By Christiaan Hetzner and Laurence Frost
FRANKFURT/PARIS (Reuters) - General Motors Co (NYSE:GM - NewsGM.N) and PSA Peugeot Citroen (:PEUP.PAPEUP.PA) are discussing a manufacturing alliance designed to stem losses in Europe and lower production costs elsewhere, people with knowledge of the matter said.
For GM, an alliance would provide a means to lower operating costs at its loss-making European unit, Opel, while Peugeot would gain much-needed access to international markets at a time when auto sales in Europe are sagging, sources said.
But analysts warned that it could take up to 10 years to see the full benefits of such an alliance. They also said additional steps would be needed to overcome the fundamental problem in Europe's auto industry - excess capacity.
"The logical thing to do would be to close plants," said London-based Bernstein analyst Max Warburton. "But they've not been able to do it independently, and there's no reason to think they could do it together."
Peugeot confirmed it was in talks but would not name the partner. GM spokeswoman Kelly Cusinato said: "We routinely talk to others in the industry but have no comment beyond that."
In a radio interview, French Labour Minister Xavier Bertrand confirmed that the government had been informed about a possible "strategic partnership." Online newspaper La Tribune reported that the discussions had been taking place for months.
Talks between Detroit-based GM, the world's biggest automaker, and European No. 2 Peugeot are focused on sharing vehicles and parts rather than swapping stakes, according to the people. Any new shareholdings that emerged would be small and symbolic.
An alliance could eventually yield potential cost savings between $2 billion and $3 billion by pooling together vehicle development resources and sharing platforms, Morgan Stanley analysts said.
Barclays Capital said the two can share supply chains and capital expansion in emerging markets, including India.
The Peugeot-GM alliance under discussion includes shared manufacturing beyond Europe, the sources said. It would amount to more than another product-specific deal of the kind Peugeot already has with Ford Motor Co (NYSE:F - NewsF.N), Toyota Motor Corp (:7203.T7203.T) and BMW AG (:BMWG.DEBMWG.DE).
A wholesale integration of France's Peugeot with Opel would be fraught with political obstacles, observers warn. In his interview, Bertrand said the government would seek to ensure any deal protected domestic jobs.
Barclays sees as unlikely the chance that either GM or Peugeot could take out capacity by engaging in an alliance, unless European political leadership gives the green light for plants to shut.
Other analysts said while the pairing could trim costs, Peugeot and Opel have little to offer one another in the region, where they both have too much capacity and remain heavily reliant on Western European buyers.
"I don't see these two helping each other because they suffer from the same disease," AutoPacific analyst Dave Sullivan said.
TREADING CAUTIOUSLY
The European auto market has long been plagued by too much capacity, cutthroat price competition and paper-thin margins. Those structural issues have been compounded by the recent debt crisis, which has hurt consumer confidence and caused many would-be car shoppers to pull back on their spending.
Peugeot shares gained more than 12 percent to close at 16.13 euros in Paris on Wednesday. GM shares fell 1.9 percent to $26.55.
"There's increased pressure for Peugeot which remains heavily reliant on the European and French market to broaden its presence around the world," said a source familiar with the situation.
"The challenge for Peugeot is that it's not in the U.S. market, one of the world's largest, and its presence in China is growing but still small, it's too reliant on home market which is shrinking at least in this economy," the source said.
While potential synergies have already been identified, Peugeot is treading cautiously to avoid building expectations after the 2010 failure of tie-up talks with Mitsubishi Motors (:7211.T7211.T) in 2010.
Peugeot's core automotive division swung to a 497 million euro operating loss in the second half, while GM Europe's $600 million fourth-quarter loss was little changed from the previous year's.
In recent months, GM has dispatched senior executives to oversee an overhaul of Opel, which Morgan Stanley described as the top threat to the U.S. automaker's financial strength.
Peugeot put its profitable logistics business up for sale this month to help finance overseas expansion to offset sagging home markets.
But the company also halted factory investments in Brazil and India, ostensibly to save cash, and Chief Executive Philippe Varin said the Indian project may be opened to a partner.
Peugeot could draw a line under ongoing Latin American losses and strengthen its Asian foothold by sharing plants, vehicles and parts with GM in those regions.
"In return, Peugeot would offer its expertise in small petrol engines and vehicle chassis," said Florent Couvreur of Paris-based CM-CIC Securities.
But the French automaker has since reiterated its opposition to any tie-up that threatens the influence of the controlling Peugeot family - which holds almost one-third of its capital and half of the voting rights.
"The Peugeots want to keep control," UBS analyst Philippe Houchois said. "Carving out GM's European auto operations into a venture with Peugeot could be an elegant solution."
(Additional reporting by Philipp Halstrick in Frankfurt, Soyoung Kim in New York, Jennifer Clark in Milan, Gilles Guillaume and Elena Berton in Paris, Deepa Seetharaman and Bernie Woodall in Detroit; Editing by John Mair, Helen Massy-Beresford and Matthew Lewis)
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