Industry and financial press discussion about the recent announcement of an alliance between PSA & GM has understandably been prolific.
investment-auto-motives' Previous Perspective -
Adding to the debate about conjectural value creation versus value destruction, on 28.02.2012 investment-auto-motives provided what it considers the end-game perspective between American and French interests. Specifically the hypothesis of GM seeking to 'return' the Chevrolet brand to France – the originator's own ancestaral homeland - so as to conquer those mainstream markets which the likes of Peugeot, Citroen & Renault (& FIAT) have ruled over decades. This done by purchasing and re-envigorating divested plants across France (as well as Italy and Spain) which provide for archetypical GM volume scale-led and US$ credit enabled empire building.
GM's 'Horizontal EU Expansion' Ambition -
Driven by the central issue of European production over-capacity and structural reform, that web-log of a few weeks ago sought to highlight how the very process of broad continental sector reform hastened by rapid need for corporate right-sizing amongst the national champion European VMs would provide the perfect storm for GM to re-invent itself inside Europe given its own much reduced 'balance sheet baggage' and the support of Federal Reserve enabled low cost liquidity exercises such as the various $2.3tr QE actions, $400bn Operation Twist and the recent initiation of 'Sterilised QE'.
That overview then gave the conjectural far-horizon view, and though aspects of the short-term were described, so providing the cautionary view on the alliance, it would serve to perhaps better explain why the synergies cited by PSA and GM are in reality far less tangible – especially so regards the key element of shared engineering platforms - than the corporate IR publicity machines headline grabbing rhetoric.
Exploiting The Trans-Atlantic Bourse -
The revelation of the cross-company dialogue which has been ongoing in earnest since early January is now well recognised by the investment community as seeking to create a 'good news' story with positive immediate and long-term effects on both company's respective share prices. A Franco-American hand-holding story especially pertinent in buoying stock prices given the corollary between the US and Europe by way of the NYSE-Euronext exchange - a conceivable case of pragmatic 'reverse pseudo financial engineering' – and the fact that the US is gaining economic traction whilst Europe is seemingly over the worst of its economic melt-down fears. Thus on the surface, a highly logical alliance given both company's European production woes, orchestrated as timed to macro-economic perfection; thus designed to impress Wall St, Paris & the City of London.
Managing Investor's Perceptions -
In reaction Volkwagen CEO Martin Winterkorn, who last week proclaimed that the alliance between GM & PSA essentially ratifies VW's synergy seeking in its own (brand differentiated) platform and systems sharing ethos.
However, whilst Winterkorn sought to proclaim VW's position as industry leader in this arena, there exists a very real difference between VW Group - as a unified entity that operates 100% holds over its divisional brands - and the new PSA-GM alliance. Whereas VW operates with singular control (as ingrained by Ferdinand Piech and seen with Porsche's eventual total absorption), the real-world dualistic demands of the PSA-GM alliance partners, driven by individual parent companies own strategic agendas, invariably means that it will not be able to act a decisively nor as deeply as the VW foe.
[NB Respective share-price and MarketCap valuation differences between VW and GM and PSA, highlights that point. As of 1.00pm GMT on 12.03.2012 : VW was E127.65 per ordinary share with MktCap of E59.39bn, GM was $25.62 and a MktCap of $40.11bn, PSA was E11.86 and MktCap of E2.69bn].
But Where is the Real GM-PSA Story? -
This is not to say that there is no synergistic operational overlap that can be leveraged for sizable 'behind the scenes' cost-down measures. Simply that investment-auto-motives believes that the ultimate outcome from the alliance may not provide the level of cost-saving that has been reported.- ie the overtly enormous $125bn purchasing pool first mentioned – given the lack of true synergies that can be captured which itself primarily results from the necessary need to defend core operations and primary product lines from intervention and thus interruption.
There undoubtedly are overlaps, the essential co-operative product stream to be highlighted where specific products can be targeted, but they in themselves will not provide the kind of 'supercharged' financial savings and income that the alliance message sought to propagate.
[NB. Beyond the alliance structure, GM and PSA are of course individual entities, and so the creation of the alliance hardly means that each is now “uninvestable”.
Instead, much depends upon both company's individual performance at cost and income levels. So, present and future proven progress in: regional markets (with +ve & -ve TIV trends), the divestment of redundant assets (as seen at both GM in its Chapter 11 procedure & recently at PSA), the strength of its technical strategy path which must marry regulatory demand with consumer needs and desires, the overall cost containment achievements spanning commodities and parts procurement, R&D , vehicle development & production out-sourcing , the 'externalities' impact of ongoing part-government ownership at GM and the dilution-effect of equity raising at PSA, etc etc etc. As ever, the grouped fundamentals, which must be grasped from the investor perspective to provide the ability to ascertain the 'sweet-spot' timing as to take either institutional, SWF, PE or private retail interests in these companies].
However, the central theme of this web-log is to convey the belief by investment-auto-motives that there is less innate 'investment power' within the new PSA-GM alliance than has been communicated by what are now mutually corroborative corporate PR machines.
[NB Exclamation by the popular car press states that critics say GME-PSA house has “ruinous dry rot, yet the pair are responding by building an extension”. This unfortunately over-emotionalises the necessary 'situational analysis' required].
Even so, it is only fair that the primary 'headlines' of the announcement be re-stated.
The JV Headlines -
- “Joint savings of $2 billion a year within five years”,
- “$125 billion purchasing power to be pooled”
- “Combined total of 12.5 million units”*
[NB * PSA annual build of 3.5m units / GM of 9.0m units].
Tim Zimmerman, Peugeot UK's Managing Director mentioned that “The terms of the alliance should be clear by the end of the year, and at the start we’ll make savings on commodities like steel. As the alliance progresses further, there’ll be savings on components, modules and platforms.” PSA's Director-General Frederic St Geours, a lead architect of the collaboration Alliance, has stated that alliance work started in earnest on 1st March, co-ordination via an 8-strong steering committee made up of four directors from both parties.
