PSA faces harder decisions over Opel cuts
French carmaker has been careful to avoid cuts and closures — but for how long?
Walking out of Opel’s factory headquarters in Rüsselsheim in Germany, workers are surprisingly upbeat in spite of the threat of job losses after General Motors sold the German carmaker to France’s PSA earlier this year.
“Our team thinks there is potential for more opportunities,” says Manuel, an engineer and one of 15,000 employees at the plant. “We have a bigger market [with] the joint forces we have. We can offer more variants to our customers.”
Another says that he hopes for better practices at Opel, which he describes as inflexible and slow under GM. “That’s our hope with PSA — that we can be more free, have more autonomy.”
But the optimistic outlook on the factory floor jars with the hard reality facing the group’s management, having sealed a deal that makes PSA the second-biggest-selling car group in Europe after Volkswagen earlier this year.
Opel notched up $19bn of total losses since 1999 under General Motors, and when PSA bought the division earlier this year the new owner said it would need to cut €1.1bn in costs by 2020 to return it to profit.
In November, PSA management spoke of “necessary and unavoidable” cuts to labour at Opel, which also owns Vauxhall in the UK. But it surprised many analysts by pulling its punches on job cuts during its strategic update, saying it would strive to avoid compulsory redundancies and site closures by combining manufacturing, research and procurement.
Investor hopes are that chief executive Carlos Tavares can turn Opel round as he did with PSA. In 2014, when the owner of Peugeot and Citroën brands was on the brink of collapse, Mr Tavares oversaw a recovery based on drastic cost savings and plant closures. Now, PSA is not just surviving, it is achieving better profit margins than rivals.
While PSA revenue has only increased from €53.1bn in 2013 to €55.4bn in the last four quarters, according to S&P Capital IQ, operating profits have turned from a loss of €389m to a profit of €3.4bn. In half-year results, PSA reported operating margins of 7.3 per cent against less than 4 per cent at the Volkswagen brand.
But analysts are worried the trick will be hard to repeat. “Opel needs more hands-on management and PSA needs to move faster and more aggressively,” says Bernstein’s Max Warburton.
He adds that PSA “has revealed very few details about what it’s found at Opel and we have no financials to work from. In this kind of vacuum, it's easy to see why investors are getting nervous.”
The European car market is threatening to turn in the near future following years of expansion, particularly as the threat of Brexit looms over the industry.
Analysts are already worried about the cost of Opel’s strategy to meet the EU's 2020 carbon emissions targets, when stiff penalties will hit carmakers missing those targets. Citi estimates the cost of compliance for Opel could be between €1bn to €3bn as the company switches to cleaner PSA technologies at a faster rate.
But the emissions targets — which could lead to millions in euros of fines — are seen by analysts as less of a worry than the fundamental task facing PSA in restructuring Opel and reducing its fixed costs. Opel has a significantly higher ratio of wages to revenue than PSA.
PSA wants to save €1.1bn annually by 2020, rising to €1.7bn by 2026, and taking €700 off the production cost of each car.
But analysts say Mr Tavares faces a different sort of challenge to PSA. “My view is they tried to pitch this thing as another Peugeot turnround, but it really cannot be compared,” says Thomas Besson, at Kepler Cheuvreux.
Analysts argue much of the groundwork at Peugeot, including a crucial agreement with unions, was done before Mr Tavares arrived. The deep crisis at the company also led to the French government coming onboard as an emergency shareholder.
“That meant it turning a blind eye and allowing them to do this restructuring,” says Mr Besson.
PSA “softened us up psychologically. They played up the crisis and it became much harder to fight the cuts," says Thomas Baudoin, a spokesperson for French union CGT.
According to Citi, between 2011 and 2016, PSA reduced its automotive workforce in Europe by close to 28,000 workers, or roughly 25 per cent.
In order to meet PSA's benchmarks, Opel will eventually have to cut its 38,000 strong workforce by between 5,000 to 8,000, at a cost of about €500m, estimates Citi. But with conditions less dire and government support for a wide restructuring lacking, Mr Tavares will not have the same free hand
PSA appears eager to avoid forced job cuts or factory closures so far. Opel reached an agreement with its unions last Friday aimed at avoiding compulsory job losses through shorter working hours, voluntary redundancies and other cost savings.
“The good news . . . is that the unions were somewhat involved in the drawing up of the plan. There is buy-in of some sort,” says Philippe Houchois at Jefferies.
“I think it's not exactly the same context [as the PSA agreement with its unions] but the situation could be compared and the spirit is the same,” says Xavier Chéreau, a PSA human resources director, who took part in the union talks.
Mr Tavares also comes with his personal credit at a high. “Tavares has a high level of credibility,” says Mr Besson. “He has an amazing level of aura and PSA know it and they play it.”
But further cuts will need to occur, and analysts warn that these sorts of decisions will only get harder. The problem for factory workers is that the big decisions are still to come.
“Right now there is no need and it would actually be negative for them to do a massive reduction of headcount,” says Mr Houchois. “So the first approach is a soft approach, based on talks with unions and voluntary departures.”
The soft touch helps explain why Opel workers remain optimistic, for now. “I take it as a challenge, an opportunity to grow,” says a third engineer in Rüsselsheim. “You don’t have to take it as something bad. It’s a possibility to change.”
Mr Houchois warns the next phase could be tougher if PSA tries to reduce capacity. “That will be harder and based on whether Opel itself can reduce costs [as well as] Brexit risks and broader market conditions,” he says.