By Joseph Szczesny

 A strategic alliance between PSA and General Motors or Fiat could help in the medium- to long-term lead to a major restructuring of the European auto industry but would be difficult to achieve because of the need to close factories, according Fitch Rating Services. Fitch released the report after both GM and PSA confirmed they have held discussions about organizing an alliance that would include PSA and GM's European operations. However,

"European volume carmakers struggle with structural issues such as overcapacity, relentless competition and heavy price pressure, which are compounded by declining consumer and corporate confidence in several European markets. Pressure for further M&A or more severe restructuring will increase as new car sales fall and may not be avoided as in 2009. Fitch assumes new industry-wide car sales to decline by more than 5% in Europe this year. This includes a drop of 2 percent in Germany, 7 percent in France, 8 percent in Italy and 3 percent in Spain and the UK.

 "In addition, further pressure on price and heavy discounting in Europe could shrink revenue and profitability in 2012," Fitch said.      

 "In particular, PSA has said it is looking at potential alliances to improve

operational performance. What form any alliance or collaboration will take is unclear,and any impact on either company's ratings remains uncertain. In particular, we believe that a deal involving up-front cash outlays from either of these companies is highly unlikely, as they are looking to protect their financial structure," Fitch added.     

 Fitch said any discussion between two car manufacturers would revolve around long-term benefits from synergies, cost sharing, shared R&D investments, platform consolidation and broader diversification, versus short-term costs and political issues of restructuring. Given the highly sensitive issue of plant closure in Europe, which would be required to help address overcapacity, benefits could take time to accrue and be difficult and costly to implement, it said.   

 An alliance, whatever its form, between PSA and GM or Fiat would also need to clarify in which markets and segments it would operate and how synergies would be derived. All three manufacturers have large operations in Europe and Latin America; creating synergies without hurting market shares would need to be planned carefully.

 GM's and PSA's respective current market valuations and PSA's conditions for a merger prevent a full merger in our view, although a cross-shareholding similar to that between Renault and Daimler could be an option. PSA has repeatedly said that a merger would be possible, provided it is consistent with its strategy, builds real synergies and maintains the group's independence. Any full merger would be difficult to comply with the group's conditions, the analysis said.