A main function of that committee will be to oversee what appears to be 4 matrix-type project teams which consist of multi-disciplinary departmental experts (ranging from procurement to engineering to production) which target a notionally identified 4 platform types:
1. B-segment platform(s)
2. D-segments platform(s)
3. Crossovers platform(s)
4. MPV platform(s).
The following very basically dissects the 'parts in the sum' to evaluate whether the 'sum of the parts' do indeed add up to 'more than the whole' as both alliance partners appear believe, and hope to convince investors.
Product Analysis -
The highlighting of 4 apparently very different vehicle types looks impressive, with seeming potential to accrue mass savings over what seem 4 distinct arenas; however, the reality is that since the emergence of 'module system sets' (pioneered by Ford & Toyota, Daimler, BMW and indeed PSA) the base 'platform' engineering of visually separate product lines is no longer wholly separate and distinct. Advanced IT systems and software have were developed to enable the creation of 'systems sets' which provide for far greater 'engineering exchange' in body structure, powertrain, chassis, electrical/electronic, trim & hardware across not only model variants, but across different models within a specific segment and importantly in recent years even across different segments.
[NB. Such engineering corroberation between A & B, B & C and C & D segment vehicles is much of the reason that basic vehicle dimensions have grown over the last few decades].
This basic explanation then demonstrates that increasingly MPV and Cross-Over engineering systems have merged, indeed Chevrolet's use of the separate terms to direct prospective customers viewing its European website toward the same product offerings highlight the trend of technical merge between these two once distinct classes. Moreover, the fact is that whilst there are smaller siblings of the same genre, the D-segment actually encompasses the majority of larger, space-functional MPVs and Cross-Overs, so a D-segment car (in its own sedan, coupe, wagon, body variants) will share much of the under-pinnings of a similarly foot-print sized MPV and Cross-Over.
Thus items 2, 3 & 4 listed by the alliance are in fact to a great extent the very same engineering platform base. But, any idea of a deeply ingrained platform share agreement which includes mutual R&D, engineering development and 'productionisation' appears hollow. Instead of heavy R&D and operational spend on such a platform, investment-auto-motives believes that PSA will simply in the medium term adopt and adapt (ie brand engineer) its partner's GM vehicles across the D-segment, thus effectually replacing the agreement with Mitsubishi and relieving itself of costly large car responsibilities.
[NB Since the demise of the Peugeot 505, history has proven it economically untenable for PSA to create its own platform in this field, though its does (at a reducing rate of loss) so as to appear a full-line producer (thanks to increased module share 'into' the 508 and to French government and French fleet sales].
However, whilst there may seem potential for far-horizon collaboration for a D-segment (mid-size in US) sedan and its variants, the fact that the majority of sales for this sized car are in North America and China – both GM strongholds – thus give GM the scale advantage, so the engineering eminance and so disadvantages PSA. Importantly, GM must necessarily maintain near total control over this platform to ensure its core American model Malibu can compete directly against the Ford Fusion (& Taurus), Honda Accord, Toyota Camry and now Hyundai Sonata & Kia Optima on both production cost vehicle attributes. Thus, the ability for PSA to notionally co-develop and so influence its base engineering for Peugeot, Citroen and DS attributes looks highly unlikely, more so since the 8th generation Malibu will be introduced in 2013, making it virtually impossible for PSA to 'mould' the car to its requirements, thus would either be forced to simply 'badge engineer' or to undertake an ill-advised 'SAAB-esque' approach.
[NB The SAAB experience under GM being that it had to add the high cost of a 'DNA' re-design programme to the original 'percentagised' development cost of the base car programme. Both these CapEx and R&D expenditures then required to be ammortised over dwindling sales volumes].
As for the mutual development of a B-segment platform, as investment-auto-motives stated in its previous essay, this segment has now become key to all volume manufacturers. The the case given that this segment has in recent decades it has held the largest portion of global industry TIV, with that trend set to grow because of continued economic expansion in 'BRIC' & 'Next 11' EM markets have a proclivity for compact cars, and the fact that the 'developed' 'triad markets (Europe, N.America and Japan) continue to 'down-size' in car size due to reduced spending power and an ageing population which seeks smaller car running costs and manouvrability.
As a result, it seems incomprehensible that any volume manufacturers - especially GM and PSA given their growth ambitions – would seek to share their individual control over such a critical issues as product, strategic and income destinies.
It was stated outright by both alliance partners that exploration of the A-segment was not included in the alliance, this it is assumed because of the in-house capability at GM which stems from its Korean operations, and the fact that PSA will very probably seek to retain commercial JV links with Toyota for future generations of Aygo/107/C1.
And it was equally stated that the C-segment would not be mutually explored because of PSA's recent introduction of the new 408 which will have approximately an 8 year lifespan, thus not to be replaced until 2018-19.
Thus all the conventional car arenas offer little collaborative space.
A Focus on Commercial Vehicles -
The only alternative arena is commercial vehicles, ie Vans and their myriad of model and variant types. Here, investment-auto-motives believes, the present JV experience of Chrysler-Daimler (ie not Daimler-Chrysler alliance of old) has had an important affect on GM & PSA executives.
Chrysler has ostensibly 'off-shored' a major part of its US commercial vehicle division by 're-badging' (and critically 'de-costing') Mercedes-Benz van products as its own under the Dodge brand.
It is suspected by investment-auto-motives that GM will undertake a similar strategy within Europe, done so by switching partners from Renault (from which its uses Master and Trafic models) to PSA, so as to fill capacity at its Luton van production centre in Luton, UK. Given that PSA already relies upon its FIAT alliance to produce its 'Eurovans' in both 'Sevel Sud' (Italy) and 'Sevel Nord' (France), the situation in turn generates conjecture that GM will join this duo as a third partner.
Steeling The Far Reach Competitive March -
Given the higher portion of metal content of box-vans – on a parts count and systems-value basis - this PSA-FIAT-GM joint venture could then better impose its will for raw materials discounting from global steel suppliers; an arena which Philippe Varin of course knows intimately.
