What the Heck Is GM Thinking?

What is this about? Business news sites around the world were buzzing with the latest development in General Motors' (NYSE: GM  ) European saga on Tuesday: According to some reports, GM is about to take a 7% stake in troubled French automaker PSA Peugeot Citroen (OTC: PEUGY).

It's clear what Peugeot would get out of such a deal: A lifeline. Peugeot, long thought to be too small and too Europe-focused to survive in the long term, has been burning cash recently as it struggles with systemic problems in the European market. A deal with GM that added development resources and scale -- as well as a cash infusion -- might go a long way toward stabilizing the troubled automaker.

But what does GM get out of this, with its own European operation in even more dire straits? That's a harder question to answer.

What the heck is GM thinking?
At first glance, a major connection to Peugeot would seem to make GM's problems in Europe worse. GM's European subsidiary Opel has the same problems that Peugeot, VW (OTC: VLKAY), Ford (NYSE: F  ) , and nearly all of the other European automakers do: too much production capacity, too-rich labor deals, and labor-friendly local governments likely to obstruct meaningful restructuring. But Opel's problems are worse than most.

Opel's a mess, plain and simple, and GM CEO Dan Akerson has been very clear about his determination to clean it up. But how does adding Peugeot -- which isn't quite as much of a mess as Opel, but which is facing similar issues -- to the mix accomplish that?

Here's a key part of the problem: According to U.K. industry-watchers LMC Automotive, both Peugeot and GM Europe will run their factories at around 70% capacity in Europe in 2012. In simple English, that means both operations' factories will be making about 70% of the vehicles they were designed to produce when working at full speed. That's not good: Auto factories have high fixed costs -- labor, machinery, maintenance, electricity, etc. -- and most need to run at around 80% capacity or better to be profitable.

Obviously, an economic boom that lifted auto sales rates would help, but that's unlikely in the near term, and Akerson has made it clear that Opel should be able to turn a profit even during a deep economic downturn. So whatever happens, Opel -- and really, the European auto industry as a whole -- needs to reduce capacity. To close factories, in other words.

But mashing up Opel and Peugeot won't result in any reduction in capacity. Just as efforts to pare down Opel have been stymied by strong unions and the German government, any attempt to trim Peugeot would face stiff resistance from unions and French bureaucrats. Absent some sort of drastic situation, it's not happening.

What is GM thinking here? Is it just a technology-sharing deal -- like the ones Peugeot already has with BMW (OTC: BAMXY) and Ford? I don't think so: Such a deal wouldn't require an equity stake.

So what's this about?

What might really be going on here
Is it just an old-school boneheaded GM move, as a few wags have suggested? Almost certainly not: Akerson and his team don't make those kinds of mistakes. Akerson hasn't been perfect in his tenure as GM's CEO, but a lot of good, long-needed changes have been made at GM under his direction -- nearly all in crisp, disciplined fashion. Whatever is happening with Peugeot, there's a buttoned-down business case for it, and it's probably a solid one.

Clearly this is about Opel in some way, and about Akerson's full-steam effort to reshape the money-losing subsidiary. GM needs a sizeable European operation to add scale and expertise to its global product development and production efforts. It's possible that GM is using the threat of an expanded relationship with Peugeot as a bargaining chip in its ongoing negotiations with Opel's unions, or perhaps the German government, saying: Work with us to make Opel sustainably profitable or we'll throw it into bankruptcy and go play with Peugeot instead.

That would be hardball -- and an expensive move, if it requires following through and buying a stake in Peugeot. But if that's what's driving this, it's another sign that GM is really, really serious about fixing its European problems. From a shareholder's perspective, that's good news.

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