Why GM Must Fix Europe

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It's no secret that General Motors (NYSE: GM  ) , like rival Ford (NYSE: F  ) , is very much dependent on the U.S. market for its profits at the moment.

That was emphasized when GM reported its fourth-quarter earnings on Thursday morning. GM earned $1.19 billion before taxes in the fourth quarter, a result powered by a $1.4 billion pre-tax profit in North America.

But solid results in many of GM's overseas operations were more than offset by a whopping $700 million loss in Europe, a region that continues to represent the General's biggest ongoing challenge.

Struggling to hold ground in a deteriorating market
"We have not gotten any more bullish [on Europe], let's put it that way."
- GM CFO Dan Ammann, talking  about GM's near-term outlook for Europe on Thursday

While the loss in Europe was larger than some analysts expected, its size should have come as no surprise after the $732 million loss Ford reported for the quarter a couple of weeks ago. For the full year, GM lost $1.8 billion in Europe, compared with a loss of $747 million in 2011.

The problem is pretty simple: Not enough Europeans are buying new cars. Industry-wide auto sales in Europe hit a 19-year-low in 2012, as deep recessions kept strapped consumers away from new-car dealerships. And things may be worsening: GM's sales in Europe dropped 27 percent in December, as the overall market's decline appeared to accelerate.

GM's decline in December, like Ford's, was worse than the overall market's 16 percent drop – a reflection, at least in part, of the determination of the two automakers to hold the line on discounting, to some extent. While some European automakers, including Fiat (NASDAQOTH: FIATY  ) and Volkswagen (NASDAQOTH: VLKAY  ) , have resorted to deep discounting in some areas to try to maintain or gain market share, Ford and GM have largely steered clear.

The idea is to preserve margins and residual values, and it's almost certainly the wise course in the long run – but in the near-term, steep sales drops and slipping market share are the inevitable results.

So, what is GM doing to address those problems now? Plenty, executives say.

GM says incremental moves reflect substantial overall progress
CEO Dan Akerson reiterated on Thursday that GM still expects its European operation to break even on a pre-tax basis by "mid-decade." Mindful of comparisons to Ford's European turnaround effort -- Ford has announced three factory closings in Europe, to GM's one -- Akerson and Ammann were at some pains to explain that GM has already taken significant actions to reduce costs in Europe, as well as other actions that should increase revenues in time.

Akerson noted that 2,500 jobs were eliminated at long-troubled German subsidiary Opel last year. In addition, GM sold a transmission factory and put another facility – Opel's assembly plant in Bochum, Germany – on course to close by the end of 2015, perhaps earlier. And Opel's management team has been completely overhauled in the last year-and-a-half, with ex-Volkswagen China chief Karl-Thomas Neumann set to take over as CEO on March 1.

Meanwhile, GM is expanding its range of offerings in Europe, hoping to capture incremental market-share gains by entering new segments. Already, there are signs of success: Ammann says that GM already has 80,000 orders for the new Opel Mokka SUV, a cousin to the Buick Encore sold here, and 20,000 more for the Opel Adam city car, which is just now coming to market.

And GM's joint venture with struggling French automaker PSA Peugeot Citroen (NASDAQOTH: PUGOY  ) , which includes a series of parts-sharing and joint-vehicle-development programs, is expected to add significant savings and economies of scale over the next couple of years.

Has GM really done enough?
GM's not done, of course. New CEO Neumann's plans for Opel won't take shape for several months, at the earliest. If Europe's auto market continues to worsen, more drastic action – including, perhaps, a bankruptcy for Opel – could be in the cards. And negotiations between GM and Opel's powerful labor union are ongoing, which could yield further improvements – or could lead to a costly outbreak of labor strife.

Will it be enough, if it all goes as planned? It could be. Unlike Ford, which last fall announced a comprehensive plan to overhaul its own European decision, GM's plan has emerged in fits and starts – with, seemingly, plenty of false starts and on-the-fly course changes.

Ford's plan for Europe looks a lot like the approach the Blue Oval took to restoring its U.S. operation, and the company's success at home inspires confidence in its chances in Europe. GM's approach hasn't inspired nearly the same level of confidence, not least because its current management team doesn't have the same kind of resounding U.S. turnaround under its belt.

That doesn't mean it won't work. But it will bear careful watching. Stay tuned.


Read/Post Comments (3) | Recommend This Article (1)

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 February 14, 2013, at 10:15 PM, MARKETSURFER wrote:

    When a person has a cancer you don't say I need to "fix" the cancer. You get rid of the cancer completely either through surgery, radiation or chemotherapy. If you don't get rid of it chances are the cancer will spread. GM needs to get completely out of Europe as a place to produce their vehicles. The vehicles need to be produced in the USA or elsewhere and shipped to Europe to be sold when European dealerships have buyers for them and not before.

  • Report this Comment On February 14, 2013, at 10:30 PM, MARKETSURFER wrote:

    It is not GM's responsibility to "fix" Europe. GM needs to get completely out of Europe until Europe fixes itself.

  • Report this Comment On February 15, 2013, at 9:40 AM, TMFMarlowe wrote:

    That's not realistic. GM isn't going to walk away from a 7ish percent share of the world's third-largest auto market, and it isn't going to shoot itself in the foot by walking away from making vehicles in the region, and it shouldn't. It should take the steps necessary to make a profit under the present circumstances.

    The question is, are the steps it has taken so far the right ones?

    John Rosevear

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