Carlos Tavares Copyright Harold Cunningham, Getty Images
Carlos Tavares

Peugeot’s Owner Does to Opel What GM Failed to Do in 20 Years

The brand is making money again under French owner PSA Group following nearly two decades of losses.

A year after General Motors Co. gave up on European automaker Opel, the brand is making money again under French owner PSA Group following nearly two decades of losses.

The turnaround shows PSA Chief Executive Officer Carlos Tavares is reaping the benefits of pushing Opel’s labor unions to accept job losses, and of cutting back on everything from printers to company phones. He’s also slashed development spending by piggybacking new Opel models onto existing platforms of the parent’s Peugeot and Citroen brands.

“This is simply the quickest turnaround I have seen in the auto industry in many years,” JP Morgan analyst Jose Asumendi wrote in a note. The shares surged 13%, the most since 2012 and were 10% higher at 11:16 a.m. in local trading.

The rise back to profit for the German Opel brand and British sister marque Vauxhall, bought for 1.3 billion euros (US$1.5 billion) in March 2017, adds another notch to Tavares’ reputation as a cost cutter, showing off his ability to achieve the savings necessary to compete amid Europe’s high wages and thin profit margins. PSA’s own recovery included a 2014 bailout, freezing pay, weeding out unprofitable models and shutting a plant.

As a result, the mass-market manufacturer has lifted its profit margin into the realm of premium brands like Audi, BMW and Mercedes-Benz. The boost is necessary to gain room to maneuver at a time of unprecedented industry change with regulation forcing carmakers to produce profit-sapping electric vehicles even as buyers remains on the fence. PSA’s return on sales from carmaking rose to a record 8.5% for the Peugeot, Citroen and DS nameplates for the first half, and to 7.8% across the group including Opel.

“We’re seeing the first signs of this successful turnaround,” Tavares told Bloomberg TV’s Caroline Connan in an interview. “Each employee is contributing and I’m very happy to see the results with all of our stakeholders.”

During a later analyst call, Tavares cautioned to toast too early on the success of Opel’s return to profit, calling it “a first sign.”

Opel made 502 million euros of profit during the first six months of 2018 compared with a loss a year earlier, PSA said. Since buying the ailing brand, PSA has said it’s making good progress on slashing costs of developing new models like the next Corsa hatchback by between 20% and 50%.

The effort to cut spending also meant forging an agreement with German labor representatives to eliminate 3,700 jobs from Opel’s German workforce of about 20,000 employees.

Analyst Beat

For the group, recurring operating profit jumped 48% in the first half of the year to 3.02 billion euros ($3.5 billion) as higher sales and popular models like the Peugeot 5008 sport utility vehicles helped offset higher raw materials costs and currency swings, the company said in a statement. That’s better than a forecast of three analysts complied by Bloomberg.

“Opel-Vauxhall has started to reveal its full potential for performance thanks to the strong involvement of its teams,” Chief Financial Officer Jean-Baptiste de Chatillon said on a call with reporters. For the first time in years, the brands booked a profit “thanks to cost reduction and improving pricing power.”

Just as it is bolstered by strong car demand in Europe, PSA is facing difficulties in other markets. It halted its operations in Iran -- its biggest market outside France -- in May to comply with U.S. sanctions, hoping for the French government to negotiate a waiver that U.S. authorities refused to grant.

In China, the manufacturer is working to turn around its operations and extend a nascent recovery in sales during the first half after deliveries last year slumped 37% in the region.

“I can tell you: We will not give up,” Tavares said.

By Ania Nussbaum

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