So long, GM – Bonjour PSA

On 06 March, after weeks of speculation, it was confirmed that General Motors of the USA (NYSE:GM) was selling its European operation – Opel – to France’s Peugeot SA (EPA:UG) for €1.3 billion (plus another €900 million for the finance operation). What was behind the deal? And what does it mean for the UK car industry?

The historic UK automotive brand in question

The car brand at stake in the UK is Vauxhall Motors which has its headquarters in Luton, Bedfordshire. (General Motors UK Limited owns the brand.) This is still an iconic brand in the UK – its griffin badge is instantly recognisable to British motor enthusiasts, even though only one of Vauxhall’s car models is actually manufactured in the UK. That is the stalwart though uncharismatic Astra saloon which is made in Ellesmere Port, Cheshire.

For those with a fascination for corporate history, Vauxhall started life as a pump and marine engine manufacturer, back in 1857. It went into motor manufacturing in 1903 and was acquired by GM as early as 1925 – a very early example of the expansion of an American giant into the European market by acquisition.


Vauxhall’s Luton plant manufactures commercial vehicles – particularly the Vivaro van (or wagon). This is a competitor with that design staple, the Ford Transit – now manufactured in Turkey – as a brave army of British self-employed house painters, deliverers and general fixers well know.

Vauxhall had revenues of £3.84 billion last year and currently employs about 4,800 people. Vauxhall branded vehicles (including all the vehicles manufactured outside the UK) was the second best-selling brand in the UK behind Ford last year. The fear is that job losses will be first made in the UK as labour laws are more permissive here than in Germany and trade unions are weaker.

The German mother

Similarly, Adam Opel AG is a company with a proud history. It started out in 1862 as a manufacturer of sewing machines and in 1886 diversified into bicycles. It produced its first automobile in 1899. Opel was the first German car manufacturer to incorporate mass-production assembly lines. General Motors bought 80 percent of the German car maker’s stock in 1929 and the remaining 20 percent in 1931. GM has retained its foothold in the European car market since then until now – despite some disruption during the Third Reich.

Vauxhall had revenues of £3.84 billion last year and currently employs about 4,800 people.

The company is still based in Rüsselsheim, Hesse. From there, during the 1970s and 1980s, Opel and Vauxhall’s various model ranges were rationalised into one consistent product range across Europe, though Vauxhall branding was retained in the UK.

The company and its technology is, essentially, German, with production facilities in the UK, Spain and Poland plus a small unit in South Korea. The Insignia and Zafira models are manufactured in Rüsselsheim while the Corsa, the Meriva, and the Mokka are manufactured in Zaragoza, Spain. The Cascada and an Astra variant are manufactured in Gliwice, Poland.

Why did GM sell? Why did Peugeot buy?

Reportedly, Opel has not made a profit for 16 years. Opel had a 6.8 percent share of the European car market last year which makes it too small to benefit from economies of scale like car giants such the Volkswagen Group (ETR:VOW) (VW, Audi, Skoda, SEAT and Porsche) which accounted for 23.4 percent of the European market[i].

Opel has been confined largely to Europe not least because GM did not want the firm’s models to compete with those of its other subsidiaries elsewhere. Without Opel, GM can focus on the development of its home market in America and develop its business in China where margins are higher.


For the PSA Group (Peugeot, Citroën and DS), the deal will increase its market share in Europe from just under ten percent to over 16 percent, ahead of Renault SA (EPA:RNO) but of course still well behind VW. Overtaking Renault will be sweet revenge for PSA’s Chairman, Carlos Tavares: Renault’s Chairman, Carlos Ghosn sacked him as his number two in 2013.

The price of €1.3 billion for ten major production facilities may seem derisory. In reality, GM is paying PSA to take Opel off its hands.

Pension liabilities

Once again the devil of the deal was in the details. GM will remain responsible for Opel’s (and thus Vauxhall’s) massive pension fund deficit for the time being. GM will pay PSA €3 billion over time to take over its German pension fund liabilities while the UK liabilities – that’s over 15,000 Vauxhall pensioners – will remain with GM. However, it seems highly probable that pension benefits for existing Vauxhall workers will be reduced. It is reported that the existing defined benefit scheme will be scrapped for new employees and replaced by a defined contribution scheme.

The Outlook for the enlarged PSA Group

Mr Tavares has turned PSA around, taking it from near bankruptcy four years ago to solid profitability. His aim will be to do the same for Opel, though it will be difficult to achieve this by cost-cutting and lay-offs alone. PSA will certainly want to increase Opel’s sales outside Europe, thus reducing the European dependency of the combined group.

PSA will certainly want to increase Opel’s sales outside Europe, thus reducing the European dependency of the combined group.

Peugeot SA’s share price reacted favourably to the finalisation of the acquisition, rising to €19.60. Overall, the shares are up nearly 25 percent over twelve months. In contrast, General Motors’ shares have eased since 06 March though the share price is similarly up 20 percent in a year.

