What PSA Peugeot Citroën’s Deal With China’s Dongfeng Might Mean For GM Alliance

Struggling French automaker PSA Peugeot Citroën has signed off on a deal with China’s Dongfeng Motors and the French government that will see the Peugeot’s founding family cede control of the company. The development is of significance to General Motors enthusiasts as The General set up a collaboration agreement with the French automaker in 2012 that saw GM purchase and later sell seven percent of the automaker.

China’s Dongfeng Motors as well as the French government will each invest about 800 million Euros ($1.1 billion USD) in return for equal 14 percent stakes, while another 1.4 billion Euros ($1.5 billion USD) will be raised from existing Peugeot investors. The deal is still subject to a shareholder vote, but is widely seen as necessary to provide much-needed cash to keep the automaker operational after government assistance guarantees come to an end.

A Bleak Outlook

Currently Europe’s second-biggest automaker, PSA Peugeot Citroën has been operating at a loss over the last few years, and the outlook is rather bleak. Its 2013 earnings came in at a 2.32 billion Euro net loss. The results are an improvement over the 5 billion euro net loss seen in 2012. The automaker also announced that it may continue to post losses until 2016. Additionally, PSA’s sales fell 2.4 percent in 2013 on an annual basis.

Family Control Slips

Representing one of France’s oldest industrial dynasties, Peugeot was founded in 1810 — nearly a century before General Motors’ founding in 1908. At that time, the firm was making tools and coffee mills which, to this day, continue to be sold under the Peugeot name. The Peogeot company has controlled the company since that time in the 19^th century. But recent economic and market challenges have led to shrinking market share and ensuing losses, putting a strain on the family’s command.

Before the deal, the Peugeot family held a 25.4 percent stake in the firm. Given the deal’s approval, that amount will be diluted to 14 percent, thereby matching that of the French government and Dongfeng Motors.

According to reports from the French media, Peugeot family members were split on the way to proceed with the automaker. For instance, reported leaked letters show that chairman Thierry Peugeot was in favor of putting more family money into the business, a move that would have increased the family’s control of the company.

As Long As They Work Together

The deal involving Dongfeng and the French government was well-received by investors, as shares of Peugeot surged during trading on the Euronext Paris stock exchange. After all, an unprofitable firm without much of a direction got a new lease on life, and a new business plan that potentially involves access to international markets (such as the burgeoning Chinese auto market) — a luxury it hasn’t traditionally had.

However, the structure of the deal leaves three equal partners, and will only work if they’re all on the same page.

For its part, Dongfeng provided the Hong Kong stock exchange with a statement saying that the deal will “expand and deepen their current cooperation” with Peugeot, adding that the arrangement would “strengthen overseas cooperation to achieve the objective of selling 1.5 million vehicles under the Dongfeng, Peugeot SA and Citroën brands per year starting from 2020”.

To note, Peugeot already has a joint venture with Dongfeng — one of China’s newer car brands that markets its heavy trucks and “Fengshen” line of vehicles. The deal will also boost production and add a research and development facility. Sweetening the deal for Peugeot is the fact that Dongfeng will promote the Peugeot brand in the fast-growing car markets in South East Asia.

Meanwhile, French Industry Minister Arnaud Montebourg reportedly said that the deal would “prepare Peugeot’s renaissance and the international development of a company that had become isolated”.

The Effect On General Motors

General Motors originally entered into the alliance with PSA Peugeot Citroën back in 2012, under the leadership of then-CEO Dan Akerson and Vice Chairman (and Opel supervisory board chairman) Steve Girsky — both of whom have since left the company. The alliance was presented as a way for both PSA and GM’s financially-struggling Opel to leverage economies of scale in Europe in the areas of purchasing, sourcing, logistics, and even vehicle development, with goals to save approximately $2 billion between both partners five years into the relationship. The deal involved GM purchasing a seven percent stake in the firm for $335 million.

At the end of 2013, after various attempts to explore and finalize a common vehicle program, GM sold its stake for a $343.35 million. As it stands, the only tangible result of the arrangement was the implementation of a logistics operation for the purpose of realizing savings in distribution for both businesses.

As of this writing, GM is no longer financially invested into the alliance — and we’re not aware of any joint vehicle efforts between the two automakers. So it wouldn’t surprise us if the deal involving Dongfeng and the French government eventually results in the complete dissolution of the GM-PSA Peugeot Citroën alliance, whatever it may be at this point.