Conclusion & Hypothesis -
To summarise, from the all important product perspective there appears little immediate and indeed medium-term scope for major cost-cutting exercises beyond that offered by the creation of a new commercial vehicles triumvirate group.
However, that group and associated conjoined commercial enterprise may seek to lay the foundations for broader materials procurement leverage on behalf of the passenger cars divisions within PSA and GM.
This then suggests the possibility that the PSA-FIAT-GM commercial vehicles group latterly spin-off a raw materials buying entity – essentially an intermediate broker - which could perhaps better serve the industrial bargaining needs of PSA & GM, and indeed become a co-ordinator for a much enlarged European Chevrolet (as described) aswell as other European based indigenous producers (eg Renault, VW, BMW, Daimler) aswell as present Asian 'transplant' producers (eg Hyundai-Kia) and possibly Chinese manufacturers (eg Geely, SAIC, BYD, Great Wall).
Given the lack of deep product and product programme rational behind the GM-PSA alliance, there must exist other compelling reasoning.
So the possibility may well exist that whilst GM expands horizontally further into Europe via PSA's production base, PSA itself could as well as climbing the value-ladder with the 'transport solution' ideology that is 'Mu', also seek to descend the value-ladder into the world of low-value metals, but as a broker not direct supplier, then possibly broadening to brokering higher value metals and materials which are becoming ever more critical to vehicle structures to achieve low CO2 targets by 2020 and 2050.
Thus, the rational of the GM-PSA alliance could then be far deeper than anyone imagined, with far greater consequences for structural reform of European car-making.
The rightly self-congratulatory Volkswagen (sat on its net liquidity cash cushion of E17bn) - like those at BMW & Daimler - might wish to consider more deeply the far-horizon consequences this conjectural hypothesis holds.
But for VM competitors and the myriad of investor types alike, the synergies of the GM-PSA alliance itself offers little immediate excitement. Instead, it seems a necessary case of reading between the lines to understand the true logic, and here the hypothetical influence appears set on the 'invisible' far horizon. That of necessary corporate structural change 'horizontally' and 'vertically' that can both serve and gain reward from the sector's own evolution as determined by a changed EU market demand dynamics and the broader competitive environment.
Showing posts with label GM PSA Alliance. Show all posts
Showing posts with label GM PSA Alliance. Show all posts
Tuesday, 13 March 2012
Tuesday, 28 February 2012
Micro Level Trends – PSA & GM Collaboration – What Substance Behind the Rhetoric?
Last week saw reports that cross-party discussions amongst GM and PSA auto-executives at the 2012 Detroit Show were exploring the possibility of some sort of collaboration in Europe.
[NB, this was publicly 'ratified' by announcements on 29.02.12. Please view the attached Post Script at end of this item for reaction comment. investment-auto-motives stands by the argument for skepticism outlined below].
Investor's Reaction -
One autos analyst at a major investment bank reflects the central 'pros versus cons' dilemma as viewed by the investor mindset...
“Synergies between GM and PSA could thus ultimately run into billions - we estimate from 3 billion to 4 billion euros from joint purchasing alone – but it would take many years to deliver and, given the political sensitivity, would not come without significant execution risk either."
Background -
All auto-makers have obviously suffered across the EU region since the credit driven 2007 high of near 15m unit TIV in 2007 (only previously beaten in 1999), heavy demand contraction only temporarily buoyed in 2009 by massive levels of government intervention. Those monies directed to both sides of the consumption and enterprise equation so as to prop-up flailing economies; perhaps none more so than the exercises seen in the USA and France.
The historic plethora of 'national champion' VMs has led to on-going production over-capacity within the region, this the result of what could be described as a competitive tussle between largely 'free-marketeering' German producers (exempting Opel-Vauxhall) which sell on quality grounds, versus the oft far greater government assisted – and so endemically socially obliged – national producers of France and Italy which arguably sell on price and nationalism.
[NB it is noted that the this historic norm is being confronted by PSA & FIAT – and though 2008-10 conditions were an aboration – both recognised that a growing 'competitive disconnect' did emerge some years ago given the rapid pace of competitive landscape change (esp regards Japanese & Korean EU transplants) and their historic reliance upon state aid and economic up-swings].
Yet the past and present has, and still, sees decent margins for those able to operate a technically progressive and strategically adept automaker which has inherent 'brand equity'. That then is the goal for all participants, old and new.
The essential problem is of course that all seek that successful position, but very few truly possess it, and so whether ostensibly state-backed, parent-backed or presently successful in its own right. And thus complex, intrinsically nation-based, interests dictates that the status-quo continues even if through long periods actually economically value destructive. This problem sought to be overcome through alliance ventures with others, as seen with Renault & Nissan and FIAT and Chrysler.
But the fact of over-capacity and dwindled margins remains, the trade magazine Automotive News recently quoting statistics from PWC which indicate that by 2015 Europe's expected 112 plants will have an installed capacity for 22.84m units (vs 2009's 113 plants generating 21.1 million, and 2007's 117 plants with 22.4 m capacity).
Hence the constant expectation of alliances and joint ventures.
PSA & GME : Respective Positioning -
This story appears to be playing-out between PSA and GM Europe (GME), but is all as obvious as appears?
As investment bank analysts have been quoted, there are apparent product and manufacturing synergies, but also important issues relating to the capture or loss of strategic control.
As is the norm in the sector, both companies have track-records with alliances – in its broadest definition. GM has used them to both downsize its operations, with Toyota via NUMMI in joint venture US manufacturing, aswell as growing regional presence, as with GM-Daewoo as was (resulting in GM-DAT technical centre in Korea) and across China with SAIC, FAW and SAIC-Wuling; thus giving pan-Asia coverage and distribution leverage..
