General Motors' confirmation that it is discussing selling its European Opel/Vauxhall business to PSA Group is a tough blow for Opel CEO Karl-Thomas Neumann and the division's 38,000 employees.
When Neumann became Opel CEO in 2013 he seemed confident that he could end years of losses at the division. But GM has pushed back its break even target for Opel to 2018 after losing $257 million in Europe last year when it had expected the unit to be back in the black. Now Neumann's future must be in doubt if PSA acquires Opel.
Seemingly ashamed of being caught red-handed attempting to sell off its unloved European subsidiary, GM left employees in the dark for hours on Tuesday before finally acknowledging PSA's confirmation of the discussions by copying the French automaker's earlier statement word for word.
Opel currently has the best management team it has had for at least a decade, but it looks like the European brand's ugly past and chronic losses stretching back to 2000 have finally caught up with it.
If the PSA speculation feels like déjà vu, it's because GM has been down this path before. At the height of the European car market crisis, GM Europe President and former investment banker Steve Girsky struck a strategic alliance with PSA in 2012, hoping to lower his breakeven point.
Both automakers were suffering from the same heavy dependence selling small, low-margin cars in Western Europe. Both witnessed upstart brands such as Hyundai and Kia chip away at their business by selling more affordable, better-built vehicles styled for European tastes and covered by longer warranties.
The idea behind the alliance was for each company to save $1 billion, in part by measures like Opel relying on PSA's Gefco for its logistics needs. It also included cooperating on small and midsize passenger cars, MPVs, crossovers and executives even considered developing a new common platform for low emission vehicles.
At the time industry insiders scoffed at the idea of the two sickest carmakers in Europe teaming up. Sure enough, problems ensued almost immediately. GM had no interest in helping PSA expand its presence in key emerging markets such as China or South America where it might compete with Buick and Chevrolet. Nor would it give PSA access to higher segment platforms to affordably build flagship, high-margin sedans such as the Metropolis and DS 9 concepts.
The alliance fizzled out almost as soon as it began, with only two Opel models built off of PSA architectures actually resulting from the cooperation, the Meriva and Zafira minivan replacements. GM first wrote down the value of its 7 percent stake in PSA that very same year before dumping the shares entirely the following year as the crisis at PSA continued. Instead PSA looked to its Chinese JV partner for help, making Dongfeng in one stroke the biggest strategic shareholder in the company in early 2014 with a stake of 13.7 percent.
By that point, the PSA-GM alliance was considered to have outlived its usefulness. Neumann rarely wasted any time discussing PSA, playing down the deal whenever it came up. Instead he would explain how, with the exception of the Meriva and Zafira successors, for the first time all Opel models sit astride GM global platforms to better maximize synergies. GM was after all large enough with 10 million cars built and sold annually, it was simply a matter of utilizing the scale already existing within the group. GM CEO Mary Barra called it "merging with ourselves."
What has changed since then?
Europe is in complete disarray thanks to the ongoing effects of the euro zone debt crisis, Islamic terror attacks in Paris, Nice and Brussels and a stream of refugees from the Middle East and Northern Africa. Populist forces that pushed the UK to vote itself out of Europe threaten to tear the rest of the continent apart. If Marine Le Pen is elected French President come May, she has promised to end the participation of France, Europe's second largest economy, in the euro and the EU.
GM's departure from Europe would mean that CEO Mary Barra is acknowledging the obvious – selling cars across the world does not make GM a global carmaker. Out of the $12.5 billion in operating profit earned last year, 96 percent of that came from the North American market. Only by including GM Financial results and the $2 billion in equity income from GM's China joint ventures, could it compensate fully for the $2.4 billion losses in the rest of the global automotive business.
Barra is familiar with Europe and the auto industry's landscape having served as one of the five GM executives on the Alliance Steering Committee with PSA. Leaving will quarantine GM's healthy U.S. business from further European problems.
Meanwhile PSA has a successful CEO in Carlos Tavares, someone who was capable of turning around the struggling automaker by slashing costs and eliminating waste through brutal frugality. One national managing director told me last year he got rid of half his employees, overfulfilling his staff cut targets just to be on the safe side. Ultimately, however, PSA is still subscale and remains heavily dependent on Europe.
Coincidentally, the first of Opel's two legacy products from the 2012 alliance, the Crossland X, finally has its public debut next month at the Geneva auto show. In the past Neumann has said how much he likes attending the show since it coincides with the anniversary of his becoming Opel CEO in March 2013.
He should enjoy the limelight in Switzerland. By arranging a deal with PSA, Barra no longer needs Neumann. The show could also be his last as head of Opel.