Purchasing and pricing
Volvo CEO Hakan Samuelsson said the deal makes sense because volume brands such as Peugeot and Opel, with much of their labor based in high-cost European countries, can boost their profitability either by increasing their economies of scale and volumes or by moving upscale.
Opel has tried to move upmarket with mixed results. "The cars are very, very good but they still have to price them according to what the market will accept," he told Automotive News Europe during a roundtable discussion in Geneva.
Since the deal increases PSA's European sales by more than 1 million units, it will have greater purchasing power, said Aston Martin CEO Andy Palmer, who used to work for Tavares when both were at Nissan. Another benefit Palmer sees is that PSA will be protected against a hard Brexit or a weak pound, saying that "one of the two is inevitable" in the UK, which represents about 20 percent of overall European sales, but 30 percent of profits in the region.
At the same time, Palmer predicts the combined company will find it challenging to establish a specific place in the market for each brand. "This is much more complicated than saying that Peugeot in French and Opel German," he told Automotive News Europe.
On the plus side, pricing in Europe is expected to benefit because of the PSA-Opel deal, Toyota Chief Competitive Officer Didier Leroy said. He believes that the price discipline that PSA has shown since Tavares rescued the French automaker from near collapse will be extended to Opel. This could provide some relief in low-margin sales channels such as daily rentals, where the German automaker had been very aggressive, especially in its home market.
Meanwhile, executives such as Ford of Europe Chief Operating Officer Steven Armstrong question whether the PSA-Opel deal qualifies as a true consolidation, although Armstrong is sure about one thing. "There will be future consolidation, be it in the form of alliances, cooperations or somebody acquiring somebody else," he said.
While Ford's European business is making billions of dollars, GM failed for decades to make a profit with Opel/Vauxhall. One of the big differences between the brands was that Ford was more aggressive at shrinking its European footprint when demand diminished. "We started our restructuring ahead of many of the other brands and are benefiting from it now, proving that you can be a volume player in Europe and be profitable," Armstrong said. "We earned $1.2 billion last year in Europe."
Automakers that don't have a solid balance sheet could be in jeopardy because they will need cash to invest in expensive technologies that will make their future vehicles greener, more connected and capable of driving themselves. "The investments that are required are increasing dramatically," said former Nissan Europe sales boss Guillaume Cartier, who started in a global sales role at Mitsubishi this month. "Being big is a way to secure your future."
Arndt Ellinghorst, a financial analyst at Evercore ISI in London, called the PSA-Opel deal "clean and financially sound." He added, however, that reaching the Tavares' earnings goals while also achieving 1.7 billion euros in joint cost savings will only happen if Opel/Vauxhall's management team is willing to follow the advice it gets from its new owner and if the European car market remains strong.
Douglas A. Bolduc, Rick Johnson and Peter Sigal contributed to this report