In contrast to GM's global dominance, the much reduced position of PSA in the 1970s – especially relative to Renault - meant that it has typically used JVs to critically bolster its product line – with the necessary exception of China's Dongfeng-PSA and Changan-PSA. Less well known is the relationship with Renault which operates 'Francaise de Machanique' and a share in automatic gearboxes. Conversely, most obvious alliance has been the 'Sevel' agreement in its LCV division including a derivative MPV with FIAT. This a JV precursor to projects with: Toyota for its 107/C1 A-segment car and Mitsubishi with its SAV (4WD) 4007/8, the very limited run 'iOn' city e-car and exploration with BMW into e-cars. However, investment-auto-motives suspects that far deeper collaboration has taken place regards compact cars, given the previous 'Prince' engine JV and the loss of 'contract capacity' for that engine which was destined to go to a now seemingly defunct SAAB, plus the innate ongoing margins pressure within the segment.
Thus, precedence demonstrates that GM exploited JVs to assist the 'right-sizing' of its older manufacturing base and new market strategy, whilst PSA uses alliances to support a full or expansionary vehicle range.
Thus on this basis of both companies' in market and manufacturing EU presence, there seems little obvious connect, apart from the obvious of co-ordinating where 'weaknesses' mutually prevail.
GM Europe in the form of Opel-Vauxhall has been essentially a perpetually loss-making division for decades, as with its US parent, its previous market dominance gradually eroded by others, itself able to maintain itself with US style sales discounting and incentives, a seeming necessary tactic even though its products have improved and essentially benchmarked as the norm by others, its 'yesteryear' and 'mainstream' brand personalities have prove a hurdle which both meant effective retraction from truly competitive executive style cars some years ago and little perceived personality amongst A, B, C and D segment vehicles even though more venturesome innovation efforts have been made, across Zafira, Meriva and Corsa. The corporate reaction to the 'over-stretch' Opel and Vauxhall suffered across all segments was the introduction of the lower positioned Chevrolet brand, seen thus far in Europe across the near full spectrum of vehicle types from the A segment (Spark) to the nuanced SAV and MPV segments, the same products represented in both, and far rarer halo cars such as Corvette and Camaro adding 'Chevy glamour'.
PSA's Peugeot and Citroen brands, once ailing marques, have in contrast managed to periodically refresh themselves through styling and target marketing, and have been able to demonstrate themselves as increasingly separate identities since their 80% + component and systems value share in the mid 1990s, that success allowing for wider design and engineering separation – though common modules remain key. However, there still remains a cause for concern that whilst the 'sportier'. 'younger' Peugeot is seen to sell itself with limited incentivisation, the more supposedly 'techno' & 'family' oriented Citroen is aided by discounting, the seeming necessary norm given the financial might of GM and FIAT to do so and the pricing pressure of rapidly rising Hyundai, Kia & Dacia. The move to create the 'pseudo-premium' DS brand has been its method to utilise systems share between both Peugeot and Citroen whilst also improving unit margins, growing a new facet to its group personality and so seeking to sustain its corporate autonomy.
This then provides a very generalised background.
Respective EU Production -
Unsurprisingly given the predominance of GM's established worldwide manufacturing footprint versus PSA's far later Euro+, MENA, S.America and China orientated sales push – largely from a Eurocentric hub - the two companies differ considerably.
A snap-shot glimpse provided by the Financial Times shows that in 2010 within Europe, GM built 1.464m vehicles (cars and vans) whilst PSA built 2.67m (selling 2.2m in 2010 and 2.0m in 2011). Thus the former had only – in very basic production terms – 54% of the production exposure of PSA in “broad Europe”. This important because of the traditionally high cost of European labour, especially so in respective 'homelands' of Germany and France.
However, note the major statistical difference within.
In Germany GME produces 530,000 units (rising to 730,000 including Poland). Whilst in France alone PSA built 1,465,000m units, effectively double that of GME. Exactly how that major difference is to assessed depends upon various productivity measurements, most notably respective labour force sizes, man-hours per (ex-factory) vehicle, the amortised S&GA overhead and CapEx depreciation rates.
In 2008 PSA had a headcount of 130,000, of which it is estimated that 70% (91,000) were located in France. Thus giving a general productivity rate in 2010 of 11.23 cars per person. Capacity utilisation for PSA across Europe was in 2011 approximately 80% (the nominal industry standard break-even figure), expected at 75% in 2012 given the demand fall in the domestic market.
GME, whilst positively with a smaller domestic manufacturing base, is expected to see a 2012 capacity utilisation rate of 65%. Yet whilst seemingly worse than PSA it should be remembered that it's out put is half of that of PSA at 1.1m units in 2010, and German manufacturing output is 530,000 units, which from a 2011 headcount of approximately 33,000; gives a productivity rate of 16 cars per person; better than PSA but highly inefficient relative to global benchmarks such as Korean manufacturers.
Euro-Market 'Quicksand' -
Such problematic top-line production figures, now below the standard 80% utilisation rate then are unable to absorb costs and so create a cash-burn at the operating level.
Whilst PSA partly restructured as a necessary aspect of accepting the E2bn soft loan from the French government during the financial crisis, it appears that it has been GM Europe which appears to be ahead in the industrial reformation stakes. This made all the more easier given that GME operates as a stand-alone manufacturing as sales division, whilst PSA includes its 'in house' Tier 1 suppliers of Faurecia and GEFCO. The critical aspect here being that GME may essentially more easily massage its transfer-pricing of supplied engines and gearboxes from its facilities in Austria and Hungary; whereas Faurecia and GEFCO may have sought to defend their income margins from parental pressure, as looks to have been the case when viewing the divisional income breakdown in the annual report.
However, progress is relative, and whilst GME looks good compared to PSA, its unfortunate position of having to constantly “do more with less”; whilst other specific German, Japanese and Asian rivals are winning market share, expanding their European and global volumes and so able to better finance product and corporate ambitions.
To try and remain competitive GME's has stated ambitious R&D and product actions relative to its income. But that means that strategic planning effectively becomes ever harder and contains more inherent risk; whether that be the importation of lower quality vehicles which provide unit margin but degrade brand perception, or the allocation of R&D and innovation funds in specific low-impact or high-impact technology solutions.
