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Peugeot-Opel Merger: Implications for Western European Car Market and Industry Production

July 2nd, 2017

Peugeot SA has agreed to take over the Opel/Vauxhall brand from General Motors (GM), with the deal valued at EUR2.2 billion. Both companies are in the final stages of negotiations, with GM hinting that the takeover could be wrapped up by 31 July. Euromonitor International discusses key implications that the deal will have on both the Western European new car market and automotive industry.

Implications for car market

1. Peugeot-Opel/Vauxhall will become the second largest car company in Western Europe

One of Peugeot’s main goals with the Opel/Vauxhall takeover is to increase its market share. After the merger, Peugeot-Opel/Vauxhall will overtake Renault-Nissan to become the second largest carmanufacturer in Western Europe.

Greater market share will provide more room for the company to manoeuvre and offer better pricing on models thanks to economies of scale, as well as greater negotiating power. Moreover, the acquisition of Opel/Vauxhall will provide a good platform for Peugeot to expand its sales in Northern and Eastern Europe, where Opel is a more popular brand than Peugeot.

Source: Euromonitor International and JATO Dynamics

2. Commercial vans could boost Peugeot-Opel/Vauxhall sales

Commercial vans is one of the fastest growing categories in Europe. Van volume sales in WesternEurope and Eastern Europe are forecast to grow by 2% and 6% respectively over 2016-2020.

Commercial van production is usually handled through a complex web of alliances and joint development projects. The Peugeot-Opel/Vauxhall merger will strengthen Peugeot’s position in the commercial van industry and provide new opportunities to expand. Peugeot plans to launch eight new commercial vehicles by 2021. If the plan succeeds and model cycles align, commercial vans could lift Peugeot-Opel/Vauxhall production and sales by 150,000 units.

After Opel/Vauxhall takeover, Peugeot is likely to cancel its cooperation agreement with Fiat to produce commercial vans for the Turkish market. Opel operates plants in Vigo (Spain) and Mangualde (Portugal) and Peugeot is likely to opt for manufacturing vans in aforementioned plants instead of outsourcing production to its rival. This would also leave Fiat in difficult situation, as the company would have excess capacity in van production and would be forced to search for new partners.

3. Threat of sales cannibalisation and limited opportunities to expand outside Europe emerge

Despite increased market share, Peugeot-Opel/Vauxhall will face a threat from sales cannibalisation. Both brands operate in Europe and offer products in the same medium and compact car categories, meaning that the product offerings will be in direct competition. However, the example of Renault-Nissan alliance proves that it is possible to avoid direct competition. Renault and Nissan offer cars in same market segments, yet both brands have different styling and usually compete in different price categories. Similar strategy could be applied by Peugeot-Opel/Vauxhall too.

Opportunities to expand company sales also seem limited, making the new company highly susceptible to demand fluctuations in Europe. Peugeot sells its models in China; however, GM might demand that the Opel brand is barred from entering China as part of the conditions of the brand sale, since Opel would directly compete with the Chevrolet and Buick brands in China.

Expanding into North American market would seem as the next logical step, given the fact that Opel already supplies cars to the US, rebadged as Buick. However, given the lack of US consumer awareness of Opel brand and possible resistance from GM, it would take time for Opel to accumulate significant sales volumes in America.

Implications for production

1. Synergies and platform sharing will improve Peugeot-Opel/Vauxhall profits

Peugeot claims that the Opel takeover will provide EUR1.7 billion in savings by 2026, with most of the gains delivered by 2020.

Synergies will occur through the combined purchasing and sharing of platforms/components. For example, Peugeot plans to jointly develop a new car platform with Opel, which will accommodate small cars under the Citroen, Peugeot and Opel brands.

Peugeot-Opel/Vauxhall will gain from the sharing of research and development costs. Both companies seem to fall behind competitors in electric car and autonomous technologies development, while Opel has delayed the launch of several new models, partly because of a lack of research and development funds. The situation is likely to improve once research and development funding and engineering capabilities are pooled.

2. The UK’s facilities future is uncertain, while Spain could gain

The UK might lose the most from Peugeot’s takeover of the Opel/Vauxhall brand. Opel/Vauxhall operates two production facilities in the UK, in Luton and Ellesmere Port. The Luton factory produces engines and commercial vans. Its future might be secured by Peugeot’s plans to boost commercial van production; however, production capacity might be reduced. Ellesmere Port plant meanwhile faces a far less certain future. The plant manufactures the Astra model, with the contract ending in 2021. Around 80% of output is exported to Europe and Brexit could hinder Peugeot’s willingness to manufacture the Astra model in the UK due to high political uncertainty caused by Brexit and exchange rate fluctuations.

Spain, on the other hand, might benefit from Peugeot-Opel/Vauxhall production consolidation, largely due to lower production costs. Both Peugeot and Opel have production facilities in Spain, with some of them working below optimum capacity levels. Spain provides lower-cost manufacturing in comparison to Germany, France or the UK; therefore, production from smaller plants in France and Germany could be relocated to Spain.

Source: Euromonitor International from national statistics, company reports

3. New markets could open up for suppliers, but cost pressure will intensify

Peugeot’s takeover of Opel/Vauxhall might provide new opportunities for suppliers. French and German suppliers cooperate with car manufacturers from their domestic markets. However, increased cooperation between French and German companies would change the supply chain and might open up new opportunities for smaller suppliers to expand their exports.

However, at the same time, cost pressure on suppliers is likely to increase. Industry’s attractiveness index, calculated by Euromonitor International, shows the bargaining power of producers over suppliers. The automotive industry already has high bargaining power relative to other industries in France, Germany and Spain. The Peugeot-Opel/Vauxhall merger will make the Western European car industry even more concentrated; therefore, the industry’s bargaining power and cost pressure on suppliers will increase.

Note: Bargaining power over suppliers shows the industry’s potential power to negotiate the prices and other supply conditions of its major intermediate purchases. It shows if the industry has higher bargaining power than other industries operating in the selected countries

 

 

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Justinas Liuima

Justinas Liuima is a Senior Industry Analyst at Euromonitor International. He holds bachelor’s degree in Economics from ISM University of Management and Economics and now studies in International Marketing Master’s programme. Justinas started working in Euromonitor International in 2013 as an Industry Analyst in Passport Industrial team where he analyses transportation industries. Professional interests include motor vehicles, aircrafts and market research. You can find him on LinkedIn.

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