GM's $0.89-per-share profit was way ahead of the $0.60 most analysts predicted, but that wasn't even the biggest news to come out of the company's earnings. That title was saved for CEO Dan Akerson's statement that the company's money-hemorrhaging European division was on track to break even by mid-decade.
A light at the end of the European tunnel
A possible end to GM's losses in Europe is a big deal for investors -- big enough to have sent GM shares up more than 9% after the news was announced on Wednesday. It's a big deal because GM's losses have been going on for years: The company's German subsidiary, Opel, has lost more than $15 billion since 1999 -- and is expected to lose at least $1.5 billion in 2012.
Opel certainly has issues of its own, but a big part of the problem is systemic. Just about all of the major automakers doing business in Europe have seen major losses in the past couple of years. Austerity measures in several European nations have led to deep recessions, and new-car sales have fallen sharply. In fact, 2012 may turn out to be the worst year for car sales in Europe in almost 20 years.
That's too few car sales to support all of the factories and companies in the region. Something has to give.
GM's two biggest competitors in the region, Volkswagen (OTC:VWAGY) and Ford (NYSE:F), have both reported big losses and started to make big moves. Ford recently announced a major turnaround plan for Europe that will include three factory closings. That plan is expected to return Ford's European division to profitability by "mid-decade," executives said.
Ford's announcement increased the already-heavy pressure on GM's leaders to Do Something, to make the sweeping changes in Europe that it had seemed to resist for months.
But instead, GM's leaders responded by saying that they'd already Done Something, and that Something was working.
Small steps have led to a big improvement, GM says
GM Vice Chairman Steve Girsky is CEO Dan Akerson's right-hand man. A former Morgan Stanley analyst with extensive contacts throughout the global auto business, Girsky's role has been essentially that of a (very) high-level troubleshooter. For the past year or so, the trouble he's been confronting has been Europe.
Girsky has quietly led a charge to bring more discipline and talent to Opel, while restructuring its operations and integrating it more tightly with GM. Each of those changes taken in isolation looks like no big deal, but as Girsky pointed out when he spoke to analysts and media on Wednesday, taken together they're pretty extensive:
- Upper-management overhaul. Girsky says that all but four or five of the top 18 executives at Opel have been replaced over the past year, with a mix of top internal GM talent and key hires from outside. Girsky and Akerson also put some of GM's top senior executives on Opel's Supervisory board, including GM's global CFO, its global purchasing head, and its product-development chief. Those changes have brought increased rigor and discipline -- and integration -- to Opel.
- New products and new markets. Part of Ford's plan involves bringing existing models from other regions to Europe, hoping to capture new sales in segments it hasn't previously contested. GM is doing much the same thing: Girsky says that Opel will get 23 new models and 16 new engines by 2016. Opel will also send its products to new markets, including Russia and Australia, in a bid to expand sales.
- Important cuts. Opel is in the process of cutting 2,600 jobs, most through voluntary actions. It is consolidating assembly lines and considering cutting shifts at some plants. And it plans to close its Bochum, Germany, plant after 2016 -- and other plant closings are being considered.
- Leveraging the alliance with Peugeot. GM recently announced that it will work with the French automaker to jointly develop several vehicles, which is expected to save some $2 billion in parts and development costs.
The upshot of all of this? It's pretty big: Just like Ford, Akerson and Girsky now say that GM's European division (which includes Opel and a small operation selling imported Chevys and Cadillacs) will break even by "mid-decade".
If that's how it works out, it'll be a big deal. I've been skeptical of many of GM's moves in Europe over the past year, because taken individually, most of them seemed trivial in the face of the hefty losses GM has been posting quarter after quarter ($478 million in the third quarter alone).
But Girksy's presentation on Wednesday was pretty convincing. If it pans out, this will be a huge victory for GM's post-bankruptcy management team -- and, in all likelihood, for its stock price as well.