Peugeot Reviewing General Motors Alliance
General Motors Co. (GM) and PSA Peugeot Citroen are having second thoughts about one of three joint car projects, Peugeot said Wednesday, warning that the two companies' alliance may not produce the $2 billion in annual cost savings they had expected.
Europe's No. 2 automotive group, after Germany'sVolkswagen AG (VLKAY, VOW.XE) said the plan to jointly develop a new platform for subcompact vehicles with GM "is under review, as well as the relevant terms of the development agreement."
Both companies are struggling to reduce costs in Europe. But with no sign of any significant improvement in the market seen over the medium term, they are battling to offset fixed costs at their underutilized factories. Peugeot and GM's Germany-based Opel unit are eliminating thousands of jobs and reducing production capacity, each closing a factory next year.
The review raises questions over the future of the two companies' cost-saving alliance, particularly as Peugeot said it is continuing to investigate how it might deepen a long-standing partnership with China's Dongfeng Motor Corp. (DNFGY, 0489.HK). The two companies are studying a possible plan to export cars from China, where they have a vehicle- making joint venture, to other Asian countries.
Dongfeng and Peugeot have also been in talks about a potential deal that could see the Chinese auto maker take a stake of under 30% of the French company as part of a capital increase, though those talks have moved slowly, according to a person familiar with the matter. Peugeot Chief Financial Officer Jean-Baptiste de Chatillon declined to comment on whether his company has approached Dongfeng about such a deal, reiterating that Peugeot is looking at potential industrial projects with different partners.
Peugeot's talks with Dongfeng have complicated the relationship with GM, according to people familiar with the situation. In particular, they have riled SAIC Motor Corp. (600104.HK), the Chinese auto maker that is GM's partner in the country, they said. Shelving the subcompact-car project could facilitate Dongfeng's investment in Peugeot, with GM content to focus on a narrower alliance with Peugeot for the European market, these people added.
Peugeot and GM have been counting on the alliance to save $1 billion each annually through 2015, largely through more efficient procurement but also by jointly developing a new platform for subcompact vehicles. In automobile parlance, a platform is the underpinnings of a vehicle that can be used across several models and shared with other companies.
Peugeot is battling to cover fixed costs at its factories, which fell further below their full operating potential in the third quarter. Its factories in France and the rest of Europe operated at 64% and 73% of capacity in the three months to Sept. 30, compared with 77% and 79% a year earlier, respectively, the company said. Car plants usually have to run at around 80% of capacity to break even.
"We haven't found the right equation that would ensure the project will be economically viable," a Peugeot spokeswoman said.
One person familiar with the matter said the project was shelved in early summer at the urging of GM.
"New initiatives are under consideration by the two partners," Mr. de Chatillon said on a conference call.
GM confirmed in a statement that the partners are continuing to work together on some projects, including joint procurement and two new cars. Company officials weren't immediately available to comment further.
"Peugeot has signaled that they want to review the cooperation. That doesn't have to be the beginning of the end, but it's a difficult situation," said Juergen Pieper, an analyst at Bankhaus Metzler. In flagging to GM that it is talking to other partners, "Opel has to see that as a step backwards," Mr. Pieper said.
Jens Schattner, an automotive analyst at Macquarie Securities, said neither Peugeot nor GM in Europe can spare a lot of money to spend on a costly new platform project. "Either they don't have the money to invest in this project, or it doesn't make sense to put B segment cars like the Peugeot 208 or the Opel Corsa on the same platform."
Peugeot said it sees no potential conflict with GM in having deeper ties with Dongfeng, even though GM's and Peugeot's Chinese joint ventures compete with each other in China. Peugeot's partnership with Dongfeng is focused on Asia, while the GM alliance is centered on Europe, noted Mr. de Chatillon.
Mr. de Chatillon said Peugeot is confident it has turned the corner in terms of its performance, despite on Wednesday reporting a 3.7% drop in third-quarter consolidated revenue to 12.1 billion euros ($16.68 billion), with automotive revenue falling 5.8%.
Job cuts, the closure of one assembly plant in France and a renegotiated labor agreement are reducing costs faster than expected. "In the first nine months we have seen the first tangible green shoots of recovery," he said. Peugeot incurred a EUR5 billion loss in 2012 and has been losing chunks of market share in Europe, where it sells most of its cars. Mr. de Chatillon said the company will likely win back some market share in the last quarter of this year after Peugeot launches new vehicles such its revamped 308 sedan.
The company reaffirmed its full-year financial guidance, saying it still expects to reduce its operational cash-flow consumption by at least half this year compared with 2012, and expects a "very significant" further reduction in 2014.
Mr. de Chatillon cautioned, however, that the unfavorable exchange-rate shifts since the summer due to the euro's strength "will have a clearly negative impact on our profit and loss account" after slicing 5% off the company's revenue in the third quarter.
Peugeot sold 610,400 vehicles world-wide in the third quarter, down 2.4% from a year before, and down 1.5% over the first nine months of the year.
--Ilka Kopplin and Sam Schechner contributed to this article.
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