Insight: Capacity and RV management issues could plague Opel-PSA merger

February 27, 2017

Questions have already been raised about the potential of an Opel-PSA merger to unlock the stated cost savings and generate true economies of scale, but with significant unused production capacity and a series of ‘middle of the road’ brands, the combined entity would need a substantial overhaul if it is to reverse recent lacklustre residual value (RV) performance.

Among the biggest savings to be made from combining the two businesses could come from reducing any excess production capacity. LMC Automotive estimates that – despite the factory closures in the early part of the decade – average manufacturing capacity utilisation in the automotive industry was around 65% in 2015; with limited efforts to reduce capacity since. It is unlikely that this has been improved. In fact, Opel and PSA Group – like the rest of the industry – may be holding on to even more unused capacity than at that point.

The most recent figures published by Opel showed its largest plant in Zaragoza, Spain turning out just under 320,000 vehicles in 2014. General Motors Europe’s deliveries have increased by around 100,000 units in 2015 and by a further 30,000 in 2016. If all the additional vehicles sold were produced in Spain, this would take the Zaragoza plant up to the potential 450,000 unit capacity mooted when Opel invested to expand and upgrade it in 2015. General Motors has yet to reach the limits on its plant in Gliwice, Poland, which has an annual capacity of 207,000 units, while production at Ellesmere Port, UK could be pushed as far as 200,000 units.

With excess capacity across the industry, all OEMs are being tempted to manufacture new cars at a faster rate than the market demands, putting pressure on prices. Ever more attractive deals are needed to ensure cars continue to be shifted from the forecourt. However, this discounting puts significant strain on residual values in the long term. Discounted new cars appear to be a better deal than 12-month old cars, with the result that the price of a young used car has to be decreased for it to sell. This same effect then cascades through the market affecting ever older cars.

The question for Opel and PSA Group is where they can act to reduce capacity as part of any post-merger rationalisation. The senior management of both PSA Group and General Motors have already sought to reassure governments across Europe that factories in their countries would be unaffected, but the economics of a deal may force the new management team to renege on those statements.

In announcing its 2016 results, General Motors stated that it would have achieved its goal to bring Opel and its European operation back into the black if it had not had to foot a $300m (€285m) currency impact due to the weakening British pound. The group must be wary that the impact of the UK’s decision to leave the EU will increase once negotiations start in earnest, which has to put the UK production plants at Ellesmere Port and Luton on the at-risk list.

PSA Group has also had its financial difficulties in recent years and the combination of PSA Group and Opel could force the company to re-evaluate how it addresses those challenges. PSA Group houses a string of mainstream brands that have struggled to compete with premium players like Audi, Mercedes and BMW. Like Opel, it has also had to face tough competition from the entry of value brands, including Hyundai and Kia.

Since receiving investment from the French government and Chinese vehicle manufacturer Dongfeng in 2014, PSA Group has been working systematically to differentiate its group brands, positioning Citroën as the entry-level brand and Peugeot as the next step up. The revival of the DS brand has been a deliberate attempt to create a premium line that could go head-to-head with the likes of Audi.

The DS brand has yet to deliver the desired results. Analysis conducted by Autovista Intelligence for its forthcoming report on effective residual value management strategies for new launches found that residual values for 12-month old DS models were all sitting above those for equivalent Citroën models in France in October 2015, with the DS5 enjoying an 8.2 percentage point margin over the Citroën C5 and the DS4 and the DS3 displaying a 7.9 and a 7.2 point advantage over the C4 and C3 respectively (Figure 1). But the gap has narrowed, as DS values have settled from their post-launch high and the DS range has begun to experience commercial difficulties; sales volumes are expected to fall for the fifth year in a row in 2017. This is having an impact on older models. Looking at vehicles on a replacement cycle of 36 months and 90,000km, the DS3 is actually depreciating at a similar rate to other PSA Group models. The DS3 is just 0.9 percentage points above the Peugeot 208 and around three points higher than the C3 in the UK, while in Germany it is over a percentage point behind the C3.

Figure 1: Average residual value percentage for 12-month old PSA Group models in France, October 2015 - December 2016 *

* Based on a replacement cycle of 12 months and 30,000km

The takeover of Opel would complicate efforts to differentiate brands still further. Peugeot’s positioning within PSA Group’s three-tier brand strategy was designed to allow the marque to compete effectively with Ford and Opel. Bringing Opel into the fold means that the company would have two brands in the same space. With efforts to make DS a premium brand faltering, there is limited scope to push any of the brands in the combined group further upmarket, suggesting that the only option would be to move one marque into the budget category to compete with Dacia and others on price. But there would need to be a massive jump in sales volumes for the budget brand to maintain current turnover and generate the kind of growth expected to justify a merger of this size.

Residual value performance in each market also owes much to national preferences, with Peugeot performing slightly better in France and Opel in Germany. All four brands that would be in the combined group are virtually neck-and-neck in the UK, with a brand average for three-year-old cars of 30.0% in Q4 2016 for lowest-ranked brand Opel/ Vauxhall and 31.8% for the best performer, DS. This would make it difficult to decide which brand to move down market in any attempt to differentiate the four group brands.

Playing to brand strengths is a key factor in new car success and strong residual value performance, but brand associations can vary markedly between countries. Some brands like Fiat are stronger in their national market because consumers like to buy local; Volkswagen tends to fare better outside of Germany as it seen as a mainstream brand at home, but more of a premium range elsewhere. For PSA Group to try and differentiate Citroën, DS, Opel and Peugeot on a pan-European basis, it would inevitably undermine some local associations that help to drive valuations on a local basis.

The combined group’s product range is also clustered within just a few segments, with no clear trend as to which brand is the obvious range to position as the second flight after the DS line. In each segment, Citroën, Peugeot and Opel models vie closely for position in terms of value retention.

The Opel Mokka is the clear winner in Italy, which outperforms the Peugeot 2008 in the B-SUV segment with a residual value in Q4 2016 of 41.3%; the 2008 retains 36.7% of its value. In all other markets, there is no more than 1.5 percentage points between them. As both Peugeot and Opel have seen notable success with their SUVs, the combined business is unlikely to want to drop either model at this stage. In the D-segment, the Peugeot 508 takes the second and third spot in all markets, though the Opel Insignia is the more obvious candidate for a strong D-segment offering.

The challenging tussles take place in the B- and C-segments. Of the B-segment offerings, the DS3 retains the highest proportion of its value in France, Italy, Spain and the UK, while the Peugeot 208 is the strong suit in Germany and ranked second in three out of the four markets. Looking at the C-segment Citroën has the edge, placing second in all markets bar Italy, where the Q4 2016 residual value for a car with a replacement cycle of three years and 90,000km was just 0.1 percentage points behind the Opel Astra at 25.3%.

Table 1: Ranking of Opel-PSA Group residual value performances by market, Q4 2016*

* Ranking based on the percentage of the original list price retained after 36 months and 90,000km

PSA Group has invested significant effort to give each of its three group brands a distinct identity and position in the marketplace since the financial troubles of 2014. Taking on another business that operates in a similar niche makes limited sense and raises further questions how the combined business would generate the level of synergies needed to justify the multibillion dollar price tag that General Motors expects for Opel.

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