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A Fix for GM Is In the Works

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It's a mystery to many on Wall Street and probably to many in the company as well: Why is General Motors (NYSE: GM  ) stock so cheap?

Here's a massive company with brands that are instantly recognized around the world, a string of solidly profitable quarters, a good (and still improving) product line, tons of cash in the bank, and minimal debt. Even better, or so you'd think, it's still on an upswing -- its already-decent margins should improve in coming years as its aggressive managers continue to right-size regional operations and rationalize its global product portfolio. And it's the market-share leader in the world's biggest automotive growth market.

But for all that, GM is trading at less than five times earnings as I write this, and one big reason for that is that its huge operation in Europe is chronically ill: It hasn't had a profitable year in more than a decade.

But it's starting to look like that's going to change soon -- one way or another.

They can't keep Europe, but they can't dump it either
My colleague Joe Magyer, who follows GM for the Fool's Inside Value newsletter service, recently posted his thoughts on what he called "the 3 keys to fixing GM." Among other moves, Joe argued that the General should dump its European operation altogether and focus its resources elsewhere.

I have great esteem for Joe, whose thoughts on GM often mirror mine, but my first thought on reading his article was, "They can't dump Europe." Sure, GM Europe is a longtime money-loser, and the company recently announced it wouldn't meet its targets for 2011, but it's extremely important to the General for reasons other than profits. Simply put, Europe is a massive, wealthy automotive market, and GM's sizable presence in the region provides it with important economies of scale and engineering resources. A large presence in Europe is essential to GM's global vision and long-term strategy.

But that doesn't mean GM can't make some changes -- even drastic changes -- in its European operation. And a move made this week signals that such changes may be coming very soon: GM CEO Dan Akerson put Vice Chairman Steve Girsky in charge of Opel's board. The appointment of Girsky, a former investment banker who works closely with Akerson, follows the recent replacement of GM's longtime Europe chief -- and signals that big changes are in the works.

The emerging plan to fix GM Europe
To understand what might be coming, a little background is in order. GM's European operation has several parts, but the biggest and arguably most troubled part is Adam Opel AG, the German carmaker that has been a GM subsidiary since 1931. In some ways, Opel is still an expensive, old-line automaker -- although it has been restructured several times, powerful unions and government interference have so far forestalled the kind of deep cost cuts GM has been able to implement in the U.S. and elsewhere.

Opel builds and sells cars based on global GM platforms under the Opel and Vauxhall nameplates, as well as some export models under other GM brands (the current Buick Regal, a close mechanical relative of Opel's Insignia sedan, was initially produced by Opel in Germany). In addition to Opel's products -- and this is important, for reasons that will be clear in a minute -- GM also sells Chevrolets and Cadillacs in Europe, as part of its current strategy to establish those two brands in markets all over the world.

When it first emerged from bankruptcy in 2009, GM planned to sell Opel -- in fact, it had a group of buyers in place, led by megasupplier Magna International (NYSE: MGA  ) , and strong support for the sale from the German government and Opel's powerful labor unions. But several of GM's then-new board members, including now-CEO Dan Akerson, halted the sale at the last minute. Their reasoning at the time included the need for scale and presence, as well as another: Ford (NYSE: F  ) was planning to take the excellent small cars designed by its European division -- the Fiesta and Focus -- and make them global models to compete with Toyota (NYSE: TM  ) and Honda (NYSE: HMC  ) here in the U.S. and elsewhere in the world. The board members wanted GM to follow the same path.

Now, a couple of years later, GM has rolled out an updated slate of small cars -- but they were designed in Korea, not Europe. And GM has begun the process of establishing Chevrolet and Cadillac -- brands that are separate from Opel -- in Europe.

Could GM be gearing up to dump Opel -- and build out an expanded presence in Europe without it?

Dump Opel, keep Europe?
I've thought for a while that getting rid of Opel (in several years, once Chevy and Cadillac are established players in the European market) would be GM's ultimate long-term strategy. Opel has too-fat labor contracts and more factories than it needs -- just like GM itself did in the U.S. several years ago. But cutting costs -- or as Akerson prefers to express it, lowering the division's break-even point -- has proved a lingering challenge.

Akerson and GM CFO Dan Ammann have both said that "all options are on the table" with Opel, and Girsky's assignment makes it clear that drastic action is likely sooner rather than later. Opel may not end up being sold -- Magna's no longer interested, according to reports, though a deal with GM's China partner SAIC is not outside of the realm of possibility.

But other drastic options are possible. If no buyers for Opel materialize, or if GM decides that it can't sell Opel without giving up important intellectual property, GM could put its subsidiary into bankruptcy in hopes of forcing a drastic high-speed makeover. Alternatively, Girsky could choose a more straightforward restructuring, reworking the company's union contracts and closing underutilized factories.

