GM's Europe Mess: No End in Sight

How bad are auto sales in Europe?

They're this bad: Ford (NYSE: F  ) posted a sharp 7.3% year-over-year sales decline in Europe in the first quarter -- and gained market share.

Ford's struggles are far from unique. Nearly all of the automakers doing business in Europe are facing sales declines and steep drops in earnings. Of the mass-market automakers, only Volkswagen (OTC: VLKAY) managed a (tiny) sales increase for the quarter. Not only are total sales down, in some cases sharply -- Fiat (OTC: FIATY) sales were down a shocking 26% -- but pricing has been very weak. Put simply, automakers have had to offer big discounts just to keep sales going. That has eroded margins, hitting profits hard.

But few automakers are struggling in Europe more than General Motors (NYSE: GM  ) , which just can't seem to find any answers.

A big effort to fix a longtime problem
GM's 10% first-quarter drop in European sales may not seem awful in context, but it comes on top of years of decline. The General's problems in Europe go far deeper than the current economic slump. Adam Opel AG, GM's European subsidiary, is a very sick company burdened with too many factories, too-rich labor deals, and a level of sales that won't come close to supporting either of the former anytime soon. Even in good times, it can't seem to turn a profit consistently.

Sound familiar? It should: Opel's problems are similar to the ones that plagued Detroit for years and led to GM's bankruptcy during the economic crisis. But Opel is proving much harder to revive.

Opel has been losing money for over a decade -- over $15 billion worth since 1999 -- but last year, GM CEO Dan Akerson made it clear that he was fed up with years of underperformance. GM has repeatedly tried to turn around Opel without success. The most recent restructuring, begun shortly after GM emerged from bankruptcy in 2009, looked for a while like it could be a success, but the company slid back into the red in the second half of 2011.

Akerson responded to last year's losses by doubling down: He put his right-hand man, vice chairman Steve Girsky, in charge of restoring Opel to profitability once and for all. Akerson also named several of his most able lieutenants to Opel's board, including CFO Dan Ammann and Mary Barra, GM's product chief, and replaced GM Europe's longtime president with German-born rising star Karl-Friedrich Stracke.

Girsky was charged with getting a turnaround plan in place as soon as possible. Reports -- as well as some of the executives involved, including Stracke -- suggested that a plan would be in place within "a couple of months."

That was in mid-February. It has been a "couple of months," and no plan is in sight. What happened?

What's taking so long, GM?
What happened is that the situation has so far proven even more intractable than expected. What needs to happen is fairly clear: Opel needs to close two or three factories; sharp cuts need to be made to Opel's salaried work force; and Opel's product line needs to be more tightly integrated with GM's global product plan.

Sounds simple on virtual paper, but the reality has proven complicated. Opel's union contracts prevent GM from unilaterally closing any factories until after 2014, but the longer GM waits, the larger the losses become. Even then, plant closings will be messy: Unions in places like Germany have significant government support, and no politician wants to be the one to sign off on the loss of thousands of jobs.

Girsky himself warned last month that the restructuring of Opel was likely to unfold over an extended period. So far, though, GM has little to show for what are said to be intense efforts,  aside from a new alliance with troubled French automaker PSA Peugeot Citroen (OTC: PEUGY) that raises more questions than it answers.

Meanwhile, it's likely that Opel will post yet another big loss when GM reports first-quarter earnings next month. That won't help the company's stock price -- but the appearance of a truly viable turnaround plan for Opel might. Will we see one?

While GM has struggled in Europe, its efforts to find growth in China have been a shining success. And GM's not alone: Quite a few American companies are finding strong growth, thanks to savvy execution in the fast-growing new markets like China. Motley Fool analysts have identified three big-name companies that are particularly well-positioned to profit, and you can learn more right now with our new free report: "3 American Companies Set to Dominate the World." It's completely free for Fool readers, but only for a limited time -- so grab your copy now.

Fool contributor John Rosevear owns shares of Ford and General Motors. Follow him on Twitter at @jrosevear. The Motley Fool owns shares of Ford. Motley Fool newsletter services have recommended buying shares of Ford and General Motors and have recommended 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 (4) | Recommend This Article (6)

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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 April 18, 2012, at 3:33 PM, Autowatcher wrote:

    Are GM's problem in Europe a surprise to anyone who's been paying attention? I wonder if GM's problems in Europe are directly connected to it's success in China. Let's see - years of underinvestment in Europe (and a severe lack of management attention) while at the same time very large investments in China leads to a very strong market position there. Maybe the only solution to GM Europe is the same one GM used so brilliantly in the US - bankruptcy.

  • Report this Comment On April 18, 2012, at 7:59 PM, TMFMarlowe wrote:

    GM's problems in Europe don't have much of anything to do with China. Part of the problem is the maturity of the European auto market, part of it is GM's general lack of (global) product competitiveness over the last decade, and part of it is just bad management -- particularly, bad communication and relations between the US and European managers.

    And no, they shouldn't be a surprise to anyone at this point. Nor should it be a surprise that the hoped-for quick solution isn't materializing.

    Thanks for reading.

    John Rosevear

  • Report this Comment On April 19, 2012, at 8:22 AM, 48ozhalfgallons wrote:

    Poor management aside, I think GM's problem is its cars.

  • Report this Comment On April 19, 2012, at 10:51 AM, TMFMarlowe wrote:

    @48oz: I think there's a lot of truth in that, but I also think it's changing. The cars have become much better as of late, but some perceptions have yet to catch up.

    John Rosevear

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