GM's Looming Money Pit

When General Motors (NYSE: GM  ) reports fourth-quarter and 2011 earnings next month, I expect few surprises. Sales have been decent, product-development efforts seem to be on track, and the continued struggles of key competitors Toyota (NYSE: TM  ) and Honda (NYSE: HMC  ) should make for a solidly profitable quarter. After all, Toyota and Honda were plagued by truly out-of-the-ordinary supply disruptions due to floods across Thailand. GM for the most part avoided major surprises during the past year.

But one area that could come with a surprise – and not necessarily a good one – is GM's report on its European operation. The difficult economic situation in the region has put even more pressure on Opel, GM's long-troubled European subsidiary.

Should GM just cut its losses and get out?

Why GM can't just dump Opel
The General has been trying to "fix" Opel for years now. After GM's board and then-CEO Ed Whitacre reversed his predecessor's decision to sell Opel in November of 2009, the company laid the groundwork for an overhaul of the longtime money-losing unit. As recently as last summer, GM's managers were saying that that turnaround was on track -- but a worsening European economy drove Opel's margins down and the unit back into the red.

Current GM CEO Dan Akerson, not a man known for dithering, made it clear that major changes were on the way when he put Vice Chairman Steve Girsky in charge of Opel's board in November. But suggestions that Girsky's task might be to prepare Opel for sale have so far been denied; Girsky, a former investment banker and Akerson's right-hand man, has repeatedly said that Opel is not for sale.

It probably wouldn't be too hard to find a buyer: several Chinese automakers would likely jump at the chance to own a brand with major regional clout, and Opel, for all its troubles, still retains almost 8% market share in Europe. But selling Opel would be problematic for GM for a couple of reasons:

  • Opel is a center of product expertise. Just as Ford (NYSE: F  ) leveraged the engineering talent in its European operation to create the (excellent) Focus and Fiesta small cars, Opel is a center of product development for GM. The strong-selling (and critically acclaimed) new Buick Regal is based on an Opel design. And Opel did much of the nuts-and-bolts engineering of the Chevy Cruze compact, working hand-in-hand with GM Korea (which did the design work).  Opel is a key part of GM's ongoing product overhaul plan – and GM needs both its expertise and its economies of scale to make things work.
  • Selling Opel would be an intellectual-property nightmare. If you were GM, would you sell one of your centers of product-development expertise to an up-and-coming Chinese automaker? Would you sell the right to make cars using your latest technology, your designs, your engineering and R&D efforts? I wouldn't, and, I think, neither would GM. Former GM division Saab is in the process of being liquidated right now -- despite several interested potential buyers -- because GM (sensibly) wouldn't release the intellectual property it owned, property that was critical to the design and manufacture of Saab's current cars. Absent extraordinary pressure (or an incredible offer), it won't happen with Opel, either.

So, if a sale is unlikely, what will happen with Opel?

"Fixing" Opel
GM has a few courses of action open to it without putting Opel up for sale -- though the General has already made significant progress toward restructuring. Through last September, Akerson's effort to restructure Opel had resulted in the elimination of 5,800 jobs – at a cost of $900 million.  GM has said that expects to cut another 1,600 jobs -- and spend another $300 million -- at Opel by the end of this year.

That's for the original restructuring plan. GM could accelerate those cuts, and make more – the division's costs are still too high, thanks in part to an excess of capacity, and closing one or more plants is not out of the question.

That would help, and that may happen. But I suspect that Akerson and Girsky have more dramatic plans for Opel. One possibility is an alliance with or partial sale to SAIC, the huge Shanghai-based automaker that is GM's key partner in China. Reports in the German business press, which GM hasn't denied, have suggested that the General has discussed a sales and distribution alliance with SAIC that would give Opel the means to sell its cars in China.

Boosting Opel's production and sales would certainly help. But I suspect, longer-term, that GM would like to be done with Opel. I suspect that's part of what's behind GM's recent effort to establish Chevy and Cadillac as viable brands in Europe – though those efforts will take several years to gain real traction.

Meanwhile, though, Opel continues to be a drain on GM's balance sheet -- and a very obvious drag on its stock price. Is GM about to reverse that? We'll know more when we hear from management next month.

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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, as well as creating a synthetic long position in Ford. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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 (7) | Recommend This Article (4)

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 January 30, 2012, at 8:56 PM, realkayfabe wrote:

    [quote]Former GM division Saab is in the process of being liquidated right now -- despite several interested potential buyers -- because GM (sensibly) wouldn't release the intellectual property it owned, property that was critical to the design and manufacture of Saab's current cars{/quote]

    The intellectual property you speak of was actually Saab's. GM hijacked Saab when it bought it, cherry-picked what it wanted to use it in its own established brands, because it was better than theirs.

    Intellectual theft, and organised killing of a brand that it found to competitive for its own inferior products.

    Please avoid sloppy journalism, and get the facts right, even it it doesn't back your prejudiced beliefs.

  • Report this Comment On January 30, 2012, at 9:03 PM, Hawmps wrote:

    ^

    If GM "bought" the intelectual property from SAAB, then how is it "theft". Please enlighten.

  • Report this Comment On January 31, 2012, at 5:09 AM, TMFMarlowe wrote:

    @realkayfabe: I'm always wiling to answer legitimate criticism and own my mistakes, but in this case I think you need to grab a dictionary and look up "bought". GM didn't steal anything.

    I get that Saab fans are unhappy about what happened, but it wasn't a crime any more than the death of the Saturn brand was a crime.

    John Rosevear

  • Report this Comment On January 31, 2012, at 12:15 PM, jennyswave25 wrote:

    @realkayfabe - Saab chose to sell to GM. What GM decided to do with the property once purchased was within their right as the new legal owner. Purchasing a company, using the pieces you wish to better your own, disposing of what isn't needed, and destroying brand names...is called business. Competition is healthy and spurs further ingenuity.

  • Report this Comment On January 31, 2012, at 4:57 PM, Hawmps wrote:

    How about that... I'm not the only one.

  • Report this Comment On February 01, 2012, at 3:20 PM, TMFMarlowe wrote:

    @Hawmps: Too bad he didn't come back and explain himself. Oh well.

    John Rosevear

  • Report this Comment On February 02, 2012, at 4:58 PM, Hawmps wrote:

    Ya... his comments didn't even back his OWN prejudiced beliefs.

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