PSA Turnaround Of GM Loss Maker Opel Vauxhall Eschews Pile'em High, Sell'em Cheap

PSA Groupe investors are wondering if CEO Carlos Tavares’s stunning turnaround of perennial loser Opel Vauxhall is sleight of hand or real, and the consensus says we’d better start believing.

Opel Vauxhall lost about $20 billion – yes that’s billion not million – between the year 2000 and last year when General Motors sold it to the ambitious French auto maker. Opel sells in mainland Europe, while Vauxhall sells the same cars and SUVs with its logo in Britain.

data-param-cid="62cec241-7d09-4462-afc2-f72f8d8ef40a"
data-player-id="44f947fb-a5ce-41f1-a4fc-78dcf31c262a"
data-playlist-id=9f914deb-4288-4fd7-b59b-0d4d3ca3c704
data-elements-player="true"
layout="responsive"
width="16"
height="9"
>

When GM finally rid itself of this apparently profligate European monstrosity last year, conventional wisdom merchants cheered.

But last month PSA, which sells Peugeots, Citroens and a handful of upmarket DS models, stunned investors with its claim Opel Vauxhall earned €502 million ($571 million) in the first half, compared with a loss of €179 million ($200 million) in the last 5 months of 2017. It emerged that this profit came after some artful accounting but after the dust settled, Opel Vauxhall still claimed it made a profit margin close to 3%.

In the first 6 months of 2018, Peugeot sold 516,900 vehicles in Western Europe, up 8% compared with the previous year. Citroen sold 316,800, up 2.7%, and Opel Vauxhall 452,300, down 6.9%, according to Automotive Industry Data. DS accounted for the rest. PSA has a 16.5% market share in Western Europe, putting it in 2^nd place behind VW’s 23.9%.

So what magic potion did Tavares apply to achieve this almost unbelievable profit? He applied the same methods he used in transforming PSA.

GM used the traditional pile ‘em high and sell ‘em cheap school of automotive economics with Opel Vauxhall. This market share biased policy was a great way to keep the production lines humming at full blast and keeping costs down, but it ended up flooding the market with unwanted cars which could only be sold at a loss, while also trashing second hand values.

Tavares has stopped this “doom loop”, said John Wormald, analyst with British automotive consultancy Autopolis.

“He’s stopped OV’s heedless pursuit of volume, this doom loop, and any margin and severely cut back on development investments. For a standalone OV, that would be suicidal. But it’s not stand-alone anymore, it will in future build its products on PSA group platforms, engines and transmissions,” Wormald said.

This will work even better when Opel Vauxhall’s current dull products are replaced with new ones, Wormald said.

When Tavares took the helm at PSA in 2013 the company was reeling from the financial crisis and losing huge amounts of money, not least by using the same methods that brought down Opel Vauxhall. Tavares stopped all that and actually limited production to keep prices and margins safe. He stopped worrying about market share and concentrated on selling models with intact profit margins. Tavares slashed capital spending budgets, and used limited funds to give new SUVs brash, good looks inside and out.

The result?

PSA’s operating profit rose 41% in the first half to €3 billion ($3.4 billion) compared with the same period last year, on sales 40% higher at €38.6 billion ($44 billion).

In 2013 the company was on the brink of bankruptcy and was saved by a €3 billion ($3.6 billion) state-backed rescue plan after racking up more than €7 billion ($8.3 billion) in losses over a couple of years. France and Chinese carmaker Dongfeng each bought 14% of the company. The Peugeot family stake was reduced to 14%.

PSA is also taking a leaf out of the Volkswagen playbook. VW sells its own brand vehicles but also offers basically the same ones again through its Spain based SEAT and Czech Skoda mass market subsidiaries to maximise manufacturing efficiencies by spreading costs over a much bigger production run. VW brand Golf family cars command a slight premium over the SEAT Leon and Skoda Octavia, which are almost the same under the skin. VW also provides much content for its upmarket Audi, Porsche and Bentley brands.

Professor Nick Oliver of the University of Edinburgh Business School isn’t convinced about the surprise profitability.

“If something looks too good to be true, it probably isn’t. Car companies are such big enterprises and they are tethered to their past and their environment in all sorts of ways so this sudden change is not realistic,” Oliver said.

Oliver said he would expect to see higher sales, better prices or dramatically reduced costs, but that didn’t seem to be the case.

“There is no easy explanation for this sudden profitability. I imagine that General Motors would have levied various corporate charges against Opel Vauxhall in Europe, so some of this miracle profitability might have come from that but it’s still a puzzle,” Oliver said.

Professor Stefan Bratzel of the Center of Automotive Management (CAM) in Bergisch Gladbach, Germany said GM failed to make Opel Vauxhall profitable because it didn’t understand the European market well, and relied too heavily on market share.

“That led to a situation where a lot of cars were being sold but at a loss and that had to stop. Also the bad product portfolio didn’t help, mainly a lack of SUVs. A good, viable platform strategy is required and this is something that PSA under Tavares is now doing,” Bratzel said.

This “platform strategy” means that future Opel Vauxhalls will be under-the-skin versions of already developed and paid for Peugeot engineering, so that it can leverage much higher profits.

The Opel Vauxhall Grandland X SUV is a version of Peugeot 3008, for instance, although this cooperation came before the merger. The smaller Opel Vauxhall Crossland X small SUV has much in common with the Peugeot 2008.

This will put pressure on other carmakers in Europe like Ford and Fiat which need to become more efficient, but have much lower volumes than PSA, or VW.

“I think Ford and Fiat in Europe will have to take some tough measures soon to compete, which might include cooperating with each other in the production of small cars. There is currently quite a critical situation in Europe for small car manufacturers,” Bratzel said.

Autopolis’s Wormald agrees, and also wonders if this might also start a reversal of the long-term globalization trend in the automotive industry. Could this stall PSA’s long-stated ambition to return to the U.S.?

“I think this will indeed put the squeeze on Ford of Europe and Fiat. It doesn’t solve PSA’s long-standing problem of being largely European. But all this raises another interesting question in my mind: could the world auto industry in fact be starting to de-globalize? The U.S. is going its own way, because of political inability to tax motor fuels sensibly. China’s long-term game is not being in conventional motor vehicles and mass motorization. Does PSA need to go back into North America at all?” Wormald said.