The Earnings Perspective -
In Q4 2011 GM Europe reported an EBIT-adjusted loss of $0.6bn, which included $0.2 billion of restructuring costs - thus matching last year’s results. This Q4 'hit' was rolled into an FY2011 EBIT-adjusted loss of $0.7 billion in 2011, showing improvement over the negative $2.0bn loss in FY2010.
[NB. This sits within GM's total worldwide Q4 2011 revenue of $38.0bn (+3% YoY), a net income of $0.5bn (or $0.28 per diluted share), which when EBIT-adjusted reaches $1.1bn. And an FY2011 net income of $7.6bn, which when EBIT-adjusted reaches $8.3 billion; up $1.3bn versus 2010].
Tellingly PSA did not provide a quarterly update for 2011, simply giving H1 & H2 accounts, which may be theoretically de-constructed by to provide a basic appreciation of PSA's European performance.
For the full year overall EU market sales share slipped by 0.9% to 13.3%, the A & B segment down by -1.1%, and the very positive 7.3% per car contribution seen in H1 reduced to -1.7% in H2. The Group's overall Operating Income / EBIT was E898m, down from E1,736m in 2010, this infact buoyed by positive contributions from Faurecia, GEFCO & Banque PSA Finance against the Vehicle Division's E-439m loss (vis a vis E563m the previous year).
Importantly PSA saw its balance sheet alter significantly as its Net Debt position nearly tripled and its Gearing level rose from 9% at YE2010 to 23% at YE2011, which indicates that deep structural reforms of the Group could well be on the horizon
Conclusion -
On balance, investment-auto-motives believes that PSA and GM will not collaborate in any meaningful manner on the core of small & compact cars, ie the B & C segments between 1.0L (inc the 900cc 'triple') to 1.6L; the arena of so much auto-industry, press and investor speculation.
Whilst both companies similarly recognise the need to constantly improve product quality in what are the European core segments - and increasingly 'B' as the 'global segment – and so collaboration appears a natural presumption, the fact remains that both GM and PSA will want to control their own destinies relative to such strategically important market sectors; the latter if necessary leaning upon its technically enabled BMW German links.
The only reason to contravene this stance, were if PSA sought to introduce a new entry level brand – in the Dacia manner – which would necessarily demanded a low-cost / reduced quality alternative approach, which itself could utilise either its own last generation platform or that of a (GMDAT) Korean product as its base. However, given the historical independent stance of the controlling Peugeot family and the similar independent PSA corporate mindset which must build “PSA DNA” into its cars, this seems unlikely.
So once again investment-auto-motives suspects that Thierry Peugeot and PhilipVarin will maintain a continuation of the Toyota relationship in this field, especially as a less problematic solution to replacement of the Aygo based 107, But more importantly, because of Toyota's own 21st century corporate centrality and R&D exploration of city-cars. Thus new agreements could be drawn-up which replay of the Aygo-107/C1 deal, whilst adding yet a possible plethora of Toyota sourced small and city-cars to the PSA stable, such as the 'sliding door' Toyota Porte which could replace the novel yet defunct 1007. This would offer a cost-effective and ready-made product stream for PSA as it seeks to 're-animate' in Peugeot and Citroen guises 'Japan-only' vehicles (inc kei-sized commercials) via low cost 're-skins', as it itself through initiatives such as 'Mu' seeks to become a branded transport provider, as opposed to a conventional 'production heavy', and arguably production trapped, conventional automaker.
Under this scenario, those PSA owned production plants that are potentially divested would be run or purchased by Toyota, able to leverage its strong Yen to positive FX effect, whilst continuing to de-industrialise its over-costly Japanese operations.
However, that does not discount GM's possible importance. Given the potential size of the ongoing asset disposal programme at PSA, GM could be utilised not as an operational partner, but as a potential facilities purchaser.
GM Europe imports small Chevrolet branded cars from Korea and USA, a situation which to date has been favourable because of FX tailwinds, but the much strengthened Won and recent re-strengthening of the US Dollar, means that a continuation of such a ploy only means that ant Chevrolet growth inside the EU is much undermined by the FX differential between US, Korea and Europe, this much exacerbated by the ongoing long-term devaluation of the Euro. Thus the use of discounted priced factory facilities, assisted by much reduced overheads and operating costs enabled by massively altered new labour-force agreements would be attractive.
Thus GM's Chairman and CEO Dan Akerson may well desire an ever more cost-effective manufacturing base situated within Europe, but PSA's major shareholder Thierry Peugeot and its CEO Philip Varin will seek to use the deflation of the Euro as a central pillar in their own export expansion drive where feasible, as well as a solid raison d'etre behind increasing ties with BMW given their similar single currency positions.
But for the moment, investment-auto-motives believes that whilst basic exploratory talks may well have taken place behind the scenes in Detroit 2012 – and indeed may no doubt be being more deeply assessed both in the Renaissance Centre and across the Atlantic in the Grande Armee – the idea of platform sharing is a remote one.
Whilst there are packaging and stylistic similarities, PSA's chief engineers will probably see very little (if any) 'engineering envelope' remaining at a systems level from which to develop both a sporty Peugeot derivative or comfortable citroen vehicle from the GM Spark - given its basic engineering origins as an ostensibly low cost, low priced item aimed largely at EM regions.
Yet, both Akerson and Varin innately recognise that within a new era of long-trend diminished EU sales, the primary interest (behind the immediate talk of product and supplier synergies) is that of GM's own EU market growth interest for Chevrolet.
And that GM's own long-game is to capture a low CapEx route that may combine Chevrolet's in-market production and sales ambitions across Europe, whilst also integrating Opel-Vauxhall platform efficiencies so that they may benefit from improved and better directed R&D expenditures.
GM undoubtedly seeks to take 'Monsieur Chevrolet' successfully back to his (its) homeland. And hopes that the its corporate 'bow-tie' will find favour on the back of that once famous breed of cattle. Eventually to do as much for US-French commercial relations as 'de Nîmes' sourced 'Denim' cotton did long ago.
