PSA stabilizes Opel, but much work remains

GENEVA — "No regrets."

That's PSA Group CEO Carlos Tavares' assessment one year after striking a $2.7 billion deal for Opel and Vauxhall, General Motors' stubbornly unprofitable European brands.

Tavares says PSA has begun to stanch the flow of red ink at Opel after nearly two decades of losses under GM and pave the way for sustainable profits. He has cut costs by negotiating concessions with European unions and sharing purchasing and other expenditures. There have not been large-scale layoffs or factory closings, as many had feared.

By design or necessity, PSA is moving swiftly to transfer its technology to Opel vehicles, a move that Tavares said is accelerating synergies.

"We know we can turn around this company, and we are now seeing the first concrete results," he said this month.

Other initiatives are a work in progress. A high percentage of Opels are sold through unprofitable channels such as short-term rentals. Sales have fallen sharply in key markets including the United Kingdom, though analysts say that is partly a result of reducing incentives.

Crucially, the red ink hasn't disappeared — Opel lost €179 million ($222 million) in just the last five months of 2017. However, that's an improvement from the $460 million that sources said Opel lost in the first half of the year, according to Automobilwoche, an affiliate of Automotive News.

"He's in his research phase at the moment," said Justin Cox, an analyst at LMC Automotive in London. "He's attacking costs, pooling purchasing power and leveraging engineering. Those are the kinds of things you can put in action right away, and you will see dividends quite speedily."

Tavares and his counterpart at GM, Mary Barra, announced the sale last March in Paris, and the deal officially closed on July 31. For Tavares, it was a chance to create a "European champion" — strong in Germany, the continent's largest auto market, as well as France — and vault PSA into the No. 2 sales position after the Volkswagen Group.

And for Barra, it was an opportunity to offload an albatross that had tallied a cumulative loss of nearly $20 billion since 1999.

Tavares has vowed that under his stewardship, Opel would have positive free cash flow and operating margins of 2 percent by 2020, 6 percent margins by 2026 and annual synergies worth $2.1 billion.

In December, PSA was reported to be preparing a lawsuit against GM for $620 million on the grounds that GM had not fully disclosed how far Opel was from meeting strict European Union emissions targets for 2020-21. Failure to hit the target of 95 grams of carbon dioxide per kilometer could result in hundreds of millions of dollars — $118 per car, per gram over the limit — in fines.

GM says it is not aware of such a suit. For his part, Tavares said: "Our relationship with GM and my personal relationship with Mary Barra is very smooth. We have excellent communication, and when there is a problem we fix it."

To meet those emissions targets, PSA has accelerated its timeline to integrate its more emissions-friendly technology, including clean diesels, small turbocharged gasoline engines and soon-to-come electric and plug-in hybrid powertrains. Tavares has ruled out future sales of the Opel Ampera-e, its version of the Chevrolet Bolt EV, as a way to meet fleet emissions.

"The teams from PSA and Opel were able to rebuild the product planning strategy completely, in order to put Opel back on track to meet the European regulations by 2020," Tavares said in November.

In one example, the next-generation compact Corsa, including an electric version, will be developed solely by PSA rather than as part of a joint development agreement with GM signed in 2012.

One upside is that any Opels on PSA platforms will be able to be sold outside of Europe, as they will not be considered direct GM competitors. Overseas expansion is a key part of Opel's future strategy.

"For the time being," said Thomas Besson, lead automotive analyst at Kepler Cheuvreux, "most of the synergies they are seeing are linked to the products they have in common before the deal," including the Crossland X and Grandland X SUVs.

Tavares' first public step was to install a new management team at Opel, though former GM employees still fill key posts. Michael Lohscheller, Opel's CFO, was tapped to replace CEO Karl-Thomas Neumann, who resigned in June. Two PSA executives, Remi Girardon and Philippe de Rovira, moved over to head manufacturing and finance. Xavier Duchemin, formerly vice president of PSA retail, now heads sales and marketing for Europe.

Lohscheller says being a part of a European company rather than a global one such as GM has helped his teams to focus.

"I feel very much at home here in a European company," he said this month. "In the past I was compared with every other region in the world, and now I do benchmarking within Europe. Believe you me, my team appreciates this a lot."

Tavares then targeted cost savings, setting up a joint purchasing operation that has reduced fixed costs 17 percent. Media deals have been renegotiated, saving $25 million for the same content. Information technology expenses are down 39 percent. Overall, 30 percent of savings are expected to come from procurement, with the goal of reducing costs by $868 per car.

PSA has been negotiating tougher deals with unions at Opel's plants around Europe, which Tavares said trail PSA's own factories in terms of efficiency and are struggling with low utilization rates. Tavares said he could not guarantee a future for the subcompact Corsa, Opel's best-selling model, at the plant at Zaragoza, Spain, if unions there did not agree to givebacks that reportedly included a wage freeze.

"You never negotiate without alternatives," Tavares said at the Geneva auto show this month. "Yes, the negotiation was difficult, but this is what it takes when a company is complacent for several decades and allows a cost gap to creep against the competition."

One sticking point has been the fate of the Vauxhall factories in England, in Ellesmere Port and Luton. More than 600 jobs have already been cut at Ellesmere Port, which makes the compact Astra, also produced at lower costs in Poland. The threat of tariffs tied to the U.K.'s pending departure from the European Union has added to the uncertainty, although Tavares said the slow pace of the Brexit negotiations has given the plants "breathing space" to close an efficiency gap.

Workers in Germany, where about half of Opel's 38,000 employees are based, have agreed to accept shorter hours and voluntary buyouts. Negotiations with Opel's works council and the powerful IG Metall union are continuing.

"They don't want to close plants in the short term," Besson said, "but they may use a harder Brexit to shut down one of their U.K. plants, and Germany is already starting to react. The employees are already feeling that PSA has pushed a lot."

Said LMC's Cox: "I think he's still got a big job to be done in further footprint rationalization."

Just 37 percent of Opels were sold to private buyers last year in Europe, compared with an industry average of 46 percent (and 48 percent at Peugeot), according to Dataforce. Fully 18 percent became rental cars, and 21 percent were registered by dealers or manufacturers.

Remedying that will take time, said Maxime Picat, PSA director of operations in Europe. "It's very easy to say, 'I am taking 1,000 cars from short-term rentals, so I did my job,' " Picat said. "You have to go to the real customers and the real fleets and convince your dealers why your products are excellent and why they deserve better pricing."

According to Lohscheller, Opel prices are 6 percentage points below their benchmarks in the biggest European markets.

One decision that Tavares has put off for now is what to do with thousands of engineers at Opel's technical center in Ruesselsheim, Germany. They will be part of a "center for engineering excellence" for self-driving cars and electrification, he said, as well as for a planned re-entry to the North American market.