General Motors (NYSE: GM) Vice Chairman Steve Girsky has a message for GM investors eagerly awaiting more details on the auto giant's plan for rescuing its dysfunctional European operation:
Don't hold your breath.
Contrary to expectations raised by CEO Dan Akerson and CFO Dan Ammann in last month's earnings call, Girsky said on Tuesday that GM's plan for fixing Europe would be revealed "over the next period of months and years," rather than "showing up in one big bang."
Meanwhile, Girsky suggested, we'll just have to trust that GM has a viable plan.
Should we?
A slow fix for a long-standing problem
The market certainly didn't love Girksy's remarks, made on Tuesday morning in Geneva, as GM shares dropped over 5% by midday on Tuesday. Investors had hoped that GM would be ready to unveil a comprehensive plan for restructuring its European operation within "a couple of months" after negotiations with labor leaders, as Ammann and Akerson had suggested in February.
The reality is, though, that fixing GM's troubled European subsidiary Opel won't be an easy (or quick) job, no matter the outcome of negotiations with the representatives of Opel's work force. Like most companies making cars in Europe, Opel is suffering from "overcapacity" -- factories running at less than full speed.
Experts estimate that the European auto industry as a whole has about 20% more manufacturing capacity than it should. Put another way, there are too many car and truck factories and not enough vehicles being sold to make them all profitable -- a problem that GM's new "partnership" with PSA Peugeot Citroen (OTC: PEUGY) doesn't appear to address.
As Girsky pointed out on Tuesday, this is an industrywide problem -- not just an Opel or GM problem. And GM is far from the only automaker losing money in Europe. Ford (NYSE: F) expects to lose $500 million or more in Europe in 2012, CFO Lewis Booth said recently. And things could be getting worse: Ford expects auto sales in Europe to fall 8.5% in 2012, as the economy continues to be challenged.
GM won't say how much it expects to lose on Opel this year, but the General's operation is in worse shape than Ford's. Clearly, in the long run, GM will need to close factories and consolidate production operations in order to turn a profit in Europe.
The problem is, that might not be in the cards -- at least in the near term.
Why this might not be a quick fix
GM's current contract with IG Metall, the powerful German union that represents Opel's blue-collar workers, forbids the automaker from cutting jobs (or closing factories) through 2014. Akerson probably isn't willing to wait that long, but the union will have to agree that drastic action is needed if significant cuts are to happen.
Akerson's comments last month raised hopes that the union might be willing to accept cuts sooner. But Girsky sounded like he was walking that back a bit in his remarks on Tuesday, or at least signaling that those expecting a grand bargain to be just around the corner were likely to be disappointed. "The only thing I can tell you at this point in time is that we are working with all of our constituents to improve the profitability of our European business up and down the income statement," he said.
"Up and down the income statement" reiterates GM's position that overcapacity is just one dimension of the problem. Cost-cutting on everything from purchasing to engineering is almost certainly actively under way -- Girsky characterized the new Peugeot alliance, which features a big joint purchasing arrangement, as "an additional tool to the toolkit" -- but Girsky's remarks make clear that this is likely to be a long, slow slog toward profitability, rather than a dramatic makeover.
That won't help GM's stock price anytime soon. But it might be the only way to do the dirty job of fixing Opel once and for all.
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