The Disaster Looming at General Motors

So how is General Motors looking as it prepares for its IPO?

For potential investors, the list of good stuff is a long one: Last quarter was solidly profitable, debt is at a manageable level, new models like the Cadillac SRX and Chevy Cruze are strong no-excuses entries in their segments, sales in key overseas growth markets like China are booming, and while the jury is still out on new CEO Dan Akerson, new key executives like Chief Financial Officer Chris Liddell and Chief Marketing Officer Joel Ewanick already look like very strong hires. Much is going right for the company.

Put another way, while GM's turnaround hasn't quite reached the heights of rival Ford's (NYSE: F  ) yet, much of the company is looking better than it has in years -- with one glaring exception.

That exception? Europe.

Germany-based Opel, the core of GM's European operation, is, to put it mildly, a mess. The unit -- which builds and sells vehicles under the Opel badge in mainland Europe and under the Vauxhall name in Britain -- is in deep trouble, with market share falling and losses mounting.

What happened? And can it be fixed?

The sale that didn't happen
Opel's recent history is a complex and ugly tale, involving difficult battles with unions and governments and a widely expected sale -- that was called off at the last minute. After GM emerged from bankruptcy last year, then-CEO Fritz Henderson moved to sell Opel to a consortium of buyers led by Canada's Magna International (NYSE: MGA  ) . The deal was heavily favored by the German government, and by Opel's unions, who would have gotten 10% of the new company -- but GM backed out of the sale at the last minute. The list of folks who were not happy with that decision, as you might expect, is a long one.

Why did GM back out? A group of board members, including now-CEO Akerson, stopped the sale on the grounds that Opel was GM's primary center of compact-car expertise. No doubt they were looking at Ford CEO Alan Mulally's "One Ford" strategy, which calls for a tightly integrated product lineup that can be sold in many different countries, and in which Ford's own European operation plays a key development role. (Ford's hit Fiesta and upcoming all-new Focus are both products of that operation.)

Now, to be clear, holding on to Opel -- which developed the impressive new Buick Regal -- was the right move for GM. GM needs Opel -- if not the Opel brand itself, at least the unit's engineering and product-development expertise -- and the attempt to sell the unit was probably a key contributor to Fritz Henderson's downfall.

But keeping Opel is one thing. Turning it around is proving to be a formidable challenge.

Losing $483 per car
A recent Wall Street Journal article noted that GM Europe's $200 million second-quarter loss worked out to $483 lost on every car sold. In a quarter where GM as a whole posted a solid $1.3 billion profit, that's a glaring red spot. Still, that's better than the first quarter, when the unit lost a hearty $500 million. Sales have been down for everyone in Europe, but Opel is getting a smaller piece of the pie than it used to: Western European market share fell to 7% in the first half of 2010, down from 7.4% last year.

So what is GM doing about it? Opel is in the midst of a restructuring, but GM is constrained in what it can do by local governments. Although the unit will shed 8,000 employees, it will only be able to close one of its 13 plants -- and most of its production will stay in Western Europe, where costs are among the highest in the world.

It'll help, but it probably won't help enough. That has to be giving bankers at JPMorgan Chase (NYSE: JPM  ) and Morgan Stanley (NYSE: MS  ) fits as they prepare GM's upcoming IPO "road show," but there's no dodging it: Opel is a mess, and while it might break even at some point in 2011, it isn't going to be fixed anytime soon.

Fix it? Or scrap it?
Longer term, I think the solution will have to be more drastic -- maybe a sale, maybe a more drastic restructuring, and possibly even the end of the Opel brand. It's worth noting that "GM Europe" includes more than Opel -- it includes models that GM sells in Europe under two of its familiar "global" nameplates: Chevy and Cadillac. GM has been beefing up those brands in Europe -- the company just announced that the new Chevy Aveo small car will be unveiled in Paris later this month, alongside the Cruze and the all-new Orlando minivan (which won't be coming to the U.S.) -- and an important Opel small car.


Yes, while they don't (yet) quite cover the same turf, GM has Chevrolets competing with Opels in Europe. One might ask, hasn't GM learned the lesson of having its divisions compete for the same customers? I think they have. Opel says that it has plans to expand outside of Europe, but I'm skeptical. I'd bet that the long-term future of GM involves a strategy not unlike what Ford, Toyota (NYSE: TM  ) , Honda (NYSE: HMC  ) , and Volkswagen do: Sell a tightly knit family of products under a few familiar nameplates in lots of different products around the world. It just makes too much sense. And while GM for the moment seems content to have Opel be a sort of European cousin to Buick, I wouldn't be surprised to hear that "Opel" isn't going to be one of those nameplates.

Put another way: If you live in Europe, you'd best get used to those golden-bowtie Chevy badges. I think you're going to be seeing a lot more of them.

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Fool contributor John Rosevear owns shares of Ford, which is a Motley Fool Stock Advisor selection. You can try Stock Advisor or any of our Foolish newsletter services, free for 30 days. The Motley Fool has the Cadillac of disclosure policies.


Read/Post Comments (6) | Recommend This Article (4)

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  • Report this Comment On September 09, 2010, at 8:06 AM, Jason87467 wrote:

    I think GM is really doing great! For others like this writer, if things are not going perfect, an exaggerated negative story will be written. How we like to attack our own industries instead of praising them when they are overcoming huge hurtles.

    Why don't you write about the great car, Chevy Cruze) introduced yesterday?

    In American, we are our own worst enemy.

  • Report this Comment On September 09, 2010, at 9:43 AM, TMFMarlowe wrote:

    @Jason87467, I have no idea why you think it's an "attack" on GM to point out that their Euro operations are a mess, in contrast with their rapidly-improving situation in nearly every other arena. It's not exactly a secret, and it is something that is going to come up an awful lot in their IPO roadshow.

