The latest news from Europe: General Motors (NYSE:GM) has halted talks about a deeper relationship with French automaker PSA Peugeot Citroen (OTC:PUGO.Y), according to a Reuters report that ran late Tuesday.
GM and Peugeot announced a partnership earlier this year, focused on parts-sharing and the joint development of a few models. More recently, reports had suggested that the two were pursuing a more active tie-up, perhaps a joint venture in which Peugeot's car-making operations would be merged with GM's troubled German subsidiary, Opel.
Apparently, such an arrangement is off the table for now, and that's not good news for GM.
A smart move for GM that didn't work out
I first wrote about the potential mash-up of Opel and Peugeot last month. At the time, I thought it would be an elegant solution to Opel's chronic losses, at least from a GM corporate perspective: Dumping Opel into a joint venture would take its losses off of GM's balance sheets.
Even if it cost GM a ton of money to get the venture funded, I thought, it would make a big and immediate improvement to GM's bottom line, one that was bound to do good things for the stock price.
That made it a smart-sounding solution. Opel's problems have been a drag on GM's earnings for years, and no (other) quick fix is in sight. GM has lost over $16 billion in Europe since 1999 – and another $478 million last quarter – as overhaul after overhaul has failed to fix the deeper problems with Opel.
But now we hear that those talks are off after hitting a snag. According to the Reuters report, the snag has to do with the terms of a bailout that Peugeot recently received in which the French government guaranteed about $9 billion of Peugeot's bonds. Specifically, it's an agreement by Peugeot not to cut jobs in France.
Any merger of Peugeot and Opel that made sense would have to involve job cuts. Both companies have more production capacity than they can profitably use in today's recession-ravaged European new-car market. But European politics being what they are, any cuts would have to be equally dispersed: some from the French side, some from the German side.
But that won't happen now. Simply put, if the French can't make cuts, the Germans won't play. And that means that the most elegant possible solution to GM's European woes is off the table for the time being.
Where does GM go from here in Europe?
Officially, GM says that it's on track to breaking even in Europe by mid-decade. Speaking to analysts and reporters on Halloween (no irony there), GM Vice Chairman Steve Girsky said that the incremental actions GM has been taking are starting to add up to a big improvement.
Most of Opel's top executives have been replaced in the last year, with the jobs going to a mix of strong internal candidates and well-regarded outside hires. Opel's supervisory board has been reworked, with seats going to several of GM's top global executives – a move aimed at bringing Opel, which has been quasi-independent for years (mostly to its detriment), further inside the GM sphere.
Opel's also getting a big product overhaul. Taking a cue from rival Ford (NYSE:F), which recently announced a comprehensive plan to fix its own Europe woes, GM has started adding products from its global portfolio to Opel's offerings, hoping to win new sales in segments it hasn't previously contested in the region, like small SUVs.
GM has also made several moves to cut Opel's costs, while stopping short – so far – of announcing a series of plant closings like the ones planned at Ford. That's not likely to change: Opel's union leaders reiterated this week that drastic cuts like Ford's three factory closings aren't in the cards for Opel.
But will it be enough?
Ford's plan for Europe was a drastic one that's proving unpopular with workers in affected regions, but it won immediate confidence from investors. It's simple, thorough, decisive, and well-thought-out, and its chances of success seem high.
GM's approach is a little muddier. While Girsky made a point of saying that GM was already seeing "green shoots" from its efforts to date, it's easy to be skeptical of the idea that the hard work has already been done for Opel.
But with the potential for an elegant one-fell-swoop solution to Opel now off the table, investors are left hoping that Girsky was right – that Opel is finally headed toward success. But, if I'm sure of anything regarding Opel, then it's that the company's drama is far from over. Stay tuned.