GM Throws $400 Million At Peugeot With No End-Game

This story should get wider coverage. General Motors, which is still trying to shed its legacy costs and has shown some strength in the current fiscal year, made the decision to invest in flagging French automaker Peugeot to the tune of $400 million.

There's absolutely no reason that GM should have made the move. It doesn't help GM in the slightest and adversely affects GM's bottom line. Peugeot has crummy credit ratings from the ratings companies, and there is no upside.

Yet, American taxpayers now have exposure to the ailing French company. Why?

Peugeot can undoubtedly use the cash. Last year, Peugeot’s auto making division lost $123 million. And on March 1 – just a day after the deal with GM was announced – Moody’s downgraded Peugeot’s credit rating to junk status with a negative outlook, citing “severe deterioration” of its finances.

In other words, General Motors essentially just dumped more than $400 million of taxpayer assets on junk bonds.

GM has said the deal is designed to give GM access to Peugeot’s expertise in small car and hybrid vehicle technology and ultimately allow both GM and Peugeot to save money by pooling their resources. But auto industry analysts find the deal mystifying.

An analysis by auto industry consultants IHS said it is “somewhat baffling that GM is willing to get involved in an alliance that it frankly does not need for size or complexity, while still avoiding any public plan to rationalise its European production, cut costs, or deal with labour rates.”

The deal will allow the Peugeot family to reduce its share of the family business. The family, which Forbes estimated to be worth more than $2 billion, still owns about 30 percent of the company. The Peugeots declined the opportunity to buy a piece of GM.

GM’s European operations have not enjoyed the same kind of rebound as its US operations. In fact, GM’s European operations, primarily the carmaker Opel, lost more than $700 million last year.

GM doesn't benefit nearly as much as their spinmeisters would love people to believe. GM has economies of scale that Peugeot doesn't have, and it would take years for GM to incorporate any Peugeot technologies into GM branded cars. Meanwhile, GM's European division is suffering from huge losses (offset by the rebounding American car market), and the money would have been better put to use investing in the company or setting aside a rainy day fund in case the markets go south again.

To say that the decision was baffling is an understatement. It makes no sense. This exposes the company to tons of downside risk, and little rationalization of existing GM assets in Europe. It's $400-$450 million that could be used to help shore up the Opel division and freshen/update models that are in need.