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Is the takeover good news or bad for Vauxhall?

Penny Brooks

7th March 2017

Takeovers and Mergers have been all over the news recently, and the sale of car-makers Vauxhall and Opel to PSA (owners of Peugeot and Citroen) for £1.9bn is the biggest one of this week, so far. There are a number of useful articles about the deal - here is a view of some of the issues raised.

First, it seems surprising that former owners GM have not sold Vauxhall and Opel before now, given that neither of the European manufacturers have made a profit since 1999. GM's rationalisation in the US since 2009 has led to stronger profitability there, and their US operations in 2016 gave them a pre-tax profit margin of just over 10%. However, they need to invest heavily there in new models and cleaner cars to meet tougher emissions targets, so the injection of capital from the sale of Vauxhall and Opel will be very welcome.

Second, PSA may be interested in consolidating their share of the European market in order to gain the maximum possible economies of scale. There is massive over-capacity in the car market, estimated at around 20% more potential output than is needed for the market. This means that unit costs are higher than they need to be, and also that prices are driven down, so that profits are squeezed from both sides. Further, growth in demand for new cars in Europe is predicted to fall from 6.5% last year to only 1% this year. PSA will now own 24 factories across Europe , so there is likely to be significant scope for them to cut costs by closing some of them in order to make fuller use of the capacity at those remaining open. This will be a worry for those employed at Vauxhall's factories in the UK, where jobs appear safe until 2025 but after that, PSA's chief executive says that it is down to the workers there to prove that they can 'be the best' - by which he means the most productive. As each job inside a car factory is reckoned to support 7.5 related jobs in the supply chain, it will be in the interests of all stakeholders to raise productivity to the maximum possible.

Third, another way of cutting costs is to cut out the uncertainty of exchange rate variation. The weakness of sterling since the Brexit vote last June has added to the costs of manufacturing at Vauxhall's plants at Luton and Ellesmere Port, because up to 75% of the components that they are using come from elsewhere in Europe. This means that the cost of those components has risen by up to 20% as the factories need to pay more in sterling to access the euro-priced goods. To add to this, in the days of free movement of goods, that is an efficient way to source materials. Now there is the threat that those components may cost even more if there is an import tariff imposed on them.

Finally, and more optimistically for the 4,500 workers at the two UK factories, PSA may be hedging against a 'hard Brexit' when it may be more - not less - important to have manufacturing in the UK, according to Andy Palmer, the chief executive of Aston Martin. As Simon Jack reports this morning,he told the BBC that for a company like PSA - if there is a tariff wall - having some production on the other side of it could make sense as a measure of insurance against high tariffs and volatile currency moves. For that to work, though, more of the supply chain would need to move to the UK and that takes government help. With the UK Budget due tomorrow, there is scope for the Chancellor to start to provide the support for such an investment, with focus on some of the UK's areas of skills in innovation and engineering as the market re-focuses on electric vehicles, battery technology and driverless cars.

Penny Brooks

Formerly Head of Business and Economics and now Economics teacher, Business and Economics blogger and presenter for Tutor2u, and private tutor

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