General Motors' second bailout could sting

October 25, 2012: 9:50 AM ET

Not in America, but in Europe. The company's alliance with Peugeot is struggling — and that means intervention by the French government.

By Doron Levin, contributor

FORTUNE -- A grim situation for global automakers selling cars in Europe is growing worse.

Now the two biggest Detroit-based automakers are undertaking drastic cost-cutting measures to stem massive losses. General Motors Co. (GM) is joining forces with PSA/Peugeot-Citroen to split the cost of developing new models for GM's Opel and Vauxhall brands on the continent. Ford Motor Co. (F) is shutting its under-utilized Belgian assembly plant in Genk. Ford will juggle production among its plant in Valencia, Spain and Sarlouis, Germany.

GM's move comes as financially ailing Peugeot has secured a rescue from the French government. France will guarantee $9 billion worth of new Peugeot bonds in return for greater influence over the automaker's operations. Without France's intervention, analysts say, Peugeot faces insolvency -- and GM would lose in its latest bid to stanch losses on the continent, which have totaled about $12 billion over the past decade. GM is Peugeot's second-biggest shareholder, under terms of an alliance forged earlier this year.

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Volkswagen AG and the German state of Lower Saxony, where VW is located, are protesting that French aid for Peugeot (and, by extension, for GM's Germany-based Opel unit) constitutes a violation of European Union rules and have asked for a review by the EU. "I see that certain of our competitors don't see [the bailout] with a friendly eye, but when the terms are presented you'll see that it's not state aid, but support," Peugeot chief financial officer Jean-Baptiste Chatillon told Bloomberg News.

GM, which filed for bankruptcy in 2009, is 25% owned by the U.S. Although the automaker's finances are strong, its difficulties with Opel/Vauxhall are a drag on the company and its stock, which is trading at roughly two-third's its 2010 offering price. Privately, GM executives are anxious to sever the company's connection with the U.S. Treasury. GM wants to end the appearance of government oversight of business decisions; and the automaker is rankled by the stated bias of some consumers against GM vehicles due to government aid in 2009.

GM identified four vehicle projects it will pursue with Peugeot: a compact, multipurpose van for Opel/Vauxhall; a small car; a low-emissions small car and a midsize car. "Certainly [GM] being tied to a French automaker through an equity position complicates matters," said Michelle Krebs, analyst for Edmunds.com, an automotive website, referring to the report of a bailout from the French government.

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The Ford action in Belgium will cost more than 4,000 jobs. It will put more pressure on GM, which also must cut capacity. GM has said its Bochum, Germany assembly plant could be closed in 2016. Ford's sales in the EU dropped 12.6% during the first nine months of 2012 in a market that's down 7.6%. In the second quarter Ford posted a $404 million loss in Europe. UBS on Sept. 17 estimated that shutting Genk could save Ford $500 million in costs.

The executives who took GM into bankruptcy were burned badly by a failed European alliance with Italian automaker Fiat a decade ago. (Fiat now controls Chrysler.) The previous generation also blundered on a chance to ally with Renault, whose alliance with Nissan (NASNY) and growing cooperation with Mercedes makes it relatively stable and financially secure. GM's new generation of executives has no scars from those debacles -- but it also has few good options in Europe other than to make what alliance it can and pray for an economic rebound.

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