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Why Brexit Could Cost General Motors $400 Million

By John Rosevear – Jul 23, 2016 at 9:05AM

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GM’s chief financial officer warned this week that the consequences of Brexit could mean a big hit to GM’s bottom line this year -- and put a long-cherished company goal in doubt.

New products like the Vauxhall Astra have helped GM boost sales in Britain and return to profitability in Europe after years of losses. But Brexit might send the region back into the red before the year is over. Image source: General Motors.

How badly will the U.K.'s decision to leave the European Union (EU) hurt General Motors (GM 0.21%)?

It depends on many factors, CFO Chuck Stevens said this week. But he warned that it's possible that GM could take a hit of as much as $400 million from the consequences of "Brexit" in the second half of 2016, putting its goal of making a profit in Europe this year in doubt.

Stevens: A $400 million uncertainty

Here's what Stevens said about Brexit during GM's second-quarter earnings call on Thursday:

Let me provide some commentary on Brexit. Clearly, things are still fluid, and there are a lot of unknowns. It's important that negotiations on the U.K.'s future relationship with the EU are concluded in a timely manner. All businesses will certainly benefit from free movement of goods and people, and continued free movement of goods and people.

Certainly, we've made substantial progress toward [the GM Europe business unit's] target to break even by taking advantage of a recovering industry, cost optimization, and recent [new-product] launches like the [Opel and Vauxhall] Astra and Corsa. 

Prior to the result of the referendum, we were on track to break even for the year, as evidenced by our positive first-half performance. The result of the vote has adversely impacted the British pound, and the uncertainty has put a strain on the U.K. automotive industry. If current post-referendum market conditions are sustained throughout the remainder of 2016, we believe it could have an impact of up to $400 million [on GM Europe's pre-tax profit] in the second half of 2016.

Brexit complicates one of GM's best turnaround stories

As Stevens mentioned, GM has been doing quite well in Europe. GM has lost a fortune in Europe over the last 15 years, but it has recently been making significant headway on an aggressive turnaround plan led by Karl-Thomas Neumann, the CEO of Opel, GM's German subsidiary. (Opel's vehicles are sold under the Vauxhall brand name in the U.K.) 

Through the first half of 2016, GM Europe's sales were up 4.7% from a year ago, and it earned $137 million before taxes. That may not sound like much, but it's a big change just to be in the black: For comparison, GM Europe lost $284 million in the first half of 2015, and $589 million in the first half of 2014.

Clearly, the trend has been going in the right direction. But GM had targeted 2016 as the first year in a long time in which GM Europe's full-year result would be a profit rather than a loss. The consequences of Brexit are now calling that into question. 

John Rosevear owns shares of General Motors. The Motley Fool recommends General Motors. 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.

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