Depending upon the PESTEL views taken by Thierry Peugeot and Philippe Varin potential and the relative probability and impact of various tailwinds and headwinds – ranging form a beneficial deflationary Euro to possibly protectionist EM regions – PSA should have room for manouvre between its seeming courting rivals of GM and Toyota. But in the meantime PSA must be seen to be adding far deeper strategic thinking behind the 'headlines' of its 2012 Plan; and that includes meaningful strategic and financial 'value extraction' from GM and Toyota.
Post Script -
The viewpoints stated by investment-auto-motives obviously run counter to the GM & PSA announcements dated Wednesday 22nd February.
This highlights an apparent £2bn per year synergies to be obtained in small and compact cars.
Whilst synergies undoubtedly exist in mutual commodities/materials purchasing (esp steel via Varin's connections), and in certain 'near & far horizon' R&D, aswell as in potential for a shared E segment vehicle programme (608/Insignia), investment-auto-motives believes that ultimately an attempt to co-alesce mainstream small and compact programmes will ultimately prove technically frustrating, even with a repositioning of Opel, Vauxhall & VXR brands to mirror Citroen, Peugeot and DS.
Thus the 7% stake by GM is, it is believed, a move to allow internal insight into PSA so that it can be 'remotely supervised', as is so often the real case behind competitor investment stakes, aswell as provide immediate knowledge and influence in PSA asset disposal vis a vis GM purchase issues.
[NB, this was publicly 'ratified' by announcements on 29.02.12. Please view the attached Post Script at end of this item for reaction comment. investment-auto-motives stands by the argument for skepticism outlined below].
Investor's Reaction -
One autos analyst at a major investment bank reflects the central 'pros versus cons' dilemma as viewed by the investor mindset...
“Synergies between GM and PSA could thus ultimately run into billions - we estimate from 3 billion to 4 billion euros from joint purchasing alone – but it would take many years to deliver and, given the political sensitivity, would not come without significant execution risk either."
Background -
All auto-makers have obviously suffered across the EU region since the credit driven 2007 high of near 15m unit TIV in 2007 (only previously beaten in 1999), heavy demand contraction only temporarily buoyed in 2009 by massive levels of government intervention. Those monies directed to both sides of the consumption and enterprise equation so as to prop-up flailing economies; perhaps none more so than the exercises seen in the USA and France.
The historic plethora of 'national champion' VMs has led to on-going production over-capacity within the region, this the result of what could be described as a competitive tussle between largely 'free-marketeering' German producers (exempting Opel-Vauxhall) which sell on quality grounds, versus the oft far greater government assisted – and so endemically socially obliged – national producers of France and Italy which arguably sell on price and nationalism.
[NB it is noted that the this historic norm is being confronted by PSA & FIAT – and though 2008-10 conditions were an aboration – both recognised that a growing 'competitive disconnect' did emerge some years ago given the rapid pace of competitive landscape change (esp regards Japanese & Korean EU transplants) and their historic reliance upon state aid and economic up-swings].
Yet the past and present has, and still, sees decent margins for those able to operate a technically progressive and strategically adept automaker which has inherent 'brand equity'. That then is the goal for all participants, old and new.
The essential problem is of course that all seek that successful position, but very few truly possess it, and so whether ostensibly state-backed, parent-backed or presently successful in its own right. And thus complex, intrinsically nation-based, interests dictates that the status-quo continues even if through long periods actually economically value destructive. This problem sought to be overcome through alliance ventures with others, as seen with Renault & Nissan and FIAT and Chrysler.
But the fact of over-capacity and dwindled margins remains, the trade magazine Automotive News recently quoting statistics from PWC which indicate that by 2015 Europe's expected 112 plants will have an installed capacity for 22.84m units (vs 2009's 113 plants generating 21.1 million, and 2007's 117 plants with 22.4 m capacity).
Hence the constant expectation of alliances and joint ventures.
PSA & GME : Respective Positioning -
This story appears to be playing-out between PSA and GM Europe (GME), but is all as obvious as appears?
As investment bank analysts have been quoted, there are apparent product and manufacturing synergies, but also important issues relating to the capture or loss of strategic control.
As is the norm in the sector, both companies have track-records with alliances – in its broadest definition. GM has used them to both downsize its operations, with Toyota via NUMMI in joint venture US manufacturing, aswell as growing regional presence, as with GM-Daewoo as was (resulting in GM-DAT technical centre in Korea) and across China with SAIC, FAW and SAIC-Wuling; thus giving pan-Asia coverage and distribution leverage..
In contrast to GM's global dominance, the much reduced position of PSA in the 1970s – especially relative to Renault - meant that it has typically used JVs to critically bolster its product line – with the necessary exception of China's Dongfeng-PSA and Changan-PSA. Less well known is the relationship with Renault which operates 'Francaise de Machanique' and a share in automatic gearboxes. Conversely, most obvious alliance has been the 'Sevel' agreement in its LCV division including a derivative MPV with FIAT. This a JV precursor to projects with: Toyota for its 107/C1 A-segment car and Mitsubishi with its SAV (4WD) 4007/8, the very limited run 'iOn' city e-car and exploration with BMW into e-cars. However, investment-auto-motives suspects that far deeper collaboration has taken place regards compact cars, given the previous 'Prince' engine JV and the loss of 'contract capacity' for that engine which was destined to go to a now seemingly defunct SAAB, plus the innate ongoing margins pressure within the segment.
Thus, precedence demonstrates that GM exploited JVs to assist the 'right-sizing' of its older manufacturing base and new market strategy, whilst PSA uses alliances to support a full or expansionary vehicle range.
Thus on this basis of both companies' in market and manufacturing EU presence, there seems little obvious connect, apart from the obvious of co-ordinating where 'weaknesses' mutually prevail.
