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Is GM Pouring Good Money After Bad in Europe?

By John Rosevear - Apr 11, 2013 at 7:00PM

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GM's CEO just pledged $5.2 billion to turn around its European subsidiary. But after $18 billion in losses since 1999, is GM just throwing good money after bad?

General Motors CEO Dan Akerson speaks to reporters at Opel headquarters in Germany on Wednesday. Photo source: General Motors Co.

Yes, General Motors (GM -5.05%) is serious about Europe.

That was the message that CEO Dan Akerson sought to convey on Wednesday, when he told reporters in Germany that GM would invest 4 billion euros ($5.2 billion) in its European operations through 2016.

Much of that money will be spent on GM's long-troubled German subsidiary, Opel, which has lost billions in recent years. Is this a case of GM throwing good money after bad?

A massive money pit for GM
Ever since GM's board called off the sale of Opel in 2010, the Detroit giant has been trying to get its German unit back to profitability. But it has been a challenge: GM's European operation, which is mostly Opel, has lost $18 billion since 1999 – and will likely lose another $2 billion or so in 2013.

For much of that time, Opel's problems have looked familiar to longtime Detroit-watchers: Too many factories, too-rich labor deals, too-clueless management, and not enough cars being sold to support the business. Those problems were greatly exacerbated when Europe's auto sales declined greatly after the economic crisis.

But at the same time, Opel is a key part of GM's global operation. It doesn't just deliver critical economies of scale, it also serves as a center of engineering talent. Several of GM's recent models were engineered all or in part in Europe.

That meant that Opel needed to be saved. Late in 2011, Akerson got series about overhauling GM Europe. He made a series of sweeping changes, including putting his top lieutenants on Opel's board and putting his right-hand man, GM Vice Chairman Steve Girsky, in charge of returning GM Europe to profitability.

Are those efforts bearing fruit? Not yet. But there are some promising signs.

A back-and-forth march making slow progress in the right direction
Girsky's effort has been marked by some seemingly strange decisions and stop-start actions, leading to much skepticism among analysts and industry observers (including your humble Fool). But it has become clear recently that GM really has made some progress in getting its European act together.

Opel has a new CEO, Karl-Thomas Neumann, who used to run Volkswagen's (VWAGY -4.36%) successful (and huge) China business. Its management ranks have been overhauled and streamlined. A deal has been cut with Opel's contentious German union that should lead to a much-needed factory closing next year.

And now Opel will be getting a big vote of confidence from its corporate parent. Akerson said on Wednesday that GM would spend those 4 billion euros on a bunch of new products for Europe – 23 new vehicles and 16 new engines. By overhauling and expanding Opel's product line, and the Chevy and Cadillac models it sells in the region, GM hopes to capture a greater share of the overall market – even if the market stays stagnant for several more years.

That's one of the same strategies that Ford (F -3.38%) is using with its own European turnaround plan. Will it work? It sounds like a good idea, but only time will tell.

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