PARIS General Motors (GM.N) and PSA Peugeot Citroen (PEUP.PA), daunted by likely political roadblocks, scrapped plans for a joint mid-size car program within their nascent alliance while adding engine cooperation.
The automakers said on Thursday they had signed firm agreements on three out of four previously announced vehicle projects to combine their future small car programs as well as two sizes of roomier minivans and crossovers.
Plans to pool replacements for larger models such as the Citroen C5 and GM's Opel Insignia were dropped after the companies failed to reach a "convincing business case", a Peugeot spokesman said.
But with binding agreements on three other vehicle programs and new plans to share a future generation of small gasoline engines, "the alliance is taking form and moving up a gear," he added.
Since its announcement in February, the planned alliance has drawn investor skepticism as the French automaker's finances worsen, prompting thousands of domestic job cuts under close supervision by Socialist President Francois Hollande's government.
Sharing larger car production would also have raised politically fraught questions about whether to scrap assembly of the C5 in Rennes, western France, or the Opel flagship model in Ruesselsheim, Germany.
"The subject was clearly too conflictual between France and Germany," Societe Generale analyst Philippe Barrier said.
"The projects announced today are a long way from the mega-global alliance they were aiming for originally," he said. "But there's progress - and the addition of engines shows that Peugeot can be useful to GM."
The three-cylinder engines, designed to comply with Euro VII emissions standards coming into force around 2019, will bring big savings for both partners, Peugeot said without elaborating.
Detroit-based GM took a 7 percent Peugeot stake in a capital increase earlier this year as Europe's second-biggest automaker burned through about 200 million euros ($265 million) a month. GM is also struggling to stem losses in the depressed and highly competitive European market.
Peugeot, which is closing a plant near Paris and shedding more than 10,000 domestic jobs, will next year reduce monthly cash consumption by 100 million euros excluding restructuring costs, Chief Executive Philippe Varin pledged in an interview with Le Monde on Thursday.
Talks on a deeper tie-up with GM were halted last month as Peugeot's situation deteriorated, sources with knowledge of the matter have said.
The partners had faced a year-end deadline to reach firm agreements on proposed joint programs or scrap them to pursue their own projects.
Besides small cars to replace current Opel Corsa and Peugeot 208 models, the carmakers will share development of a subcompact minivan, as well as a new vehicle platform in the compact category, Peugeot said on Thursday.
The new architecture will spawn an Opel people-mover likely to replace its current Zafira and a Peugeot crossover - between a car and an SUV.
GM and Peugeot are due to give a January update on their cooperation plans as well as the $2 billion in estimated annual savings they touted when the alliance was first unveiled.
Since then, the partners have put aside plans to develop a small car for Latin America, a dual-clutch gearbox and now the tentative mid-sized car program.
The door remains open to cooperation outside Europe, GM and Peugeot said, promising "exploration of product and industrial initiatives in Latin America or other growth markets".
Peugeot has reached an agreement in principle with creditor banks to refinance its Banque PSA lending arm and expects to finalize the deal next month, the company also said.
In return for the state-backed 11.5 billion euro debt rescue and guarantees on 7 billion euros of further borrowing, the carmaker appointed French industrialist Louis Gallois to its board as a government representative.
But the bailout and increased ministerial pressure on Peugeot have raised some doubts at GM about deeper cooperation.
Following the government intervention, "our partner naturally asked itself some questions", Varin said in his interview with Le Monde. "I spent a certain amount of time explaining the situation to them."
(Additional reporting By Christian Plumb; Editing by Mark John and David Cowell)