It has been clear for a while that General Motors
The focus with which GM is attacking this problem is encouraging for shareholders. But as the company starts moving toward a solution, it's worth asking: What will it really take to fix this operation?
The price of fixing Opel
Several Wall Street analysts have thrown out estimates of what it will take to fix Adam Opel AG, the money-losing GM subsidiary at the heart of the automaker's troubled European operation. The estimates vary, but they have all been in the neighborhood of $1 billion over the next two years. That's the rough cost of the job cuts and other restructuring that will be needed to lower Opel's fixed costs enough to satisfy GM.
That sounds expensive, but is it? Opel lost $747 million in 2011 and could lose more than $1 billion this year if the European economic situation worsens -- amounts that are drops in the bucket in the context of the $15.6 billion lost by Opel since 1999. In that context, a billion-dollar fix that stops further losses might be viewed as a bargain -- one that could push GM's stock significantly higher, if it works.
GM's goal is to lower Opel's fixed costs enough to ensure that the operation stays profitable even during a severe economic downturn. GM's CEO, Dan Akerson, has said that the company's revamped cost structure in the U.S. ensures profitability as long as industrywide auto sales stay above 10.5 million a year, a rate of sales seen only briefly during the worst moments of the economic crisis.
That lowered U.S. cost structure is the result of GM's government-guided bankruptcy and restructuring. It was clearly successful: GM's booking strong profits in North America, profits that have allowed it to invest aggressively in new products. Now GM's European operation, which means Opel, needs a similar fix -- but for better or worse, a high-speed bankruptcy and restructuring aren't in the cards.
Is a sale of Opel in the (long-term) works?
GM's senior managers are known to be huddling with leaders of the unions representing Opel's workers. GM CFO Dan Ammann, who was recently appointed to Opel's board along with several other senior executives close to Akerson, said last week that he expects a restructuring plan to emerge from these discussions within a couple of months, a time frame echoed by Opel CEO Karl-Friedrich Stracke.
That plan is likely to include a lot of job cuts, and possibly plant closings. Officially, Opel's current union contracts forbid it from closing plants or laying off workers unilaterally before 2014 -- but with union leaders having acknowledged the need to act quickly and decisively, more options may be on the table.
It's also becoming clear that some out-of-the-box thinking is being applied. While an outright sale of Opel is almost certainly not in the cards in the near term, for a variety of reasons, GM may be pondering ways to rid itself of Opel over the longer term. France's labor minister confirmed on Wednesday that French automaker PSA Peugeot Citroen has been in talks with GM about an "alliance," a joint product-development arrangement that might be -- from GM's perspective -- a first step toward spinning Opel off into welcoming arms.
In the nearer term, a tie-up would give both PSA and Opel more scale -- something that would help both compete better with Volkswagen (OTC: VLKAY) and Ford
Is that a route to success for GM? While some consolidation is likely necessary for the European auto industry to thrive over the longer term, my sense is that it's probably just one of many options that are being explored right now. We'll have to wait until GM formally announces its plan, probably this spring, before we know for sure where all of this is going. But one thing is clear: Anything less than dramatic, decisive action at this point will be viewed by investors as a disappointment.
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