General Motors is in talks with PSA Peugeot Citroen to sell the European Opel division. The PSA group has officially confirmed that the talks are ongoing to develop strategy initiatives. The deal is focused on improving operational efficiency and profitability of the group by acquiring Opel. The Opel division is one of the popular divisions for General Motors and it helps the automaker to reach the global audience. However, by selling it to the PSA group, GM is willing to step down from the competition regarding global auto sales.
Even though GM’s decision to stop its influence in the UK is shocking to many, the company has taken this decision carefully. The Chevrolet was not welcomed widely in Europe and the model has been pulled back already. Opel Marques also stopped selling in Russia by 2015. The European division was not making profits and several production plants were put on hold. When the UK left the European Union, GM has decided that it is time to pull back from the not-so-profitable European market.
The current profit strategy for GM has been overhauled to bring in more money to the company. The company is no more interested in sales volume. Instead, it focuses on increasing profits and raising margins. The fleet deliveries by GM were reduced by 12% last year. GM focuses on increasing retail sales to increase profits. The major element of interest for GM is improved return on invested capital (ROIC). In 2016, GM was able to increase its ROIC remarkably by 28.9%. Compared to the last year, this is a 170 point increase.
The decision to sell the Opel division is certainly profitable for GM, but the profits for PSA are unclear. By acquiring Opel division, PSA will be able to increase their capacity in Germany. However, Germany is one of the most expensive countries to make vehicles. As a result, it will result in excess capacity for Peugeot. PSA has different views on the issue. When it acquires Opel, PSA will become the single owner of 16% of the car market in Europe. It will grow to be the second largest automobile group in the continent. This boost will help the company to expand its scale and increase buying power. As a result, it can cut operational costs and thereby increase profits.
The deal can’t be finalized easily as there are numerous obstacles. The industrial union of Germany, IG Metall has warned that the deal can’t be finalized without the involvement of the union. The Economy minister of Germany also expressed his displeasure in deal talks without consulting with the local government. The French government has 14% shares of the PSA and it is expected to support the group to go through with the deal. While there is no confirmation that the deal is certain, it has resulted in increased demand for the shares of GM and PSA. GM will succeed in getting a clean cut from the Europe through this deal. It is of importance to the investors as GM focuses on developing driverless smart automobiles.