GM Europe in the form of Opel-Vauxhall has been essentially a perpetually loss-making division for decades, as with its US parent, its previous market dominance gradually eroded by others, itself able to maintain itself with US style sales discounting and incentives, a seeming necessary tactic even though its products have improved and essentially benchmarked as the norm by others, its 'yesteryear' and 'mainstream' brand personalities have prove a hurdle which both meant effective retraction from truly competitive executive style cars some years ago and little perceived personality amongst A, B, C and D segment vehicles even though more venturesome innovation efforts have been made, across Zafira, Meriva and Corsa. The corporate reaction to the 'over-stretch' Opel and Vauxhall suffered across all segments was the introduction of the lower positioned Chevrolet brand, seen thus far in Europe across the near full spectrum of vehicle types from the A segment (Spark) to the nuanced SAV and MPV segments, the same products represented in both, and far rarer halo cars such as Corvette and Camaro adding 'Chevy glamour'.
PSA's Peugeot and Citroen brands, once ailing marques, have in contrast managed to periodically refresh themselves through styling and target marketing, and have been able to demonstrate themselves as increasingly separate identities since their 80% + component and systems value share in the mid 1990s, that success allowing for wider design and engineering separation – though common modules remain key. However, there still remains a cause for concern that whilst the 'sportier'. 'younger' Peugeot is seen to sell itself with limited incentivisation, the more supposedly 'techno' & 'family' oriented Citroen is aided by discounting, the seeming necessary norm given the financial might of GM and FIAT to do so and the pricing pressure of rapidly rising Hyundai, Kia & Dacia. The move to create the 'pseudo-premium' DS brand has been its method to utilise systems share between both Peugeot and Citroen whilst also improving unit margins, growing a new facet to its group personality and so seeking to sustain its corporate autonomy.
This then provides a very generalised background.
Respective EU Production -
Unsurprisingly given the predominance of GM's established worldwide manufacturing footprint versus PSA's far later Euro+, MENA, S.America and China orientated sales push – largely from a Eurocentric hub - the two companies differ considerably.
A snap-shot glimpse provided by the Financial Times shows that in 2010 within Europe, GM built 1.464m vehicles (cars and vans) whilst PSA built 2.67m (selling 2.2m in 2010 and 2.0m in 2011). Thus the former had only – in very basic production terms – 54% of the production exposure of PSA in “broad Europe”. This important because of the traditionally high cost of European labour, especially so in respective 'homelands' of Germany and France.
However, note the major statistical difference within.
In Germany GME produces 530,000 units (rising to 730,000 including Poland). Whilst in France alone PSA built 1,465,000m units, effectively double that of GME. Exactly how that major difference is to assessed depends upon various productivity measurements, most notably respective labour force sizes, man-hours per (ex-factory) vehicle, the amortised S&GA overhead and CapEx depreciation rates.
In 2008 PSA had a headcount of 130,000, of which it is estimated that 70% (91,000) were located in France. Thus giving a general productivity rate in 2010 of 11.23 cars per person. Capacity utilisation for PSA across Europe was in 2011 approximately 80% (the nominal industry standard break-even figure), expected at 75% in 2012 given the demand fall in the domestic market.
GME, whilst positively with a smaller domestic manufacturing base, is expected to see a 2012 capacity utilisation rate of 65%. Yet whilst seemingly worse than PSA it should be remembered that it's out put is half of that of PSA at 1.1m units in 2010, and German manufacturing output is 530,000 units, which from a 2011 headcount of approximately 33,000; gives a productivity rate of 16 cars per person; better than PSA but highly inefficient relative to global benchmarks such as Korean manufacturers.
Euro-Market 'Quicksand' -
Such problematic top-line production figures, now below the standard 80% utilisation rate then are unable to absorb costs and so create a cash-burn at the operating level.
Whilst PSA partly restructured as a necessary aspect of accepting the E2bn soft loan from the French government during the financial crisis, it appears that it has been GM Europe which appears to be ahead in the industrial reformation stakes. This made all the more easier given that GME operates as a stand-alone manufacturing as sales division, whilst PSA includes its 'in house' Tier 1 suppliers of Faurecia and GEFCO. The critical aspect here being that GME may essentially more easily massage its transfer-pricing of supplied engines and gearboxes from its facilities in Austria and Hungary; whereas Faurecia and GEFCO may have sought to defend their income margins from parental pressure, as looks to have been the case when viewing the divisional income breakdown in the annual report.
However, progress is relative, and whilst GME looks good compared to PSA, its unfortunate position of having to constantly “do more with less”; whilst other specific German, Japanese and Asian rivals are winning market share, expanding their European and global volumes and so able to better finance product and corporate ambitions.
To try and remain competitive GME's has stated ambitious R&D and product actions relative to its income. But that means that strategic planning effectively becomes ever harder and contains more inherent risk; whether that be the importation of lower quality vehicles which provide unit margin but degrade brand perception, or the allocation of R&D and innovation funds in specific low-impact or high-impact technology solutions.
The Earnings Perspective -
In Q4 2011 GM Europe reported an EBIT-adjusted loss of $0.6bn, which included $0.2 billion of restructuring costs - thus matching last year’s results. This Q4 'hit' was rolled into an FY2011 EBIT-adjusted loss of $0.7 billion in 2011, showing improvement over the negative $2.0bn loss in FY2010.
[NB. This sits within GM's total worldwide Q4 2011 revenue of $38.0bn (+3% YoY), a net income of $0.5bn (or $0.28 per diluted share), which when EBIT-adjusted reaches $1.1bn. And an FY2011 net income of $7.6bn, which when EBIT-adjusted reaches $8.3 billion; up $1.3bn versus 2010].
Tellingly PSA did not provide a quarterly update for 2011, simply giving H1 & H2 accounts, which may be theoretically de-constructed by to provide a basic appreciation of PSA's European performance.
For the full year overall EU market sales share slipped by 0.9% to 13.3%, the A & B segment down by -1.1%, and the very positive 7.3% per car contribution seen in H1 reduced to -1.7% in H2. The Group's overall Operating Income / EBIT was E898m, down from E1,736m in 2010, this infact buoyed by positive contributions from Faurecia, GEFCO & Banque PSA Finance against the Vehicle Division's E-439m loss (vis a vis E563m the previous year).
