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Peugeot chief says Brexit adds pressure on Vauxhall's plants

PSA Group is pushing the UK factories acquired in its deal for General Motors's European operations to make a leap in competitiveness to offset the potential risks posed by Brexit.

[FRANKFURT] PSA Group is pushing the UK factories acquired in its deal for General Motors's European operations to make a leap in competitiveness to offset the potential risks posed by Brexit.

British Vauxhall plants, where production costs are about twice as high as the French automaker's domestic sites, face hurdles in either a hard or soft Brexit scenario, Carlos Tavares, PSA's chief executive officer, said in an interview in Berlin. 

If the UK reaches a trade deal with the European Union as it departs the bloc, the plants will need to be competitive with facilities in continental Europe.

Without a trade agreement, they will need to vie with factories overseas, he said in the interview at the Automobilwoche conference.

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Reviving the battered Vauxhall nameplate is probably the biggest challenge in PSA's ambitious turnaround of GM's former European operations, which were purchased earlier this year in a 2.2 billion-euro (S$3.479 billion) deal.

While the plan includes prospects to export Opel vehicles into more than 20 new markets, Vauxhall remains relegated to the UK, raising questions about its future.

'Dump Vauxhall'

"Dump the Vauxhall brand," Max Warburton, an analyst at Sanford C Bernstein, said in a report Thursday.

"Even the most jingoistic Brexiteers would rather buy a German car. There's no room for a one-market brand in 2017."

To illustrate how weak the brand is, the analyst once recalled an episode at a recent UK motoring event, the Goodwood Festival of Speed, when Vauxhall cars didn't attract any by-passers despite games and a big stand, in sharp contrast with a packed display area for Ford Motor.

The chief of the Paris-based maker of Peugeot, Citroen and DS cars disagrees. Mr Tavares argues there's value in developing the marque around its long heritage to reconnect with British consumers.

"I consider Vauxhall as an asset and not a penalty," he said.

"I don't see there's a risk that Vauxhall doesn't stay."

Vauxhall was founded in 1857 and began manufacturing cars in 1903. Since the 1980s, the cars have been largely identical with the models designed and engineered by Ruesselsheim, Germany-based Opel.

The automaker operates a factory in Ellesmere Port, England, that produces the Astra hatchback and station wagon as well as a plant in Luton, outside London, that makes vans.

Barrier Risk

The brand could turn out to be a valuable asset in the wake of Brexit. "It wouldn't be smart if management just says we close Ellesmere Port and suddenly there are trade barriers and we have no production capacity in this important market and lose access," Wolfgang Schaefer-Klug, Opel's top labour representative, told reporters Thursday in Ruesselsheim.

PSA plans to cut 400 jobs there.

While Vauxhall's future has yet to be mapped out, a revival could include reversing years of re-badging Opel cars with the British marque's griffin logo.

"Nothing is taboo, including differentiation," Mr Tavares said, adding that the guiding principle is that "we make money", a rarity for the operation under GM's ownership in recent years.

PSA aims to change that by reducing Opel and Vauxhall's production costs by 700 euros per car by 2020 to generate an operating margin of two per cent of revenue. 

Unlike many restructuring plans in the auto industry, the company is not relying on growth to fix its problems. 

Instead, Opel's effort will largely mirror PSA's own revamp under Mr Tavares, who transformed an industry laggard squeezed by bloated costs into one of Europe's most profitable mass-market manufacturers.

Mr Tavares, 59, eliminated unnecessary expenses and focused the company on its most lucrative models, ceding market share in the process.

Still, "overall, the turnaround will be undoubtedly harder to achieve than it was for PSA Group," Jean-Louis Sempe, an analyst at Investec, wrote in a report.

Outlining Strategy

The PSA reorganisation involved Mr Tavares setting more specific targets with managers than announced in financial statements, a method that can leave investors cold.

PSA shares fell 3.5 per cent to 18.99 euros as of 11.23 am Friday in Paris, accelerating from a 2.2 per cent drop Thursday, when Mr Tavares outlined his strategy for the former GM nameplates.

Kepler analyst Thomas Besson called the presentation "disappointing, in our view, as management refuses to give any reference/starting point for future improvement".

In acquiring Opel, PSA doubled down on Europe's saturated market.

While relying on the region without a strong presence abroad is a risk, it forces PSA to compete and the carmaker can still make "tons of money" on its home turf, Mr Tavares said.

Strong European operations provide the platform for expansion elsewhere, he said.