General Motors' last tango in Paris

February 27, 2012: 12:48 PM ET

The automaker has struggled to make gains in Europe and now it's contemplating an alliance with Peugeot. The odds are long -- and here's why.

By Doron Levin, contributor

opel_dealershipFORTUNE -- The alliance between PSA Peugeot Citroen and General Motors currently being mulled by both companies may prove marginally beneficial. But, it is unlikely to solve each auto maker's deep economic and financial troubles in Europe. And for the American side of the equation at least, it may only serve as a painful reminder that GM has stumbled attempting such a maneuver several times before.

GM's (GM) chief executive officer, Dan Akerson, must rue the day that the automaker decided not to sell GM Europe's Opel subsidiary to one of several eager suitors when it had a chance in the aftermath of its 2009 bankruptcy. Then chief executive Fritz Henderson favored the move, which today would have looked very shrewd. Henderson was overruled by GM's board and then forced out in favor by then-chairman Ed Whitacre, who took over from Henderson. Whitacre quit less than a year later.

Instead, GM negotiated a restructuring agreement with Opel's unions to close a plant in Antwerp, with the loss of 8,300 jobs, in return for the union's agreement to cost savings through 2014. Analysts concur that across of car companies Europe has far too much capacity to build vehicles, a problem that has only worsened as the European financial crisis has further depressed sales.

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GM's management prior to its bankruptcy and reorganization by the U.S. government demurred on an offer to join a strategic alliance with Renault SA and Nissan Motor Corp. in 2006 -- another seemingly unfortunate move in hindsight. Carlos Ghosn, Nissan-Renault's boss, saw the opportunity for several cooperative ventures with GM that could have saved costs for all three parties. GM torpedoed the talks by demanding a $2 billion payment as the price of becoming an ally. Though the potential opportunities were never spelled out publicly, it's easy to imagine that GM's Opel brand could have forged cost-sharing projects, just as Daimler's Mercedes brand has subsequently began to realize in cooperative ventures with Renault.

Marring the track record further, a decade ago GM engaged in a broad alliance with Fiat SpA that ended with few savings, lots of acrimony and a $2 billion payment from the Americans to the Italians. The agreement was eventually aborted. (Fiat is now aligned with another Detroit manufacture, Chrysler.)

Akerson, who is painfully aware of GM's abysmal record in Europe, is not prone to dither. He knows that GM's current market capitalization is deeply compromised by European losses, and thus an annoyance to the U.S. Treasury, which would like to sell its 25% interest in GM. One equity analyst values GM Europe at a negative $8 billion or $5 a share, a nasty dent in GM's overall $42 billion capitalization. Akerson has assigned a top lieutenant, GM vice chairman Steve Girsky, to resolve the European mess. Girsky was named chairman of Opel's board and is adding members from GM's top management in Detroit.

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Question is, is Peugeot the right dance partner? Not likely. The manufacturer is one of the least impressive on the continent if not the planet. The Paris-based automaker is dominated by the Peugeot family and under heavy pressure from the French government to avoid closing plants in France. Last year's the company's share of the western European market fell to 12.6 percent to 13.7 percent, as sales fell overall.

What's more, GM's Opel and Peugeot already maintain cooperative ventures with various European carmakers for common parts and a few shared architectures, such as Peugeot's venture with Toyota (TM) in the Czech Republic. But the substantive efficiencies are needed in each automaker's basic manufacturing organization. "However, it is unlikely that any sort of rationalization will come directly out of" an alliance between GM and Peugeot "due to political and union factors and as a result will be something far more suitably addressed alone," said Ian Fletcher of IHS Global Insight in a research note from London.

GM said it has "talks continuously with all sorts of parties," while declining to acknowledge that specific alliance talks with Peugeot are taking place. In its last conference call for reporters and financial analysts, GM executives said the automaker remains committed to returning Europe to profitability and that the subsidiary isn't for sale.

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Meanwhile, Peugeot chairman Phillippe Varin estimates Europe's overcapacity at about 3 million vehicles. Peugeot and Opel together sell about that number, meaning that the industry might be better off if the two companies simply shut their doors, or if they found Chinese partners eager to try their hand abroad. Since those two options are unlikely, the two auto makers will first try to contradict a time-worn adage of Wall Street: two rocks tied together are unlikely to float.

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