The upshot
Here's what I expect: I think GM is likely to announce its plan for Opel sooner rather than later -- early next year. I think it's likely to be a drastic plan with a drastic timetable, either a sale, or a very quick, very deep series of cuts and changes. I think Opel will be fixed or dumped, once and for all. I think Chevrolet in particular will become a much more prominent brand in Europe, no matter what happens to Opel. But I don't think GM is going to abandon the European market, because it's too important to the company's overall strategy.

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Fool contributor John Rosevear owns shares of Ford and General Motors. You can follow his auto-related musings on Twitter, where he goes by @jrosevear. The Motley Fool owns shares of Ford. Motley Fool newsletter services have recommended buying shares of Ford and General Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (5) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 25, 2011, at 1:35 PM, TMFJoeInvestor wrote:

    Great article, John, though I still think you're being a little soft on GM Europe. Yes, Europe represents a large market, but so does fleet sales. Not every market is worth chasing. The idea that GM [air quotes mine and made up] "has" to be in a market where it "bleeds cash" strikes me as very "old GM." Instead of keeping both financial and human capital tied up in a money-losing business housed within a fading economy, GM should focus those resources towards markets where it has proved it can profitably compete (North America) and emerging economies where it has already established a strong competitive position (namely, China). The sooner GM’s leadership stops anchoring on sunk costs and chasing bad business the sooner we’ll start hearing words like “returns on invested capital” pop up during its conference calls instead of “restructuring” or “break even.”

    I'm also skeptical as to what synergies GM Europe brings to the table. GM actually seems to suffer from diseconomies of scale in Europe, if the ongoing losses are any indication, and I'd imagine the company could find a way to maintain star engineering talent and a product development presence in Europe even without mass-scale manufacturing.

    Admittedly, this is me partially just me kicking GM’s hornet’s nest – but it needs kicking. Big picture, you and I are actually very much on the same page: GM has great potential and needs to make drastic changes in Europe. I’d still be happy if GM followed along with some of the potential paths you laid out above, which are smart and realistic. Thanks for the great response and, hopefully, this sparks further discussion!

    Fool on!


  • Report this Comment On November 25, 2011, at 3:18 PM, wigginsrl wrote:

    You don't suppose common stock is trading so low because just three years ago GM stiffed all their common shareholders out of a few billion? Seems like there might be a few people who still remember, whatcha think?

    Oh but wait. I'm forgetting that now GM is backed by the full faith and credit of the American government! And we know about that credit, so never mind, lol.

  • Report this Comment On November 25, 2011, at 3:31 PM, TMFMarlowe wrote:

    Joe, I look at it this way: GM has the vehicles to compete in Europe, what it needs is to find the cost efficiencies to compete profitably. It has found those cost efficiencies elsewhere, so at least in theory it can find them here. I figure it's only fair to give Akerson one big chance to bring Europe's breakeven point down to sustainably-profitable levels, and I figure that's what Girsky has been dispatched to do... one way or another.

    Also, I'm (at least at the moment) less interested in stirring up the hornet's nest than in figuring out what they might actually be up to, because it's clear to me that there's at least the outline of a plan in place. But that's not to say that poking the nest is without merit!


  • Report this Comment On November 27, 2011, at 4:03 AM, baldheadeddork wrote:

    I've thought from 2008 that selling Opel would eventually lead to the end of GM as an independent company. As Chrysler proved in the 80's and 90's, it is now impossible for the US market to shoulder all of the development costs for a full range of first-world cars. If you can't sell in Europe and the US, you're just a take-over target in waiting.

    But even though the GM board "saved" Opel, the entire debacle had done immense damage to the brand in Europe. Opel sales are down disproportionately since the crisis began and show no signs of turning around.

    That they are considering Cadillac and Chevrolet as the new face of GM in Europe is a sign of how bad the situation is. Neither Cadillac or Chevrolet is a stranger to the European market. GM has tried to peddle US-market Cadillacs in Europe for decades. (I remember a one sentence review of an early 80's DeVille in Car magazine - "As flash as a rat with a gold tooth.") Chevrolet has fared even worse. GM has sold Corvettes and Camaros in Europe alongside whatever cr*p Daewoo had to offer. So when the typical European thinks Chevy, he gets images of clown-shoe sports cars or subcompacts that have consistently been the worst in their class for decades.

    It's not an exaggeration to say that GM pinning it's future in Europe on the Cadillac and Chevrolet brands would be like Fiat deciding to relaunch itself in the US as Yugo. If they can't rescue Opel, then create a new brand. Those nuggets are beyond polishing.

  • Report this Comment On November 27, 2011, at 1:55 PM, TMFMarlowe wrote:

    @baldheadeddork: Here's where we differ: I think auto brands can be remade pretty quickly, IF the product is great. I don't have to look any farther than the number of Fords proliferating among my import-lifer friends to see that. (Or heck, look at Hyundai -- from cheap hopeless tin cans to serious Honda alternative in what, a decade?) Chevy in Europe is a viable proposition -- IF the Chevys are good. And they could be.


    ps: Having spent a big chunk of my high school years pushing my buddy's 2000 Spider home after a spectacular variety of disabling electrical failures, I think Fiat relaunching itself as Fiat in the US is bad enough...

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