Why GM is willing to exit Europe by selling Opel division to Peugeot

General Motors has lost money in Europe every year since 1999. After three years at the helm, chief executive Mary Barra has had enough.

Pulling off a deal to sell the Opel division to France’s PSA Group, which owns Peugeot, will prove a deep-seated obsession with being the biggest is long gone, as GM will likely drop outside the top three among the world’s biggest automakers. It also will demonstrate Ms Barra, a company lifer, isn’t wedded to the past.

“Kudos to her for making the right decision,” said Maryann Keller, an independent auto industry consultant in Connecticut, and a longtime critic of GM’s management. “Opel hasn’t made money in decades. This flies in the face of the clichés we’ve always heard that you have to be in Europe and have German engineering to be a global carmaker.”

Since leaving bankruptcy in 2009, Detroit-based GM has lost about $9.1bn (€8.6bn) in Europe. The automaker racked up losses of a similar magnitude in the decade leading up to bankruptcy. Management struggled for years to stem the red ink in a market where the automaker lacks a reputable luxury brand or leading position in any particular country, suggesting there was no obvious way to render the business a reliable profit contributor.

An exit from Europe would be the most significant yet under Ms Barra and GM president Dan Ammann to drop money-losing businesses and concentrate on profitable markets. It started in 2015, when GM shuttered production in Thailand and Indonesia, where Mr Ammann said the company posted poor results and lacked a clear path for improvement.

That same year, GM largely abandoned Russia, which was reeling amid political turmoil and a sinking economy. It was a bold move considering the Renault-Nissan alliance and Ford Motor both were expanding there. GM appeared to be waving a white flag when others were staying the course.

At the time, Mr Ammann said GM was “perfectly willing” to “make the tough decision and move on” if there wasn’t a good business case to invest.

Selling the Opel division, which also operates the UK’s Vauxhall, would be far more significant than leaving Russia, where GM sold just 189,000 cars in 2014 before deciding to pull out. The company delivered 1.2m vehicles in Europe last year.

Hiving off Opel would render GM a seller of fewer than 9m cars annually worldwide, after years of approaching the 10m-unit threshold crossed by Toyota and Volkswagen. GM probably would fall behind the Renault-Nissan alliance, which now includes Mitsubishi in its global tally.

“This is a big market to exit, so they would not be a truly global automaker,” said David Whiston, an auto analyst with Morningstar. “But this is indicative of the new GM that really wants to focus on returns.”

Exiting Europe also would signal Ms Barra is more interested in investing in North America, where GM derives most of its profits, and in China, the company’s biggest and fastest-growing market of late.

GM sold 3.9m cars and trucks in China last year, an increase of 7% from 2015. Management sees that market as an ideal one to achieve economies of scale for several models. It’s also profitable: GM’s joint ventures in the country earned nearly $2bn in equity income last year.

“The decision to exit is Business Strategy 101 — move resources away from unattractive markets with weak completive positions, toward attractive markets with strong positions,” Brian Johnson, an auto analyst at Barclays, noted.

Ms Barra has said she’s most focused on posting strong profits. Even with its North America business slipping a bit in the fourth quarter, GM reported a record return on invested capital of 28.9% last year. Adjusted earnings before interest and taxes climbed to a record $12.5bn.

“This is a very different company, one that is more focused and more disciplined,” Ms Barra told analysts at a January conference in Detroit. “We have changed from a culture that once was a best-efforts company to a culture that is accountable for delivering results.”

Ms Barra isn’t the first GM executive to try to dump Opel, which the company has controlled for almost 90 years. In 2009, former CEO Fritz Henderson had an agreement with Canadian auto-parts maker Magna International to sell a majority stake. The board backed out of the deal, reckoning GM needed a presence in Europe, both to be truly global and to have the scale to defray the massive costs of investing in new models and technology.

The trouble is, GM sells mostly to Europe’s crowded mass market, where price competition keeps margins thin. With limited sales from Cadillac, the company lacks a luxury business to generate the fatter margins made by Volkswagen, BMW and Daimler.

GM lacks a captive home audience like PSA and Renault, which rely on market share in France to keep profits afloat. And Ford has a very profitable commercial-truck business that contributes to its bottom line.

Bloomberg


More in this Section

Doubts Donald Trump’s growth spurt can be sustained


Breaking Stories

Accumulated profits at Johnny Sexton firm climb to €1.6m

Turkey raises tariffs on some US goods amid escalating feud

Latest: Web Summit withdraw Le Pen invitation saying it is 'disrespectful' to Portugal and attendees

More people saving money, but amount invested falls slightly

Lifestyle

New father’s life ‘changed forever’ after he was run over by surgeon

More From The Irish Examiner