How Spain could deliver swift savings in Peugeot-Opel deal

By Sarah White

VILLAVERDE, Spain (Reuters) - As the only European country where carmaker PSA's production overlaps with that of Opel, Spain could deliver the quick cost savings sought by PSA boss Carlos Tavares to convince investors to back his planned acquisition of the rival brand.

Between them, PSA - maker of Peugeots and Citroens - and General Motors' Opel operate three Spanish factories that employ about 13,000 people in total.

Production at the smallest, PSA's 1950s-era Villaverde plant in Madrid, is running at well below capacity.

Its dependence on only one car model has fuelled fears among workers that its output could be absorbed by the French firm's larger factory in Vigo or Opel's site in Zaragoza under a combined group, union sources told Reuters.

"Workers at Villaverde are worried," one source said. "This is a space that is under-utilised."

The union sources cautioned, however, that nothing was clear cut because Villaverde's productivity per worker was high compared with elsewhere in Europe, and labour costs low.

When asked whether the plant could be closed after the proposed acquisition of Opel, a source at PSA in Spain said it was too soon to assess the effect of a potential deal.

The Villaverde factory has narrowly escaped closure in recent years thanks to a contract to exclusively produce the Citroen C4 Cactus. It is due to assemble the C4's next incarnation from the end of this year or early 2018.

But with production of the Cactus having fallen in 2016 as demand waned, forcing 1,300 of its around 1,700 staff to take temporary reductions in their hours, Villaverde is operating at around 40 percent of its capacity, analysts estimate.

If the PSA-Opel deal goes through, shifting Villaverde's production to Zaragoza or Vigo would raise capacity utilisation at the combined group's factories to 85 percent from around 70 percent now, according to Reuters calculations.

The calculations were based on the analysts' estimate of Villaverde utilisation and figures from PSA and Opel sources on utilisation at the Zaragoza and Vigo plants.

PSA and Opel declined to comment on any of the figures.

CAR POOLING

Despite some European layoffs expected in a PSA-Opel deal, the bulk of savings could come from pooling vehicle platforms and engines, sources told Reuters on Wednesday.

This could make the Zaragoza and Vigo plants the model for how a combined PSA and Opel group will seek to operate across Europe, as both already host an alliance between the two firms.

Opel's Zaragoza plant, Figueruelas, will start churning out PSA's latest C3 Picasso model after the summer, the first of three cars to be produced using a shared production platform. Vigo will take on the production of the Opel Combo utility car next year.

The only other plant in European to host this PSA-Opel alliance is in Sochaux, France.

Neither PSA nor Opel would disclose any figures about the performance of the alliance at the two Spanish plants including any cost savings that might have been achieved.

While other European capitals have expressed concern about the deal, the Spanish government has been quiet, sticking to the conciliatory approach that helped Spain attract many new models, protect jobs at the height of a recession and become Europe's second-biggest car producer after Germany.

A Spanish industry ministry spokesperson said the impact of a potential acquisition of Opel by PSA had not yet been addressed but added that Madrid's relations with the two companies were "fluid and good".

Labour reforms since 2012 in Spain, where the car industry accounts for 10 percent of economic output, have made it easier to lay off staff than in many other European countries and also dented unions' powers.

Politically, closing plants in PSA's home country of France - where the government owns a 14 percent stake in the firm - and in Germany, which accounts for about half Opel's 38,000 staff, would also be extremely sensitive.

Germany has already extracted assurances from PSA that it will honour existing labour agreements in coming years.

In Britain, meanwhile, Prime Minister Theresa May has already discussed the deal with Tavares amid fears for jobs and site closures, and Tavares is due to meet British unions and the business minister on Friday.

($1 = 0.9473 euros)

(Editing by Julien Toyer and Pravin Char)