    John Rosevear

  • Report this Comment On September 09, 2010, at 10:39 AM, baldheadeddork wrote:

    @ Jason: I'm not speaking for John, but Opel is a huge problem for GM. The car you mention, the new Cruze, is a good example of why Opel's problems are a major threat to GM's future.

    The Cruze is just a modestly restyled Opel Astra. It's been on sale in Europe for over a year. That's the case for almost all of the good cars GM is making now. The new Buick Regal and Lacrosse are built on the Epsilon II platform, which was also created for Opel Insignia. The Theta midsize crossover platform is used to make the Opel Antara and the Chevy Equinox. The same joint development between GM in the US and Europe occurs with engines and transmissions, too. There are huge cultural differences between the US and European auto markets, but on the data level they're closer than any other large markets. If you build a midsize that can compete in Europe, it doesn't take a lot of changes to make that car a success in the US market.

    Without a strong presence in Europe, the US market would have to support the development of nearly all of these platforms alone, and that's a hugely expensive proposition. A new platform can cost five billion dollars to develop, and a new engine will cost that much, too. No first-world automaker can survive as an independent if nearly all of their R&D costs have to be covered by one market.

    There's a good example of this in the recent past. In the mid 90's, Chrysler was in their second renaissance. The first was the K-car that saved the company in the early 80's and the second was the LH platform that saved them a decade later. The LH was a terrific car for its time and a big hit. But even with the LH, Chrysler CEO Bob Eaton knew the company wasn't making enough money to pay for development of their next generation of product. Eaton specifically cited Chrysler's lack of presence in Europe as a choke point. Chrysler had a strong presence in small cars and utility trucks in South America, but they couldn't share development costs for the profitable midsize and large cars with any other market. That inability to share platform costs is the direct cause of the Daimler merger.

    But (I can hear John saying), GM is much stronger today than Chrysler was when it sought a partner. Not really. At the time of the merger Chrysler had a 15% share of the US market and they were making a lot of money, thanks to the LH products and the Jeep SUV's. GM is much less profitable now, and their slightly better market share isn't enough to compensate for the large increase in R&D costs in the last decade. GM has a strong presence in China, but like Chrysler in South America - China is years away from meshing with the US market like Europe does.

    If GM doesn't have a strong presence in Europe, I don't see how they can survive as an independent company. That's why Opel matters so much. If they don't find a way to get this turned around _right now_, I'm convinced they'll be looking for a buyer by 2016.

  • Report this Comment On September 09, 2010, at 11:24 AM, TMFMarlowe wrote:

    @baldheadeddork: You say it well, but you underestimate me -- I was a Chrysler shareholder when they got Daimlerized. I know how well they were doing then (and about the problems with their product pipeline, or lack thereof, despite having a nice cash hoard.)

    I still say there's an even easier comparison -- look at Ford.

    John

  • Report this Comment On September 09, 2010, at 12:45 PM, baldheadeddork wrote:

    Please, call me Dork. ;-)

    I have to disagree with you about the prospects for GM bailing out on Opel and re-establishing itself in Europe with Chevy and Buick. As FUBAR'ed as Opel is right now, turning that around would be a cakewalk compared to convincing Europeans that a Chevrolet was a desirable car.

    European arrogance towards American cars is the stuff of legend, but it's not a myth. When American cars have been sent to Europe they've been mocked, despised and ridiculed. I remember Car magazine in the mid 80's describing the Cadillac Fleetwood (then sold in the UK) with "As flash as a rat with a gold tooth." American muscle cars have the same cult following in Europe that Morgan's have here, but the general impression of American cars and American automakers in Europe is a visceral disgust, even today.

    Ford of Europe and Opel succeeded only because they spent decades running away from their parent companies US models. Everyone knew they were owned by American companies, but the clear line between US and European product allowed European buyers to believe Opel and FoE were different companies than GM and Ford in the US.

    That still exists today. The (mostly correct) perception of One Ford in Europe is that Americans are finally getting the decent, attractive cars Ford has made in Europe for years. Ford is pushing its European plants to match productivity and costs of the US, there is an expectation for Europe to rise to US standards on that level. But on product design and focus, Europe is the dominant partner in One Ford.

    GM trying to establish Chevrolet in Europe would be the exact opposite. Chevrolet is a horrible brand in Europe, maybe the worst of all US auto brands. Chevy built its brand image in Europe with decades of trying to shove off US cars that were awful and made no consideration for the desires of European buyers. Then in 2005, they repositioned Chevy as a way to sell Daewoo's in Europe. GM made Chevrolet the bottom feeder brand for Europe to protect Opel's image.

    As terrifying as this is for anyone who's been forced to take one at a rental counter, going from Corsica's and Camaro's to the Aveo may have improved Chevrolet's image in Europe. Try to get your brain around an Aveo being an improvement over anything.

    GM going to Europe with Chevrolet would be like Fiat rebranding Alfa's as Yugos for the US market. It would be the single dumbest thing GM has ever done. If they can't turn Opel around, I think they should abandon the European market and start talking to Nissan/Renault about a merger before wasting billions trying to make Chevrolet into a strong European brand.

  • Report this Comment On September 13, 2010, at 8:03 PM, TMFMarlowe wrote:

    They're already going to Europe with Chevrolet. It's happening. There's a push on to "raise the brand's presence" to something more desirable than the small rental junkers it has been associated with in recent years.

    I agree it sounds daunting, but... betting against GM's marketing powers has rarely been a winning game in the long run.

    John

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