GM's Europe Plan Starts to Emerge
While General Motors (NYS: GM) has come a long way in a short time -- from decline and bankruptcy to strong profits in less than three years -- the General's transformation from Rust Belt relic to global dynamo is still far from complete.
GM CEO Dan Akerson and his team still face a variety of challenges, from key models that are past due for updates to a pension liability that could end up costing the company billions in a few years. But no challenge has occupied senior management's attention like its money-torching European subsidiary, Opel.
Opel has lost more than $15 billion since 1999 -- losses GM hasn't been able to stop despite several restructuring efforts. But Akerson has made it clear that he is determined to fix Opel once and for all -- and in the past few days, the outlines of his plan have started to come into view.
The plan to remake Opel
The biggest problem plaguing Opel, and all of Europe's automakers, is overcapacity: too many factories making too few cars to be profitable, particularly when sales decline during difficult economic times -- like now. While other global giants such as Ford (NYS: F) and Volkswagen (OTC: VLKAY.PK) are also losing money in Europe, GM's operation is seen as especially troubled, with Opel losing share in a market where overall sales are down 14% since 2007.
It has been clear for a while that Europe's automakers were going to have to close factories. But such moves are complicated in countries, like Germany, that have strong unions and union-friendly laws. For Opel, the situation is complicated further: The automaker's current labor contracts forbid it from closing plants until after 2014.
Reports in the German media, however, indicate that plant closings are a key part of the emerging Opel turnaround plan. This past weekend, Der Spiegel reported that GM may be planning to close Opel plants in Bochum, Germany, and Ellesmere Port, U.K., in 2015. According to the report, which is based on an internal GM strategy document, GM would replace the lost production with imports -- as many as 300,000 vehicles a year -- from its factories in lower-cost areas such as Mexico, South Korea, and China.
On the surface, it's a sensible plan from GM's perspective, one that uses the company's giant global footprint to better advantage than the status quo. But will it fly?
It's one thing to plan, another thing to do
These plant closings are probably only one part of a larger plan that will include leveraging GM's new alliance with PSA Peugeot Citroen (OTC: PEUGY.PK) and integrating GM's European offerings more tightly within a streamlined global model lineup, as well as further consolidating the automaker's non-union operations in Europe.
But they're the part that's likely to face stiff resistance. Already, German labor leaders have signaled stiff opposition to the idea of closing the Bochum plant, calling on GM instead to increase production and step up exports from Europe to other markets.
Building cars in high-cost Western Europe for export to markets such as China makes little sense and is unlikely to fly. Opel's labor leaders must know that, and must also know that plant closings are inevitable if Opel and the auto industry in Western Europe are to thrive in the long term.
But unveiling a plan to close plants now could lead to problems for GM. Will workers at the doomed plants be willing (or able) to maintain high quality standards? Will they strike? How will Opel customers respond to the idea of Chinese-made cars replacing German-made ones? Is GM really willing to sustain what could be $2 billion or more in further losses before closing the plants in 2015 -- on top of the additional billion or more it will take to actually close the plants? How will GM investors react to that news?
Officially, as of midday on Monday, GM still hadn't announced anything -- yet. But The Wall Street Journal, citing "people familiar with the plan," reported last week that the plans could be made public "within the next couple of weeks." Clearly, the time for action is coming soon. And just as clearly, fixing Opel is going to be an expensive, messy, and time-consuming effort.
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At the time this article was published Fool contributor John Rosevear owns shares of Ford and General Motors. Follow him on Twitter at@jrosevear.Motley Fool newsletter serviceshave recommended buying shares of Ford and General Motors and have recommended creating a synthetic long position in Ford. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.