Analysts and financial media alike have been putting the word out in recent days: General Motors' (NYSE: GM) European operation is in big trouble.
Now that's not news exactly. The problems with GM subsidiary Adam Opel AG go back more than a decade, and they've been widely discussed here and elsewhere. But they've worsened as the European economy has headed south -- and when GM reports year-end earnings next week, the numbers could be ugly.
This got the boss's attention
An unnamed "GM official" told The Wall Street Journal on Tuesday that the company will disclose "horrendous" losses at Opel when it reports earnings next week, and said that "increasing frustration" with the operation was likely to lead to drastic changes soon.
Again, this is no surprise. Opel is the biggest problem spot in GM's global operations, and in happy contrast to some of his predecessors, CEO Dan Akerson is not the type to dither over major problems. Akerson's style is to assess the situation carefully and then to take (hopefully) decisive action. Surprise losses last fall put Opel squarely on his radar, and all signs are suggesting that the assessment stage of Akerson's effort to deal with Opel's dysfunction is rapidly coming to a close.
Opel's problems, in a nutshell, are a lot like the problems faced by the U.S. automakers several years ago: too much production capacity, too sweet labor deals made in a more profitable era, and market share that is slowly slipping away to nimbler competitors such as Ford (NYSE: F) and Volkswagen (OTC: VLKAY). Cuts made a couple of years ago after GM aborted its plan to sell Opel to Magna International seemed to have Opel heading slowly back on track. But the recent downturn in the European economy has driven the division back into the red -- and now, the feeling among GM managers is that those cuts didn't go nearly deep enough.
And increasingly, there are signs that they plan to do something about that.
Ramping up pressure on Opel's unions?
GM's PR folks wouldn't confirm the unnamed official's statements to the Journal -- but they didn't exactly deny them, either. It's possible that the flurry of recent reports are part of a quiet campaign to ratchet up pressure on Opel's unions, who may balk if asked to agree to deep cuts and factory closings as part of a more comprehensive turnaround plan.
GM has already stacked Opel's board with senior execs from North America, starting with Vice Chairman Steve Girsky, who was dispatched by Akerson last fall to take charge of Opel and figure out how to turn it around. Since then, other big names known to have the ear of Akerson have followed, including global product chief Mary Barra and CFO Dan Ammann.
Now comes word that an ally of a different sort may be joining Opel's board: Bob King, president of the United Auto Workers. King's role may be to help Opel's labor leaders -- who also sit on Opel's board, as is standard in Germany -- come to grips with the need for drastic changes.
But what will those changes look like?
A big-time overhaul, but not (likely) a sale
While an outright sale of Opel might be tempting for some in management, I don't think it's in the cards. I explained why here, but to recap: Opel is an important center of engineering expertise for GM, its volumes are important to giving GM the economies of scale it needs to compete globally with VW and Toyota (NYSE: TM), and selling Opel would raise all sorts of troubling intellectual-property issues.
Instead, Opel will need to be fixed, and the fix is likely to be drastic -- as drastic as the unions will permit. The key for GM will be to cut costs deeply enough that Opel will remain profitable even during a deep economic downturn, matching what GM has already accomplished in North America. Factories in Germany and England may be closed, according to the Journal, and 5,000 or more workers cut.
Meanwhile, GM continues to ramp up the presence of its Chevrolet brand in Europe, an effort that some at Opel see as a competitive threat. Replacing Opel with Chevy might indeed be GM's long-term hope, but it's pretty clear that major changes are coming soon. We'll know more when GM releases its 2011 earnings next Thursday -- stay tuned.
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