General Motors just gave investors another reason to be wary of Tesla shares.
GM revealed this week that it wants to cut loose Opel, its European division (Opel in Britain is called Vauxhall). Opel has been losing fortunes for years, in spite of a valiant turnaround effort under GM boss Mary Barra. So GM is cutting its losses. Ms. Barra's plan is to sell Opel to France's Groupe PSA, owner of the Peugeot and Citroën brands.
Once the sale is completed – and there is no assurance it will be – GM's European auto manufacturing and sales business will disappear and PSA will emerge as Europe's second biggest car maker, after Volkswagen.
There are a lot of reasons why GM would be happy to unload Opel. One of them is to free up resources to compete in the electric and driverless car markets. Ditto PSA. With Opel in its European mix, the vastly enlarged PSA might, in time, develop the market and financial clout to finance its own e-car revolution.
The transition away from cars powered by internal combustion engines and driven by humans will be an epic and hideously-expensive effort and Tesla is way ahead of the pack. The creation of mad genius Elon Musk, Tesla's cars are all electric and packed with enough software to give them rudimentary self-driving capabilities.
Investors have bought into the Tesla dream, pushing the shares up about 65 per cent in the past year alone. The rally has sent Tesla's market value to US$43.3-billion. That's three times the value of Fiat Chrysler Automobiles (FCA), which made 4.7-million vehicles in 2016 against Tesla's 84,000.
To compete with Tesla, the mainstream car companies, especially the ones that are not called Volkswagen and Toyota, will have to find merger partners. If they get their acts together and launch cars that can compete with Tesla silent rolling wonders, Tesla's e-car leadership will take a hit, along with its lofty share price.
Sergio Marchionne, the Italian-Canadian CEO of FCA and the man who put Fiat and Chrysler together after the 2008 financial crisis, has pushed endlessly for consolidation. The car companies' business model – blowing their brains out on new platforms and technology that merely replicated their competitors' – is ultimately suicidal, he argued.
Mergers would allow the companies to vastly reduce their costs by sharing platforms and sales networks, and pooling development budgets and purchasing programs. Mr. Marchionne predicted almost a decade ago that only six big car companies would survive and he's probably right.
It was Mr. Marchionne who took the lead in the consolidation game. Fiat and Chrysler came together and, in 2009, he tried to buy Opel. In the same year, so did a group led by Canadian auto parts giant Magna International. But GM was not ready to sell, for fear that it would be shut out of the world's third-largest car market.
While GM's European losses, which came to more than $9-billion (U.S.) since GM came out of bankruptcy protection in 2009, narrowed, they never vanished. Opel's market share, at 6.7 per cent, was too small to make the brand competitive. Its factories were running at only 65-per-cent capacity and Brexit delivered a currency-exchange shock to the Vauxhall division. In retrospect, GM should have abandoned Opel years ago.
Fiat, under Mr. Marchionne, is still thinking big and is looking for a merger partner. Ditto PSA. The PSA-Opel deal, if completed, would give the enlarged company 16.6 per cent of the European market, based on last year's sales figures. The synergies potentially would be enormous. PSA has always envied the savings that Carlos Ghosn was able to achieve through the Renault-Nissan alliance.
The auto consolidation effort, which will probably accelerate if the PSA-Opel deal is done, is recognition that carmakers will need every euro and dollar to reinvent themselves. Diesel Engines will have to be cleaned up as governments tighten air pollution and carbon-dioxide regulations. Electric cars will have to come with longer driving ranges and lower stick prices. Driverless cars will come of age. Mr. Marchionne recently said that developing the next generation of autos would cost the industry more than US$100-billion and that may be an underestimate, given the artificial intelligence requirements of driverless cars.
Tesla, in other words, is going to have competition. Already, GM makes the hybrid Chevy Volt – a plug-in electric car with a gasoline generator – and the all-electric Chevy Bolt has just hit the market. Tesla is still the star attraction among e-cars but how long will that last as the traditional car companies devote more resources to electric and driverless mobility? The Bolt starts at about $30,000, after the U.S. federal tax credit of $7,500, which is about a third of the price of the Tesla Model S (Tesla's new Model 3 will probably come with a Bolt-like price).
By selling a loser division – Opel – GM can free up resources for cars that would have been dismissed as science fiction only a few years ago. Tesla's awesome success is not the only reason the auto industry is consolidating, but it's certainly one of the main reasons. More consolidation will come. Tesla beware.
Eric Reguly