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Issue: Feb 2012


GM Europe Set to Announce "Horrendous" Q4 Losses, Major Restructuring Expected



Opel/Vauxhall must brace itself for some radical surgery as the unit's US owner will not carry it any more.

by IHS Global Insight

Significance 
General Motors' (GM's) European unit is preparing to announce what are being described as "horrendous" fourth-quarter losses according to an unnamed GM executive, whose comments were reported by the Wall Street Journal. 

Implications 
The predicted fourth-quarter results indicate that the unit may have actually slumped to a full-year loss following a USD292-million loss in the third quarter. This was during the year that Opel/Vauxhall was supposed to break even after its last round of restructuring. 

Outlook 
A new management regime has recently been appointed to Opel/Vauxhall with Karl-Friedrich Stracke promoted as overall executive CEO of Opel/Vauxhall while GM vice-chairman Steve Girsky has been appointed as the chairman of the supervisory board. Stracke must come up with a plan to return Opel/Vauxhall to profitability as every impression is that the company's US head office is running out of patience.
General Motors (GM) is close to announcing full-year financial results that will paint a negative picture for the company's main European unit Opel/Vauxhall. According to a Wall Street Journal (WSJ) report, GM is preparing to announce what have been described by an unnamed GM executive as "horrendous" fourth-quarter results for Opel/Vauxhall, as part of its full-year results. This means that it is likely that GM Europe is faced with the prospect of a significant full-year loss for 2011, despite the last round of restructuring being all but completed. The unit slumped to a third-quarter loss of USD292 million. According to the WSJ, the unnamed executive said: "There is increasing frustration with Opel and a feeling that the cuts two years ago did not go nearly deep enough. If Opel is going to get fixed, it is going to get fixed now and cuts are going to be deep." 

GM appointed a new supervisory board in January to oversee the implementation of a new restructuring plan that is in the process of being devised by executive board chairman Karl-Friedrich Stracke. He will report with the new plan to the supervisory board which is now headed by deputy GM chairman Steve Girsky. In recent days GM's senior vice-president responsible for global product development, Mary Barra, has been added to the Opel supervisory board. GM's CFO Dan Ammann and Timothy Lee, president of GM International Operations, were also appointed to the Opel board in November 2011, and it has also just been announced that GM has appointed United Auto Workers (UAW) president Bob King to the Opel supervisory board. This would indicate that the company is foreseeing some major industrial unrest as a result of the expected restructuring plan. Last month, Reuters reported that GM was discussing the transfer of some Chevrolet production from South Korea to Europe in a deal that also would include the cost cuts that are needed to stem Opel's losses. No deal has been reached between GM and its European unions yet, according to the WSJ report, and the last restructuring actually stated that there could be no further job losses at Opel/Vauxhall until 2014. However, it appears that plants in Germany and the UK could be under threat. 

Outlook and Implications
There is a growing clamour among US investors and the US business media that follow GM's fortunes closely to cut Opel/Vauxhall loose. The company came close to doing just that three years ago, when it accepted a bid by Magna and Russian state bank Sberbank only for the board to change its mind at the last minute and abandon the sale. At the time, the GM board appeared to be concerned that if the sale went ahead it would lose its status as a carmaker with a truly global footprint, while the Rüsselsheim R&D facility remains a key component of the company's global model development strategy, developing its mainstream mid-sized C1 and D1-segment architectures. The board which voted to keep Opel/Vauxhall at the end of 2009 was headed by previous CEO Ed Whitacre—one of the board members who voted against retaining Opel/Vauxhall was his successor Dan Akerson, whose sole focus is turning GM into a profitable carmaker in the long term. He is hard-headed and pragmatic and sees no reason to keep a loss-making unit purely to retain a fully global presence, especially when the Chevrolet brand's sales and share have been rising in Europe in recent years, although this was partially reversed in 2011, when Chevrolet sales declined 2.2% to 172,000 in the EU, against an overall market which declined by 1.7% during the year, according to the European Automobile Manufacturers' Association. In recent years GM has shown its determination to make Chevrolet a truly global brand and this has been illustrated by parallel sales of Chevrolet in Europe and moves to establish an dealership network parallel to the existing Opel/Vauxhall network. GM has lost nearly USD2.4 billion on Opel just since 2009, while the unit has lost a total of USD11 billion combined since 1999. In 2011, it spent USD900 million on restructuring costs, and expects to spend another USD300 million in 2012, according to a regulatory filing. In the first three quarters of the year the company lost. 

It is clear that the current senior GM Detroit management regime would not have retained Opel/Vauxhall in the first instance. It has given the unit time for the last restructuring plan to work and is now running out of patience. It is possible that it may go for more basic restructuring and tweaking in terms of further job losses and maybe one or two further plant closures. Certainly some of the company's model strategy plans be reviewed, including reported plans to release a premium-style executive car with some kind of fuel-cell powertrain elements and the prospects of putting the e-RAK radical EV city car into production. Both of these vehicles will be costly to bring to market and will surely require higher prices that Opel/Vauxhall's current customer base would not accept. So the option that Stracke has in terms of a more comprehensive is further mild tweaking of the last restructuring which saw the loss of just over 7,000 posts and the closure of the plant in Antwerp, Belgium. It is also possible that he may go for something completely radical. Would it beyond the scope of possibility for GM to abandon the Opel and Vauxhall brands altogether? Possibly, but a properly radical plan may be to just retain four or five of GM Europe's remaining European production sites and turn them into assembly plants for Chevrolet models, and then reposition Chevrolet as a value, lower-mid-market brand to compete alongside the likes of Hyundai, Kia and Skoda, while also retaining the Rüsselsheim R&D facility for an enhanced global vehicle development programme to create true "world" cars, such as Ford is now doing again. This may be step too far in the immediate term but there is little doubt that radical surgery is required is required and is being encouraged.


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