How PSA turned around Opel, GM’s German castoff

August 29, 2018 10:37 CET

The giant Opel factory in Ruesselsheim, an industrial city a half-hour’s drive west of Frankfurt, appears little changed from last summer: Employees still wear “We are Opel” T-shirts and spend their days building Insignia sedans and Zafira minivans. One thing, though, is dramatically different: The cars that roll off the end of the line are sold at a profit.

“When I see friends in the pub, I can finally put the keys to my Opel on the table with pride again,” Matthias Deschamps, a 33-year assembly-line veteran, says looking over the production floor. In July, when the automaker reported its first profit since 1999, “there was a big sigh of relief.”

The end of Opel’s run of losses — $20 billion in red ink over two decades — came less than a year after General Motors sold the company to PSA Group.

PSA CEO Carlos Tavares, who was ousted as Renault’s chief operating officer after publicly seeking the top job at GM, has made peace with skeptical unions and figured out how to profitably produce low-margin cars in a high-cost country.

Opel posted earnings of €502 million ($583 million) in the first half, against a €179 million loss from August to December 2017, the first five months under PSA. Opel’s 5 percent profit margin is now on par with Volkswagen Group’s namesake VW brand, which has double the market share in Europe and sells more than five times as many cars globally.

As he did at PSA, Tavares avoided angering the staff with expensive and disruptive factory closings. Instead, he secured an agreement with labor to trim salary costs by reducing the standard work week to 35 hours from 40 and eliminating 3,700 jobs through buyouts.

Tavares has also cut output—Opel’s European deliveries dropped 6.2 percent in the first half to stem losses and focus on cars customers actually want to buy. In Ruesselsheim, that means assembling 42 vehicles per hour instead of 55.

For PSA, Opel offers an opportunity to survive in the ultracompetitive mass-market auto business by spreading costs across more vehicles. And for Tavares—a notorious penny-pincher who flies discount airlines, urges colleagues to turn off office lights when they leave, and abandoned the prestige of a headquarters in central Paris for the suburbs—it was another chance to prove himself.

Reducing complexity

In contrast to the flybys typical of GM executives, his first official visit to Ruesselsheim a year ago became a six-hour inspection tour as he took a deep dive into Opel’s operations, initiating part-by-part comparisons with Peugeot and Citroen. The review uncovered hard-to-justify excesses such as the 57 possible infotainment systems for the Corsa, a small hatchback that starts at about 12,000 euros. That is being reduced to fewer than 10. Similarly, Corsa buyers will have nine windshield and wiper options, down from 16.

“Under PSA, there is a stronger focus on reducing complexity,” said Flavio Friesen, a director for vehicle engineering who has worked at Opel for 11 years. “That has helped us get more efficient.”

PSA faces more challenges, as it’s highly reliant on the saturated European market where it competes with global giants such as Volkswagen, Toyota, and Renault-Nissan. The group’s brands largely target the same price-conscious consumers, and Opel’s reputation needs polishing after GM’s ownership. The U.S. company sought to sell the brand in 2009 but pulled the plug at the last minute to maintain a presence in Europe, and Opel had five chiefs in its last seven years under GM.

PSA must figure out what to do with the Vauxhall nameplate, which sells almost identical cars to Opel in Britain, adding cost and complexity to its operations. And Opel will have to make the transition to electric vehicles under the guidance of PSA, which has lagged behind rivals such as Volkswagen and Renault-Nissan.

“Opel is not done,” says Stefan Bratzel, director of the Center of Automotive Management at the University of Applied Sciences in Bergisch Gladbach, Germany. “The challenge is to combine good numbers with good marketing and change their image.”

While Tavares has called the ahead-of-schedule profit a “first very positive sign” of Opel’s recovery, he cautions that achieving PSA’s goal of 1.7 billion euros in annual savings from the deal will depend on combining the companies’ engineering teams. The revamped Corsa, due next year, will share most basic parts and technical elements with compacts from PSA’s French brands, and other models will soon follow.

And then there are Tavares’s long-term goals, including an eventual return to the U.S. and transforming PSA from a European specialist to a global player. While he won’t rule out further acquisitions, he says PSA doesn’t need to grow dramatically to be successful. “More than volumes, profitability is the most important element,” he says. “I prefer agility and efficiency to being the biggest car group.”

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