SCENARIOS-Peugeot, Mitsubishi cooperation talks

Published: 26 Jan 2010 17:19:15 PST

PARIS, Jan 26 - France's PSA Peugeot Citroen is discussing deeper ties with Mitsubishi, but the Japanese carmaker played down expectations of a capital alliance, such as Peugeot taking a stake in Mitsubishi.

Mitsubishi needs a strategic partner to survive, while PSA wants global scale to become less reliant on stagnating European markets, where government subsidies are running out.

Below are some possible scenarios for future relations between the two:

TALKS ON TRACK, CAPITAL ALLIANCE GOES AHEAD

Mitsubishi President Osamu Masuko told reporters talks were continuing and a capital alliance was possible but not central to discussions. Some said a capital tie-up would cement the partnership between the two companies, citing another Franco-Japanese linkup as an example to follow.

"The Renault-Nissan alliance works in a way because they share a CEO and they have a capital alliance where their two fortunes are intertwined," said Credit Suisse analyst Stuart Pearson.

TALKS ON CAPITAL STALL, BUSINESS AS USUAL

The two manufacturers already work together on several projects -- a joint venture factory in Russia, an original equipment manufacturing deal in sport utility vehicles and most recently an agreement for Mitsubishi to supply i-MiEV electric vehicles to Peugeot and Citroen -- and could continue to do so. "Peugeot is not desperate to do the deal. They are convinced that they need a partner, but not at any price," said Societe Generale analyst Eric-Alain Michelis. "Mitsubishi needs Peugeot more than Peugeot needs Mitsubishi."

TALKS ON CAPITAL STALL, COOPERATION GROWS

Even if the two groups do not manage to secure a capital tie-up, there are more areas of cooperation that could be exploited, said SocGen's Michelis.

"Peugeot is interested in Mitsubishi's automatic transmission (and) petrol engines. Mitsubishi could be interested in some of the Peugeot small cars," he said.

Credit Suisse's Pearson also noted: "You don't necessarily need the capital tie-up to realise purchasing synergies and share platforms."

However, a failure to agree on a share deal would not augur well for deeper cooperation later on.

"If you can't agree on a price and the relative value or merits of a company, it's going to be hard to agree on the sharing of cost savings when you do start doing things together," Pearson said.

The two companies could also work together to boost their presence in fast-growing Asian markets, even though this would probably work more effectively if they had cross-shareholdings.

"I'm not sure that when you don't have money involved people are really willing to help each other," said Michelis.

Peugeot wants to grow in Asia and Mitsubishi has a presence in many of the major markets in the region, which could give Peugeot market access without the cost of setting up new dealer networks, headquarters and other facilities, said Michelis, adding Mitsubishi could also be grateful to offload some of the excess capacity in its showrooms.

However, the smaller manufacturer (which sold 1.06 million cars worldwide last year against PSA's 3.2 million) may not have a big enough market share in many target countries to help its French partner get a big enough foothold.

Mitsubishi's market share in China -- the big prize for automakers after it overtook the United States as the world's largest in 2009 -- is tiny, said Credit Suisse's Pearson. And while getting established in some of the smaller Asian markets will benefit Peugeot eventually, it may not reap short-term rewards.

ALTERNATIVE ALLIANCES

Peugeot, like many carmakers, already has joint projects with fellow manufacturers including BMW and Ford Motor Co on engines.

But in an industry bloated with overcapacity, carmakers need to forge deeper, structural alliances to achieve significant cost-savings and the necessary scale to conquer important markets.

"Not having a capital alliance with Mitsubishi leaves Peugeot free to pursue alliances with other global carmakers. Mitsubishi doesn't really strategically bring Peugeot anything," said Pearson.

A tie-up with GM or Ford would make a lot more sense, giving major positions in key markets like China and Brazil, Pearson said.

"That would be a lot more interesting than Mitsubishi which is really just the last person still standing in a game of musical chairs."