Wall Street Journal

PARIS -- Shares in French car maker PSA Peugeot Citroën soared Wednesday after it emerged the company is in talks with U.S. auto giant General Motors Co. about a possible alliance, as it grapples with weak sales and a raging price war in Europe in the small-vehicles segment, on which it relies for most of its business.

French labor minister Xavier Bertrand confirmed the talks on French radio. "The chairman of the group (Peugeot Citroën) informed me last night of these discussions over a strategic partnership," he said.

Peugeot issued a statement Wednesday morning after the news was first reported in French newspaper La Tribune, confirming it was in discussions on a potential alliance or cooperation agreement with another company, but didn't identify the other party. It said there was "no certainty at this stage that these discussions will result in any agreement."

Peugeot shares skyrocketed 16 percent to €16.64 ($22.02) by midmorning. By contrast, the blue chip Paris CAC 40 index was down 0.4 percent.

"The talks are not aimed at a takeover," said a person familiar with the matter. "Both companies would remain independent entities and responsible for their respective operations. They're mainly looking at possibly sharing technology and developing certain components together."

Another person familiar with the matter said "everything is on the table, up to and including some sort of cross-minority shareholding."

A GM spokesman said his company won't comment on "speculation."

As they struggle to deal with chronic overcapacity in their core market, European car makers are increasingly tempted to link up with competitors to share the development, engineering and manufacturing costs of new vehicles and technology.

Peugeot Citroën, Europe's second-largest automotive group by volume after Germany's Volkswagen AG, is in the midst of a major austerity plan. Last week, France's biggest auto maker said its automotive division had operating losses in 2011 and had burned through €1.65 billion of cash. To stop the hemorrhaging it stepped up its cost-savings plan for 2012, while freezing or downscaling some capital-expenditure programs, including a planned assembly plant in India.

By contrast, General Motors, which was moribund three years ago before it was bailed out by the Obama administration, last week reported a 62 percent jump in net income to $7.6 billion for 2011.

But GM's Opel and Vauxhall brands in Europe are also struggling. GM's European businesses is still in the red, though it has clawed back from the type of steep red ink seen in 2010. However, GM had originally targeted breaking even in 2011. GM has acknowledged that much more restructuring is necessary, but hasn't been more explicit as talks continue with unions over reducing costs.

Last week, the head of GM Europe's Opel and Vauxhall brands said the auto maker isn't cutting back investments on new cars as talks continue with unions over reducing costs, but he shed little light on what concrete measures could be taken to make the business profitable again. Talks with labor unions might take "a couple of months," said Karl-Friedrich Stracke, GM vice president and president of General Motors Europe, during a conference call. He declined to elaborate on a specific time frame or measures GM is looking into to make Opel and Vauxhall financially viable.

Peugeot already has industrial alliances with other car makers. They include Toyota Motor Co., Ford Motor Co., BMW AG, Mitsubishi Motors Co. and Fiat Automobile.

A linkup between GM's European operations and those of Peugeot Citroën would help give both companies the scale they need so badly. Peugeot Citroën chief executive Philippe Varin reaffirmed last week that his company is open to alliances with other auto makers, provided they respect three criteria: they must fit in with Peugeot Citroën's strategy; create significant synergies; and respect the French company's independence.

Bernstein Research analysts said in a note that consolidation in the European industry is desirable and that a linkup between Peugeot and GM "might work in the end." But it said "a loose alliance could only be a temporary solution, while a full deal may need more capital," assuming that Peugeot would be the lead partner in a deal, and not GM.

Unlike in North America, car makers avoided large-scale cutbacks in Europe during the industry slump in 2008 and 2009 when massive job cuts at high-profile manufacturing sites like car factories proved too politically sensitive.