PSA/Peugeot-Citroen has been resisting the idea of an alliance but it now appears that it is warming up to rival Fiat as it seems to be the only way to catch up with Volkswagen, which leads the European market. Volkswagen has such a tremendous investment capacity and a geographic reach that weaker rivals would be kicked to the side if they don’t partner with others to reduce capacity and share the costs involved in the development of new cars.
London-based UBS analyst Philippe Houchois said that Peugeot “definitely needs” to have additional scale. VW is already spending much more than PSA and Fiat.
In fact, VW is planning to invest 62 billion euros in new models in 2011-2016. On the other hand, PSA’s last annual report indicates that it spends an annual average of 3.7 billion euros on investment, research and development for 2008-11. Fiat and Chrysler have 26 billion euros earmarked for 2010-14. These automakers are faced with the challenge of the market trends going against them.
The demand in Western Europe is expected to drop by 6% in 2012, suggesting that the automakers will be competing based on the price while they race to increase their market share in countries like Brazil, Russia, India and China.
These two companies have sufficient cash to get through the 2012 slump but in the long term, they will have to worry about investing to achieve technological advancements. UBS's Houchois said that no company seeks to be more exposed to Europe “but if you're already there then you need scale."
LMC Automotive said that Europe makes up 45% of Fiat sales in 2011 and 54% of PSA's, the highest share compared to other major automakers. These two companies did much worse than the 1.4% decline in Europe’s market. Fiat’s deliveries fell by 12% and PSA had a 9% decline. VW got an 8% increase while gains were also reported by BMW and Hyundai-Kia. [source: Guardian]