GM Facing Tough Choices in Europe – Part Two

Continued from Part One.

In another twist to the tale, a report in the FT says GM seems to be at an advanced stage of discussions with France’s Peugeot, also a struggling carmaker with excess capacity, to jointly develop engines, transmission systems and entire vehicles that would be sold under their respective brands. While this could have design and production cost savings, it would really only make sense if between them they closed excess production capacity.

While no shares will change hands in the proposed cooperation between GM and Peugeot, it has similarities to Chrysler’s cooperation with and later 53.5-percent takeover by Italy’s Fiat, the loss-making carmaker that owns the Lancia and Alfa Romeo brands in addition to Fiat. That merger could be said to be timely for Fiat, as the combined company reported a small net profit for 2011 and projected $1.5 to 2 billion net profit for 2012, largely on the back of a resurgent North American market for Chrysler brands.

On the other side of the coin, Tata’s Jaguar Land Rover (JLR) has been investing something like $1 billion per year for the last few years and is set to double this next year as it expands production in the UK and overseas, and takes on more staff to meet record demand. Tata Motors bought Jaguar Land Rover from Ford in 2008, for £1.5 billion, in a move some derided as a mistake. Last year, JLR made a profit of £1.1 billion and this year’s profits are expected to be even higher still.

GM probably missed the boat in selling its European operations back in 2009.

Who would buy them in today’s market is unclear. GM could still make the operations profitable; they have great research and design resources and some plants that are highly efficient. Arguably, in a world where smaller cars are likely to be a long-term trend, a European design and production base is a strategic asset that could be of considerable benefit to the global GM corporate.

However, GM as a group will not be willing to carry the cost of a loss-making European division for long, and unpopular as it will be among European governments and unions, plants are going to have to close.