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GM Looks to Russia for Help

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Is Russia the answer to General Motors' (NYSE: GM  ) European crisis?

It's looking like it might be part of an answer, at least. GM's European subsidiary Adam Opel AG is bleeding cash, hobbled by structural problems that will take several years to fix. Opel's intractable problems have held back GM's global profit growth and put a damper on its share price.

But a big new investment by GM in St. Petersburg might turn out to be good medicine for Opel -- and for GM shareholders.

To Russia, with high hopes
GM CEO Dan Akerson announced late last week that the company will more than double the production capacity of an existing plant in St. Petersburg that will make the new Opel Astra sedan, along with several Chevrolet models. The investment in the plant, part of a $1 billion package GM plans to spend in Russia over the next five years, will increase the factory's annual production capacity from its current 98,000 vehicles to 230,000 vehicles by 2015.

GM's total Russian production capacity will be 350,000 vehicles per year once this expansion is completed, as production at a separate plant in Tolyatti will be boosted as well. GM's investment will also fund an expansion of local engineering resources as the company works to develop and fine-tune products for the local market.

Opel is just part of GM's Russian picture -- the brand's vehicles are sold alongside those of GM's two "global" brands, Chevy and Cadillac -- but it's a part that the General hopes to expand as it looks for ways to mitigate the German subsidiary's losses, which ran to $747 million in 2011 and have totaled more than $16 billion since 1999. Of the roughly 244,000 vehicles GM sold in Russia last year, about 67,600 were Opels -- a number GM hopes to push up to around 100,000 over the next couple of years.

Making the most of a losing situation
GM announced earlier this month that it plans to close an Opel factory in Bochum, Germany, and that it would delay pay raises due to workers in the interim. But that plant closure won't happen until late 2016 at the earliest, and GM will likely need to close a second Opel plant to bring the unit back to breakeven -- particularly if difficult economic conditions in Europe persist.

These are hard, long-drawn-out moves, as plant closings are politically fraught ordeals in Europe and especially in Germany, where Bochum could be the first auto factory to close since the end of World War II. To help take the pressure off, GM has been looking to expand Opel's presence outside its core market in Western Europe -- in China as well as in Russia.

GM is the biggest automaker in China with annual sales over 2 million, but it sold just 5,000 Opels in the Middle Kingdom last year. Increasing that to 20,000 is a near-term goal -- but unlike in Russia, Chinese Opels face competition from their own stable-mate, Buick, which has a product line that overlaps Opel's.

A good start on a growing market in Russia
Russia's auto market is nowhere near the size of China's -- yet -- but as it did in Russia's southern neighbor, GM has done a good job of getting in on the ground floor. Chevrolet was Russia's best-selling foreign auto brand last year, and is running neck and neck with Renault (OTC: RNSDF) so far in 2012.

But even now, there's plenty of competition. Ford (NYSE: F  ) has also built a strong presence in Russia -- its Focus compact, the same Focus that is sold here in the U.S., is one of Russia's best-selling cars, and Ford and Volkswagen (OTC: VLKAY) both made significant new investments in Russia last year.

Russia is already the second-largest auto market in Europe, behind Germany, and analysts expect moderate growth to continue over the next several years. While it won't reach the nearly 20 million-per-year market of China's, 3 million vehicles a year is likely in the near future, analysts say.

GM is hoping to have a sizable part of that. And if Opels catch on with Russian consumers, it could make things a bit easier on the General -- and on its shareholders.

While GM's stock could have significant upside in coming months as the company launches a ton of new products and continues to make internal improvements, we've run across another stock pick that has so much promise we've dubbed it "The Motley Fool's Top Stock for 2012." This company is revolutionizing commerce in Latin America and could be a golden opportunity for savvy investors. You can get instant access to the name of this company and the full story -- download it 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, 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 (5) | Recommend This Article (6)

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 June 25, 2012, at 7:05 PM, 48ozhalfgallons wrote:

    There was only one car worse than an Opel. That was a Yugo. Even Fiat is better than these. If many Russians buy Opels we might expect a pre-emptive strike.

  • Report this Comment On June 25, 2012, at 8:57 PM, TMFMarlowe wrote:

    @48ozhalfgallons: I remember those Opels too, but that was a long, long time ago. Today's Opels are mostly close relatives of current Buicks. Like most of what GM sells now, they're decent cars, and getting better.

    John Rosevear

  • Report this Comment On June 26, 2012, at 10:28 AM, GentRich wrote:

    Opels are very good cars! Those that bash Opels have never been in one. I lived in Europe, I have relatives that own Opels are are very pleased with their choice. Europeans that desire a mid size car, instead of those "throw away econobox coffin on wheels" cars, buy Opels, if they can't afford a BMW or Mercedes. VW has a competitor, the Jetta, but it is viewed as an inferior quality vehicle! So, before you open your mouth bashing a product that you don't know anything about, go and drive one. Also, go see how many 20+ year old Opels are still on the road even today despite the harsh, (road salty) winters that the Europeans endure. GM has made a good move by investing in Russia and slowly moving production from Germany to Russia. The Russians know how to make very tough, high quality cars (Lada and Moskvich - ugly but indestructible). The base knowledge, education and engineering know how is there, to make automobiles (airplanes, rockets and of course weapons) is there, and the General won't have to pay the inflated, entitlement German wages along with 2 months of vacation per worker per year.

  • Report this Comment On June 26, 2012, at 10:42 AM, TMFMarlowe wrote:

    @GentRich: I think you'll find that those who bash Opels are mostly older Americans who remember the Opels that GM imported in the 1970s when the company was scrambling to improve its overall fuel economy. They weren't the best cars, and they tended to rust rather quickly, but times (and Opel) have changed a lot.

    Thanks for reading.

    John Rosevear

  • Report this Comment On June 26, 2012, at 12:55 PM, 48ozhalfgallons wrote:

    I hope time proves these recent Opels as worthy as claimed. My '70's era one blew smoke before it rusted away. Fool me once..... Why didn't GM just rename the brand? Nothing like brand loyalty, eh? The used '72 302 Gran Torino which replaced the little Opel still runs well, holds wax, is worth 4 times what I paid for it. No rust, no smoke. Never got a "Wow!" when I drove the Opel.

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