GM has an enormous problem in Europe. Namely, GM Europe is losing money, has been losing money, and will continue to lose money for years. Over the past three years since GM emerged from bankruptcy, GM Europe has lost $3.8 billion (with-a-b) USD. With Europe teetering on the edge of recession (if not already in one), a shrinking auto market, overcapacity, and government austerity, it’s a perfect storm of bad news for GM.
You may recall that around the time former GM CEO Fritz Henderson left the company, GM was in serious discussions to sell Opel (which is the primary brand in GME; others include Vauxhall (rebadged Opels sold in the UK) and Chevrolet (mostly rebadged Korea-built Daewoos). The most likely buyer was auto supplier Magna Steyer, a company that is about as close to being an OEM automaker as possible without actually being an automaker. Really, since Magna has the ability to produce cars (Magna has a plant in Graz, Austria that can build cars on contract for OEMs; in fact, Magna is the largest contract automobile manufacturer in the world), the only things it would have needed to be an OEM were vehicles to sell and a sales and marketing operation (not to mention a dealer base).
But that sale fell through when GM’s board pushed back against Henderson’s plan. Germany and Opel’s unions were furious at the change of plans. Torpedoing the deal at the time were concerns that the bidding process may not have been fair, and that selling GM’s engineering hub for midsize vehicles (such as the Epsilon platform that underpins the Malibu, Insignia, Regal, LaCrosse, XTS, and 2014 Impala). Henderson left the company shortly thereafter, and GM Europe continued to restructure.
There are serious, serious macroeconomic problems in Europe, though. Even in good years, Opel has lost a ton of money for GM. In bad times like today, the subsidiary has been an albatross around GM’s corporate neck. Record earnings and double-digit sales growth in its home market and in most other regions are forgotten by Wall Street, which is laser-focused on the bumbling and stumbling at GM Europe.
Aside from all of the problems already outlined (poor economy that is getting worse, shrinking car market, overcapacity austerity government budgets), Opel has a brand image problem. Despite how cool the cars look to our North American eyes, Opel is seen as a non-premium brand – kind of the way Kia was seen in the US five or six years ago. To capture sales, Opel has to sell its cars for less than direct competitors such as Volkswagen do. If Opel tries to increase pricing, it will see its market share further erode, benefiting the likes of VW, and even Kia. So Opel begins behind the 8-ball by not having pricing power.
Then Opel has six plants in Europe, and in a shrinking market, and with market share that is shrinking even faster, it doesn’t need that many. GM CFO Dan Amman has said that he’d like all plants to run flat-out, three shifts. There are two ways to accomplish that: taking a plant offline, or increasing sales.
Bochum, Germany’s Opel plant is on the chopping block, and its workforce (and the union representing that workforce) knows it. There are no investments planned for Bochum after production of the Opel Zafira MPV concludes at the end of 2016. GM has an agreement with its union in Germany, IG Metall, to keep the plant open until 2017, but will still have to negotiate its closure. No auto plant in the former West Germany has closed since World War II; it’s not easy – or cheap – to do.
Opel’s Supervisory Board – which, per German law, has representation from the union and from management – will take up the latest restructuring plan tomorrow (June 28). As the headline to this piece states, the plan is trying too hard to please too many different stakeholders (GM stockholders, the German government, the workers and their union) and doesn’t seem likely to have much impact on the short-term problems that Opel is facing.
There will be no job cuts as part of the plan, other than the negotiation of the closure of Bochum. Until then – which is four and a half years from today – staffing reductions are likely to come only in the form of attrition, possibly replacing departed permanent employees with temporary workers if needed.
The other part of Opel’s restructuring plan will likely involve changes to the production mix. Working with new partner PSA, Opel is likely to produce some vehicles for Peugeot or Citroen, while PSA is likely to produce some vehicles for Opel, as the two struggling automakers try to lash themselves together a bit to ride out Europe’s economic storms. GM may also shift some production from South Korea to Europe to boost plant capacity in the Old Country. Opel also hopes to boost market share through brand positioning and expanding to a few [token] export markets.
For its part, the strong and normally-combative union seems ready to take at least some of its medicine, similar to how the UAW suddenly saw the light in the US in 2007 and its members approved a contract that was extremely concessionary for the union.
Armin Schild, an IG Metall leader and Opel Supervisory Board member said, “IG Metall expects a further difficult, recessionary phase that will impact the entire European auto industry. We should count on the northern European car markets being affected more than they have so far.”
With Europe in crisis mode right now, it’s hard to see how workforce and capacity reductions nearly a half-decade from now, and production tie-ups that will take years to germinate, will have any kind of meaningful impact on Opel’s issues in the short term. Without dramatic improvements in its Europe results, expect the GM mothership’s stock to continue to languish far below its IPO price for a while.