PSA’s Carlos Tavares and GM head Mary Barra announced the acquisition at a press conference in Paris on 6 March 2017
Boom or bust for UK domestic OE tyre supply
In a deal designed to make PSA Group the second largest carmaker in Europe, the Peugeot-Citreon brand owner has bought GM’s long-term lossmaking Opel and Vauxhall brands and production bases for 2.2 billion euros. This figure includes a joint venture with BNP Paribas on the GM Europe auto financing operations (valuing these transactions at 1.3 billion euros and 0.9 billion, respectively). But what does it mean for the tyre sector?
As a result of the acquisition of Opel/Vauxhall, which generated revenue of 17.7 billion euros in 2016, the newly expanded PSA will hold an estimated 17 per cent market share.
“We are proud to join forces with Opel/Vauxhall and are deeply committed to continuing to develop this great company and accelerating its turnaround,” said Carlos Tavares, chairman of the managing board of PSA. “We respect all that Opel/Vauxhall’s talented people have achieved as well as the company’s fine brands and strong heritage. We intend to manage PSA and Opel/Vauxhall capitalizing on their respective brand identities. Having already created together winning products for the European market, we know that Opel/Vauxhall is the right partner. We see this as a natural extension of our relationship and are eager to take it to the next level.”
PSA: Deal ‘unlocks value’
“We are very pleased that together, GM, our valued colleagues at Opel/Vauxhall and PSA have created a new opportunity to enhance the long-term performance of our respective companies by building on the success of our prior alliance”, said Mary T. Barra, GM chairman and chief executive officer.
“For GM, this represents another major step in the ongoing work that is driving our improved performance and accelerating our momentum. We are reshaping our company and delivering consistent, record results for our owners through disciplined capital allocation to our higher-return investments in our core automotive business and in new technologies that are enabling us to lead the future of personal mobility.
According to the new owners, leveraging the successful partnership with GM, PSA expects Opel/Vauxhall to reach a recurring operating margin of 2 per cent by 2020 and 6 per cent by 2026, and to generate a positive operational free cash flow by 2020. Considering the firm has posted losses for the last 16 years, this is likely to bring with it significant realignment of production capacity, leading some to raise questions about the future of the Ellesmere Port and Luton Vauxhall production facilities in the post-Brexit environment.
An official statement highlighted PSA’s specific ambitions: “By immediately improving EBIT-adjusted margins and adjusted automotive free cash flow and de-risking the balance sheet, the transaction will enable GM to lower the cash balance requirement under its capital allocation framework by $2 billion, which it intends to use to accelerate share repurchases, subject to market conditions.”
However, workers representatives in the UK have suggested that management has given assurances that production will remain in Great Britain until 2021 and, looking more internationally, the company said that “existing supply agreements for Holden and certain Buick models will continue” too.
Commenting on the news, general secretary of the Unite trade union, Len McCluskey, said: “This has obviously been a very difficult time for the workforce…Now that General Motors has disposed of its UK sites, our focus switches to working with the new owners to persuade them of the evident merits of our plants and this excellent, loyal workforce.
“I am determined that we can convince the new boss, Mr Tavares, that it makes sense for him to continue to build in Britain. Our plants are the most productive in the European operation, the brand is strong here, the market for the products is here, so the cars must be made here.
“But there is also a role for the government to play. The uncertainty caused by Brexit is harming the UK auto sector. [The] Budget is a perfect opportunity for the government to make is clear that it will preserve our trading arrangements and that it will invest for our auto sector’s future now, beginning with assistance for the reshoring of components.”
Nevertheless, Tavares told journalists at the acquisition press conference in Paris that Brexit could be a “nice opportunity”: “If you think deeply about the two scenarios -either it’s hard or soft. If it’s a soft Brexit, then the focus is simply on performance – being competitive in the UK versus other countries. In that set-up, the cheaper pound could boost competitiveness. If it is a hard Brexit – it will be ‘a very nice opportunity’ to source more car parts from inside the UK”.
For her part Prime Minister Theresa May emphasised her role in events, with number 10 saying she set out to GM boss Mary Barra the importance of the Vauxhall brand to the UK and “reiterated her desire for the jobs at both plants to be secured for the long term”. In response, Barra is said to have reiterated that Vauxhall would remain a British brand and that the acquisition will respect all agreements regarding the workforce.
The point is that what happens next is very important for the UK’s OE tyre business. Vauxhall registers between 6000 and 8000 new cars a month, which equates to some 84,000 vehicles a year. And you can multiply this by at least four to get an annual OE supply figure. Therefore, should things go a pessimistic route post-Brexit, those selling into the UK OE tyre space stand to lose a marketplace worth up to 350,000 units a year. However, should Tavares’ position that a hard Brexit is a “nice opportunity” turn out to be correct, the – and even those few companies still producing domestically for the domestic OE business – could end up benefitting from a bigger sales opportunity.