GM and PSA Group (Peugeot and Citroën), confirmed today that discussions are underway to “exploring numerous strategic initiatives aiming at improving profitability and operational efficiency, including a potential acquisition of Opel Vauxhall by PSA.”  Both companies said there is “no assurance that an agreement will be reached”.  While little is known about its financial or operational terms, fearing job losses, the German government and powerful unions have been vocal in criticizing the plan.  Britain also said it had contacted GM President Dan Ammann to express concern over the future of Opel’s UK plants.

Any potential deal will likely encounter stiff resistance from labor in Germany, where “co-determination” laws give union representatives a say in corporate policy-making. IG Metall, the powerful German metalworking union, and the German Group Works Council said a sale could violate laws there.  “If this is the case that GM has been holding talks with PSA with the goal to sell Opel/Vauxhall, then this would be a clear violation of German and European co-determination rights,” they said Tuesday in a statement. “Nevertheless, we would unconditionally examine a potential sale of Opel/Vauxhall to PSA based on previous experiences with PSA.”

To quell concerns PSA said it would dispatch CEO Carlos Tavares to meet German labor and political leaders likely to include Chancellor Angela Merkel, as his GM counterpart Mary Barra visited Opel headquarters near Frankfurt.

Tavares, expected to head the combined company if the deal goes through, “wants to meet Opel’s German stakeholders”, a PSA spokesman said, adding no date had yet been set for those talks.
PSA and GM have declined to say what cuts they would make to jobs, plants, production capacity or research and development under the deal being discussed. Of GM Europe’s roughly 38,000 staff, about 19,000 are in Germany and 4,500 in Britain.

GM has lost money in Europe since the late 1990s, racking up losses of roughly $20 billion.  It missed its goal to break even in the region last year because of currency issues related to the United Kingdom’s “Brexit” vote to leave the European Union.  The automaker doesn’t believe it has a chance to break even until possibly 2018.

A sale of Opel and its sister Vauxhall brand would essentially end GM’s presence in Europe.  GM has considered selling its money-losing European division before, including in 2009 to Canadian auto supplier Magna International but ultimately opting to keep it in order to maintain a sizable presence there and remain a global automaker.

Much of GM’s car-engineering development is based in Ruesselsheim, Germany, including development of smaller, four-cylinder engines used in GM vehicles worldwide. It’s unclear if a deal to sell Opel would include that, or whether PSA would emerge as a critical engine supplier to GM.

Combining PSA and Opel would create an automaker with about 16 percent of European market share, ranking it second behind Volkswagen.  PSA is interested in Opel because of its strong presence in Germany and the United Kingdom, but it is questionable if taking over the brand would make it profitable given the preference for German cars over French in both markets.  

Five years ago, GM and PSA announced a $400 million 7 percent stake in PSA aimed to save it $2 billion annually by 2017. The companies were to share vehicle platforms, components, modules, and research and development efforts, plus create a global joint venture to buy goods and services from suppliers to save money.  But by the end of 2013 that deal had soured and GM sold its stake in PSA for $343 million.

The news comes as a surprise as just last week, GM’s Chief Financial Officer Chuck Stevens told reporters in Detroit that the company would push to break even in Europe in 2018.  The combined Opel and Vauxhall brands sold 1.16 million vehicles in Europe last year, about one-tenth of GM’s overall global sales volume.  GM has said it aims to boost market share in Europe to 8 percent by 2022, from about 6 percent today.

Opel’s importance increased after GM announced in late 2013 it was pulling the Chevrolet brand from Europe, backing off on a planned expansion. GM did that to concentrate on its Opel brand.  Executives repeatedly have said they are committed to Opel, and Barra’s first foreign trip as CEO in early 2014 was to Ruesselsheim to underscore that commitment.

Just before Barra ascended to the top job, GM said it would largely pull Chevrolet from Europe.  If GM were now to sell Opel, it would leave the automaker with little brand recognition in Europe.  It sold fewer than 2,300 Chevrolets there last year — mostly Camaros, Corvettes and Tahoes.  It has opted to exit other unprofitable ventures, including pulling out of Russia, ceasing manufacturing in Indonesia and Australia, and restructuring in Thailand.  GM’s other global brand, Cadillac, is working to establish itself in China.
PSA, under Tavares has begun an aggressive expansion program, just last week announcing the purchase of India’s Ambassador car brand from Hindustan Motors.  And in May of last year announcing PSA’s intent to return the the North American market.  

Analysts say a deal to shed Opel could potentially benefit GM.  Investors cheered the news Tuesday, pushing GM stock up 4.8 percent to $37.24 while PSA shares fell almost 1 percent, reversing part of Tuesday’s 4.3 percent gain after some analysts cautioned that significant cost savings would be needed to offset the combined company’s dependence on Europe’s competitive, mature market.

Whether PSA’s growth plans will pay off in increased sales and profits is is certainly speculative.  It is likely to put pressure on the company to re-evaluate its Citroën brand as diversity of models in large automotive companies where takeovers have occurred, such as Fiat Chrysler, inevitably lend to efficiencies where offerings are consolidated.  The distinction PSA has tired to make with both Citroën and DS brands would most likely not have much traction in the German and UK market, nor in new markets it pursues in India and North America.