General Motors and alliance partner PSA Peugeot Citroen have halted talks on a deeper tie-up amid misgivings about the French carmaker's worsening finances and government-backed bailout, people familiar with the matter said.
The companies, already pursuing an operational partnership announced in February, had also been exploring a full combination of Peugeot with GM's European unit Opel, which is based in Germany.
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But two sources with direct knowledge of those discussions said they were broken off after Peugeot accepted a state guarantee for its lending arm last month and announced a further deterioration of its cash position.
The automakers have agreed to a "pause" in early-stage talks on a Peugeot-Opel deal, said one of the sources. The government bailout is "sabotaging the plan", he added.
"They now consider that any deeper tie-up is unlikely before 2014, when the market picks up," another source said.
"The government bailout conditions rule out French job cuts, which means a deal can't happen any faster," he said. "It would be politically impossible to have all the cuts falling on the German side."
A Peugeot spokesman said there were no Opel tie-up talks currently in progress, breaking a month of silence since they were first reported.
"There are no such discussions underway," the spokesman said, declining to comment on past conversations. GM had no comment, a Detroit-based company spokesman said.
With their costly French and German plants and exposure to austerity-strapped southern markets, Peugeot and Opel are major casualties of Europe's protracted slump in auto sales, which has left the industry struggling with surplus capacity.
Peugeot, which is burning though 160 million euros ($200 million) of cash a month, is scrapping 10,000 jobs and a domestic plant. GM, which predicts European losses of $1.5-1.8 billion this year, is in union talks to close an Opel factory in Bochum, Germany.
An imminent tie-up would have required deeper plant and workforce cuts on both sides, the same sources said.
One option discussed would have seen GM transfer Opel to the new combined entity along with a $5 billion cheque to offset future losses and restructuring, according to one of the people. That could have allowed the U.S. automaker to expunge the underperforming division from its own accounts.
Unlike Renault, which is still 15 percent state-owned, the government has no stake in Peugeot, but political influence has grown as its finances weakened, leading to the 18.5 billion euro refinancing deal that put a government representative on the board.
Unveiling the bailout, including a 7 billion euro state guarantee, ministers said they would expect to be consulted on strategy and sounded a cautious note on the GM alliance.
"Peugeot needs to build alliances," Industry Minister Arnaud Montebourg said in an October 23 interview with daily Liberation.
"But we need to ... measure their consequences for our country and obtain Peugeot's commitment to preserve all its French sites," he told the newspaper.
Montebourg's office did not return calls and messages seeking comment for this story.
The French bailout stirred doubts in Detroit, which further deepened with Peugeot's warning that net debt would rise in 2012 as the group consumes cash faster than it can sell assets.
Peugeot shares have plunged 57 percent this year, compared with a 25 percent gain by GM, which last month posted $1.48 billion in third-quarter profit on strong U.S. sales.
"GM is looking at this and saying, 'What the heck are we doing here?'" said a person familiar with the company's thinking.
"Peugeot's incentives to cooperate may have changed because the French government is at the table," he said. "They're not going to want to have Opel building Peugeot product."
GM and Peugeot announced plans in February and March to pool European purchasing, logistics and vehicle programmes including a future small car for Brazil, a project that was dropped last month.
The deal also saw GM pay $400 million for a 7 percent stake in its troubled French partner.
The decision to shelve a deeper tie-up may renew critical scrutiny of the existing alliance plan, already questioned by some investors.
The dropped car programme in Brazil, where Peugeot needs a partner to cut costs, hurts the company "in the area where they needed help the most", Credit Suisse analyst Erich Hauser said.
Peugeot has sacrificed other relationships and markets to pursue the broader GM alliance, which is now falling short of early expectations.
Ford, a longstanding engine partner, said in April it would stop making larger diesels with Peugeot, and BMW dissolved their hybrid parts venture to team up with Toyota instead.
The French automaker blamed financing problems for its February decision to halt sales to Iran - the Peugeot brand's second-biggest market - but GM told investors its new partner had promised to exit the country.
Peugeot had also flagged plans to build cars with GM in India and seek a partner to develop rechargeable hybrids, but GM said it had no interest in either project.
Setbacks aside, the depth of Europe's slump is making the alliance and its promise of eventual gains seem irrelevant, according to Credit Suisse's Hauser.
"It's become obvious that the plan announced in February is just inadequate," he said. "For it to make sense there would have to be a plan B."
($1 = 0.7867 euros)
(Additional reporting by Soyoung Kim and Ben Klayman; Editing by Will Waterman)