General Motors' Next Big Problem: Making Europe Profitable

It wasn't all that long ago that General Motors' (GM) most reliable product might have been its earnings report for North America: Every quarter posted a huge loss, just like clockwork.

GM's operations at home were broken, a legacy of decades of poor products, and labor deals and infrastructure that the company could no longer afford. But now, thanks to the U.S. government and (it must be said) new managers who are mindful of the opportunity given to them by American taxpayers, GM's making a lot of money here at home.

But as this week's earnings report made clear, the company still has an awful lot of work to do elsewhere.

Big Profits and Big Challenges

GM made $2.2 billion in North America in the third quarter, but it couldn't expand on that number with earnings abroad. Increased profits in China were canceled out by weak Europe and South America numbers, and GM's total operating profit also came in at $2.2 billion. Total net income was $1.7 billion. Bankruptcy restructuring, new labor deals, and a smarter use of resources have all contributed to GM being profitable here at home, and those profits are big enough to carry the whole company. In fact, CEO Dan Akerson and his team have pushed GM's breakeven point in the U.S. down so far that the company should continue to be profitable even in a very deep recession.

Now, though, Akerson has to repeat that feat in places like Europe, even as the company continues to work aggressively to improve its profit margins here in the U.S. Europe, where the company has lost more than $13 billion since 1999, is an enormous challenge for GM. The same is true for rival Ford (F) -- but like Ford, GM has concluded that Europe is essential to its global operations. It has to be saved.

Europe Is One of the Keys to GM's Renaissance

Even when its European unit is profitable, as it was (barely) last quarter, it doesn't contribute a lot to GM's overall bottom line. But it's important for other reasons, namely the economies of scale and engineering expertise that it adds to GM's global business.

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To understand why, we need to understand how GM is transforming itself by following a trail blazed by its ancient rival, Ford. Rather than developing a slew of different models for different regions -- as both Ford and GM used to do, and as companies like Honda (HMC) still do today -- Ford is committed to selling a single lineup of cars and trucks around the world, just 20 or so cars and trucks total.

That "One Ford" approach is the key to Ford's profitable revival: Under this new plan, Ford has fewer models to develop, and that means it can commit more money and attention to each model, improving quality and competitiveness. That in turn means bigger profits per vehicle and more money for the cycle to continue.

It's similar to the way Toyota (TM) approaches its global business. It's working out very well for Ford, and GM is actively following in the Blue Oval's footsteps, with some very good new products. And just as Ford uses its European operation as its center of small-car expertise -- the new Focus and Fiesta were both designed in Germany -- GM has drawn important new models like the Buick Regal from its own European design centers.

Europe's a critical part of the plan. That means that Akerson needs to find a way to make Europe profitable, even in tough times like these.

A Daunting Challenge

Making its European region profitable in good times and bad will be hard for GM: Rules set by labor-friendly governments mean that the kind of cost-cutting changes the company has won here will be slower to come in the Old World.

But making those kinds of changes, at least, is something that GM's current leaders know how to do. Earlier this week, Akerson replaced GM's longtime European chief with a rising star, Karl Stracke, who used to run GM's engineering team in Detroit. Stracke's mandate is clear -- it'll just take time to make it happen. The harder part is the thing GM can'tchange: Europe's economic mess, which is clobbering car sales. Until that starts to get better, GM's challenge in Europe will remain daunting.

At the time of publication, Motley Fool contributor John Rosevear owned shares of General Motors and Ford. You can follow his auto-related musings on Twitter, where he goes by @jrosevear. The Motley Fool owns shares of Ford Motor. Motley Fool newsletter services have recommended buying shares of General Motors and Ford Motor.

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