GENERAL MOTORS and PSA Peugeot Citroen are discussing a manufacturing alliance designed to stem losses in Europe and reduce production costs elsewhere, sources with knowledge of the matter said.

Talks between GM, the world’s biggest automaker, and European number two Peugeot are focused on sharing vehicles and parts rather than swapping stakes, according to the people. Any new share holdings that emerged would be small and symbolic.

French Labour Minister Xavier Bertrand confirmed that the government had been informed about a possible "strategic partnership", online newspaper La Tribunereported that the discussions had been taking place for months, and the news sent the French automaker's shares soaring yesterday.

Peugeot confirmed talks but would not name the partner. GM spokeswoman Kelly Cusinato said: “We routinely talk to others in the industry but have no comment beyond that.”

Peugeot shares jumped €3, or 21 per cent, and were 13 per cent higher while GM was down 0.1 per cent.

As of Tuesday’s close, Peugeot had declined 50 per cent over the past 12 months – the worst performance on the 15-member Stoxx Europe autos and parts index.

“This alliance would be a game changer for Peugeot in the medium term,” Natixis analysts said in a note to clients.

While potential synergies have already been identified, Peugeot is treading cautiously to avoid building expectations after the 2010 failure of tie-up talks with Mitsubishi Motors in 2010.

Wholesale integration of Peugeot with GM’s European Opel division would be fraught with political obstacles, observers warn.

“The logical thing to do would be to close plants,” said London-based Bernstein analyst Max Warburton. “But they’ve not been able to do it independently, and there’s no reason to think they could do it together.”

Like Peugeot, GM’s European Opel division already faces heavy restructuring to reverse losses compounded by the region’s slumping auto market and cut-throat price competition. – (Bloomberg)