Why GM would make a big deal to sell its European arm to PSA. And what will the French group gain by acquiring a brand that has cars similar to its own
In Liquid Modernity, when everything is changed as if it were water at the mercy of the wind, traditions are collapsing. It is no different in the automotive industry. The next tradition to break must be the presence of General Motors as a manufacturer in Europe. Since 1929, GM has had a European arm called Opel. And the expansion of that arm in England called Vauxhall. But it seems that Detroit has decided that it is no longer possible to lose money on the Old Continent. “America First” is the motto of President Donald Trump. And GM is following suit.
Last week, news broke that GM is in talks with Grupo PSA (which owns the Peugeot, Citroën and DS brands) to sell Opel and Vauxhall. The contract must be completed at any time. For GM, it will be a relief to get rid of an operation that has caused a loss of 1.070 billion in the last two years alone. Who cares about keeping traditions in this situation? For PSA Peugeot Citroën, the addition of Opel/Vauxhall would place it second in the European market, with a sales share of 16.3%. Therefore, it will be behind only the Volkswagen Group, which ended 2016 with 24.1%.
But what is really behind all that? For GM, the reason is clear. After all, he hasn’t taken a penny from Opel for 16 years! But what would PSA gain by adding these brands, other than a large share of the European market? To understand this chess game of the car industry, I share a quote from an article by the Portuguese consultant Luis Pimenta, who, in addition to being my friend and having the same name as his compatriot Camões, published an excellent analysis in his Web site column Motor24, and Portugal.
According to Pimenta, while PSA operates in Europe, South America and Asia (with China being the largest market), Opel is only European. Plus: many of their products are interactive. But this acquisition will cause PSA to change its production rate, from 3.1 to 4.3 million cars per year.
“And here we reach an important point: size as a success factor. The automotive industry is the most concentrated of all and, once again, the data is clear on this point. The five largest players produce almost half (49%) of the cars on the planet, in a domain that extends to the geographical side: the brands come from only 13 countries in the world and the 15 most developed ones account for 88% of car production. Among the G20 countries, only Saudi Arabia does not have car factories.
This is the theme of such a possible transaction between PSA and Opel. A battle of giants where size counts. It’s a lot.
And it counts, especially, because in the automotive industry there is a sector that hides the real “gray eminences”, the real “owners of everything”: the sellers. Getting a good price in front of them is important to the amount of profit for each car produced. However, the greater the trend, the greater the weight of the conversation. And the price is better.”
According to Luis Pimenta, since 2015, dealers already represent more than 80% of the value added in each car. He notes that design, structure and engineering are still born in the infancy of the brand, such as the engine, “but almost everything else is made by external suppliers, in a direction that has grown with globalization”.
As a result, there are now nearly 20 mega-vendors with a reach unimaginable a decade or two ago. The Portuguese consultant claims that Bosch alone (the biggest of them) earned more than 73 billion euros last year, more than the 54.7 billion euros of the PSA Group. These same suppliers became an active part in product development (so much so that Bosch invests 9.9% of its revenue in Research and Development, versus 3.5% for GM, for example).
With the significant importance they have gained in this industry, car manufacturers’ suppliers serve several competing brands and have increased their bargaining power against car manufacturers. Which, in turn, became hostage to a few companies (the recent suspension of the production of Volkswagen do Brasil because of the bank seller is an example).
As a result of all this, Carlos Tavares, also Portuguese, CEO of Grupo PSA, came to the conclusion that it is important to have a strong focus and strengthen economies of scale, because every cent must be considered these days. Finally, if the agreement goes through, maybe one day, in the future, we may not have Chevrolet Corsa or Chevrolet Astra in Brazil, as we already had, but Peugeot Corsa or Peugeot Astra. It would be curious. And yet another culture crumbles in these fluid times.