GM And Peugeot Form Alliance

| About: General Motors (GM)

I wrote last week about General Motors (NYSE:GM) and France's PSA Peugeot-Citroën discussing a possible alliance (click here); this morning the news has been confirmed. GM is taking a 7% stake in Peugeot (OTCPK:PEUGY) and the two companies will share parts, platforms and purchasing power. The hope is that with the increased purchasing power, both companies will be able to achieve economies of scale for commodities and other parts. Additionally, the sharing of platforms should allow fewer parts to be purchased and is inline with the trends in the industry of sharing parts between vehicles. Ford (NYSE:F) is well on its way to having a global platform that will allow parts to be interchangeable between vehicles no matter where they are produced.

As part of the alliance, GM intends to take a 7% stake in the French automaker. Peugeot will raise $1.34 billion (€1.0 billion) in new capital by selling new shares to existing shareholders. The two companies said in a joint statement that they would continue to sell their own vehicles independently and on a competitive basis. The deal will mean they can leverage a combined purchasing volume of $125 billion with suppliers. By 2015, GM and Peugeot expect to save approximately $2 billion annually from this deal.

Peugeot would become GM's main partner in Europe and the two would consider broadening their partnership to other regions long-term. I am still a non-believer though. Something needs to happen in Europe for GM Europe, it lost $747 billion during 2011, and a staggering $14 billion since 1999. Additionally, the auto market in Europe is expected to be even weaker during 2012 than it was during 2011. GM is taking a 7% stake in Peugeot and leaves the door open for a larger stake down the road, but it seems to me that Peugeot is getting the better end of this deal, and as a shareholder of GM (through the government) I want a better return for my money.

Auto sales in Europe are down 14% since 2007, and only two factories have been closed, one by GM and one by Fiat. There is such an overcapacity in Europe that plants need to be shuttered or idled to account for approximately 1.5 million units of extra production (to meet current demand levels). Closed plants means fewer jobs which is not a popular topic in Europe right now, which means that governments are not likely to make a stand.

This is GM's latest foray into the European marketplace. It formed an alliance with Italy's Fiat SpA back in 2000. Anyone want to take a guess what the expected savings was from that alliance? You guessed it, $2 billion annually. In 2005, GM paid $2 billion to dissolve the alliance after seeing little to no benefit. As I said earlier in this article, I am unconvinced. I do not think either company will see the benefits that it hopes for, and the hopes of having "unmatched purchasing power" seems ludicrous; Ford and Toyota (NYSE:TM) would have boasted about this purchasing power during their alliance for hybrid technology.

Disclosure: I am long F.