Importantly PSA saw its balance sheet alter significantly as its Net Debt position nearly tripled and its Gearing level rose from 9% at YE2010 to 23% at YE2011, which indicates that deep structural reforms of the Group could well be on the horizon
Conclusion -
On balance, investment-auto-motives believes that PSA and GM will not collaborate in any meaningful manner on the core of small & compact cars, ie the B & C segments between 1.0L (inc the 900cc 'triple') to 1.6L; the arena of so much auto-industry, press and investor speculation.
Whilst both companies similarly recognise the need to constantly improve product quality in what are the European core segments - and increasingly 'B' as the 'global segment – and so collaboration appears a natural presumption, the fact remains that both GM and PSA will want to control their own destinies relative to such strategically important market sectors; the latter if necessary leaning upon its technically enabled BMW German links.
The only reason to contravene this stance, were if PSA sought to introduce a new entry level brand – in the Dacia manner – which would necessarily demanded a low-cost / reduced quality alternative approach, which itself could utilise either its own last generation platform or that of a (GMDAT) Korean product as its base. However, given the historical independent stance of the controlling Peugeot family and the similar independent PSA corporate mindset which must build “PSA DNA” into its cars, this seems unlikely.
So once again investment-auto-motives suspects that Thierry Peugeot and PhilipVarin will maintain a continuation of the Toyota relationship in this field, especially as a less problematic solution to replacement of the Aygo based 107, But more importantly, because of Toyota's own 21st century corporate centrality and R&D exploration of city-cars. Thus new agreements could be drawn-up which replay of the Aygo-107/C1 deal, whilst adding yet a possible plethora of Toyota sourced small and city-cars to the PSA stable, such as the 'sliding door' Toyota Porte which could replace the novel yet defunct 1007. This would offer a cost-effective and ready-made product stream for PSA as it seeks to 're-animate' in Peugeot and Citroen guises 'Japan-only' vehicles (inc kei-sized commercials) via low cost 're-skins', as it itself through initiatives such as 'Mu' seeks to become a branded transport provider, as opposed to a conventional 'production heavy', and arguably production trapped, conventional automaker.
Under this scenario, those PSA owned production plants that are potentially divested would be run or purchased by Toyota, able to leverage its strong Yen to positive FX effect, whilst continuing to de-industrialise its over-costly Japanese operations.
However, that does not discount GM's possible importance. Given the potential size of the ongoing asset disposal programme at PSA, GM could be utilised not as an operational partner, but as a potential facilities purchaser.
GM Europe imports small Chevrolet branded cars from Korea and USA, a situation which to date has been favourable because of FX tailwinds, but the much strengthened Won and recent re-strengthening of the US Dollar, means that a continuation of such a ploy only means that ant Chevrolet growth inside the EU is much undermined by the FX differential between US, Korea and Europe, this much exacerbated by the ongoing long-term devaluation of the Euro. Thus the use of discounted priced factory facilities, assisted by much reduced overheads and operating costs enabled by massively altered new labour-force agreements would be attractive.
Thus GM's Chairman and CEO Dan Akerson may well desire an ever more cost-effective manufacturing base situated within Europe, but PSA's major shareholder Thierry Peugeot and its CEO Philip Varin will seek to use the deflation of the Euro as a central pillar in their own export expansion drive where feasible, as well as a solid raison d'etre behind increasing ties with BMW given their similar single currency positions.
But for the moment, investment-auto-motives believes that whilst basic exploratory talks may well have taken place behind the scenes in Detroit 2012 – and indeed may no doubt be being more deeply assessed both in the Renaissance Centre and across the Atlantic in the Grande Armee – the idea of platform sharing is a remote one.
Whilst there are packaging and stylistic similarities, PSA's chief engineers will probably see very little (if any) 'engineering envelope' remaining at a systems level from which to develop both a sporty Peugeot derivative or comfortable citroen vehicle from the GM Spark - given its basic engineering origins as an ostensibly low cost, low priced item aimed largely at EM regions.
Yet, both Akerson and Varin innately recognise that within a new era of long-trend diminished EU sales, the primary interest (behind the immediate talk of product and supplier synergies) is that of GM's own EU market growth interest for Chevrolet.
And that GM's own long-game is to capture a low CapEx route that may combine Chevrolet's in-market production and sales ambitions across Europe, whilst also integrating Opel-Vauxhall platform efficiencies so that they may benefit from improved and better directed R&D expenditures.
GM undoubtedly seeks to take 'Monsieur Chevrolet' successfully back to his (its) homeland. And hopes that the its corporate 'bow-tie' will find favour on the back of that once famous breed of cattle. Eventually to do as much for US-French commercial relations as 'de Nîmes' sourced 'Denim' cotton did long ago.
Depending upon the PESTEL views taken by Thierry Peugeot and Philippe Varin potential and the relative probability and impact of various tailwinds and headwinds – ranging form a beneficial deflationary Euro to possibly protectionist EM regions – PSA should have room for manouvre between its seeming courting rivals of GM and Toyota. But in the meantime PSA must be seen to be adding far deeper strategic thinking behind the 'headlines' of its 2012 Plan; and that includes meaningful strategic and financial 'value extraction' from GM and Toyota.
Post Script -
The viewpoints stated by investment-auto-motives obviously run counter to the GM & PSA announcements dated Wednesday 22nd February.
This highlights an apparent £2bn per year synergies to be obtained in small and compact cars.
Whilst synergies undoubtedly exist in mutual commodities/materials purchasing (esp steel via Varin's connections), and in certain 'near & far horizon' R&D, aswell as in potential for a shared E segment vehicle programme (608/Insignia), investment-auto-motives believes that ultimately an attempt to co-alesce mainstream small and compact programmes will ultimately prove technically frustrating, even with a repositioning of Opel, Vauxhall & VXR brands to mirror Citroen, Peugeot and DS.
Thus the 7% stake by GM is, it is believed, a move to allow internal insight into PSA so that it can be 'remotely supervised', as is so often the real case behind competitor investment stakes, aswell as provide immediate knowledge and influence in PSA asset disposal vis a vis GM purchase issues.
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