What about Brexit?

Mr Tavares made some very significant comments about the outlook for Vauxhall given the (increasingly likely) prospect of a hard Brexit. He indicated that PSA would continue to invest in the UK even if the country leaves the Single Market and the Customs Union. If trade “frictions” between the UK and the EU arise, then he suggested it would be in the Group’s interest to have production facilities inside the UK to serve the UK market.

He said that “the supplier base needs to be developed” – which I take to mean that the UK should actively seek to repatriate supply chains by making more components in Britain. This is a wake-up call that the UK needs not just a clear Brexit strategy but also a coherent industrial policy as well.


Some commentators have dismissed Mr Tavares’ comments as mischief-making. Opel sold over 288,000 vehicles in the UK last year but only 46,000 were actually assembled in the UK. British plants will account for just five percent of the enlarged PSA Group’s total output. The latest Opel model, announced in January 2017, will be the Opel Crossland X which is designed to compete with the Renault Captur. This will be assembled in Zaragoza.

The current version of the Astra is scheduled to remain in production at Ellesmere Port until 2021 and the current generation of the Vivaro is planned to remain at Luton until 2025. Of the 118,000 Astra units manufactured last year about 80 percent were exported, mainly bound for Germany. Of the 74,000 Vivaro units about two thirds were exported. Despite the fact that these plants enjoy high levels of productivity they could look vulnerable over the medium-term.

The European car market

Europe is the world’s most competitive car market and profits are harder to come by here than elsewhere. Both Peugeot and General Motors posted weaker European car sales growth at the start of 2017. New registrations at PSA rose 6.5 percent in January and were up 5.3 percent at Opel Group. The performance of both companies lagged behind a wider 10.3 per cent rise in new car registrations in the EU overall, according to the European Automobile Manufacturers Association (ACEA).

Overall, EU car sales are rising as Europe enjoys a steady economic recoverys, characterised by higher consumer spending. Last year in Germany car sales rose by 10.5 percent and in France by 10.6 percent. The UK, however, posted the weakest pace of growth of the EU’s five biggest economies with a 2.9 percent increase.[ii]

New registrations at PSA rose 6.5 percent in January and were up 5.3 percent at Opel Group.

Emissions regulations

European manufacturers have to comply with EU regulations aimed at reducing greenhouse gases. Since 2015 new cars registered in the EU may not emit more than an average of 130 grams of CO2 per kilometre. The average emissions level of a new car sold in 2014 was 123.4 grams of CO2 per kilometre.

The ACEA believes that Europe’s cars are now the “cleanest” in the world, with the average car engine emitting 28 times less carbon monoxide than 20 years ago. Moreover, the average new car today has become much more fuel efficient, consuming 15 percent less fuel per 100 kilometres than 10 years ago[iii]. However, another environmental issue has now eclipsed all others.

The demonization of diesel

One trend that may negatively impact the enlarged PSA is that diesel engines are rapidly falling out of favour. Although diesel engines compare favourably with petrol engines in terms of CO2 emissions (they are more fuel efficient) they are dirtier as they produce particulates, especially nitrous oxide (NO) which is harmful to human and animal health. New European regulations limit NO emissions to just 80 mg per kilometre – down from 180.


Many European cities, not least London, are planning to introduce toxicity charges and there is talk of a government scrappage scheme in the UK for diesel cars. UK Transport Secretary Chris Grayling has warned motorists to “be wary” of buying diesel cars and there is evidence that the sale of new diesel cars is already beginning to fall. In 2015 about half all cars sold in the UK were diesels but that is likely to be well down this year.

A substantial proportion of PSA Group’s output has diesel engines. In France diesel was favoured by the tax system for many years, though no longer. Reconfiguring its engine mix will be a huge headache for PSA, as for other automotive giants. On the plus side, PSA has been innovating in engine design. At the 2013 Geneva Motor Show, the Group unveiled an experimental petro-hydraulic hybrid engine.

The bigger picture

Whatever the future of Vauxhall in the UK, there are massive forces of change at work in the global automotive industry.

In the April edition of the MI magazine I’m going to discuss why the global automotive industry at a critical juncture in its evolution. Electrification is going to be huge. Some forecasts reckon that more than half the cars on our planet will be electric-powered within 25 years. And many – if not most – of those will be self-driving. I want to ask: which of the current players are best placed to ride these trends and profit best?

My answer may surprise you. Suffice to say for now that some major automotive manufacturers are shifting away from making cars as such to focus on automotive technology.

[i] See: http://www.best-selling-cars.com/europe/2016-q1-europe-best-selling-car-manufacturers-brands/

[ii] See: https://www.ft.com/content/4627854c-f4f4-3f1a-af41-710b89f09268

[iii] See: http://www.cnbc.com/2016/04/18/driving-growth-the-future-of-europes-car-industry.html