold outside of Western Europe in any numbers.
As a result, the part of today’s GME that’s likely to be immediately hardest hit by any PSA takeover is the research and development division. ISI estimates that GME spent around £850m in research and development and capital expenditure in 2016. As part of Peugeot-Citroen that sum would be brought crashing down.
Any future Opel and Vauxhall models would eventually be re-launched on PSA platforms and a great deal of investment in petrol and (big) diesel engines would come under existing PSA R&D. PSA’s Carlos Tavares has a track record of cutting costs, something he did at Renault and, more recently, at Peugeot-Citroen.
So a combination of big reductions in R&D spending at Opel and Tavares cost-cutting at Opel/Vauxhall could immediately stop the losses at GME. However, any future profitability gains would have to wait until all of the Opel/Vauxhall range were based on PSA technology.
With the new Insignia just around the corner, that could take at least four years.