For General Motors, Less Is More in Europe

Twelve consecutive years of loss-making! That's the story of General Motors' (NYS: GM) European business. The company's North America income has often been offset by the huge losses posted by its European businesses.

The economic uncertainty in Europe, coupled with a large dose of mismanagement over the years, has negatively affected GM's European operations (particularly Opel), and it's time the company buckled down.

What's the problem?
The European problem can be summed up in a single phrase -- overcapacity in a gloomy market. The European economy has yet to stage a recovery, and demand for automobiles remains weak. This is evidenced by the 8.3% dip in registration for new cars in this region during January and February as compared to the year-ago period.

A glum economy, cutthroat price competition, and overcapacity have formed a deadly combination, which is stifling most of the automobile players in the region, including Peugeot, Renault, and Fiat. While Ford (NYS: F) may not be fairing as bad as GM's Opel operations, it is not raking in profits either. And Hyundai's success is likely to add to the general discomfort.

Consider this: By the end of February this year, GM's Opel lost nearly 1% of its market share as compared to the end of 2011. During this period, the company's sales also slid 20%, higher than the 18% fall for peers Peugeot and Fiat. Unfortunately for GM, overcapacity has a lot to contribute to this scenario. Despite falling demand and shrinking market size, the company is still operating at 80% capacity, which translates to an excess production of as much as 500,000 cars.

Cutting out the flab
General Motors has little else to do but to shut down a few of its loss-making European plants. Although GM has yet to confirm the details, factories in Bochum, Germany, and Ellesmere Port, U.K., could be on the chopping block. The company expects a significant 30% drop in manufacturing capacity out of this move.

At the same time, the company hopes to benefit from its new partnership with Peugeot in terms of combined production and considerable savings in the areas of research and development, logistics, and production.

Low costs and road blocks
Apart from capacity cuts, GM also aims to curb costs as much as possible. The company may build production units in "low-cost" countries including China, Mexico, and South Korea. It may import up to 300,000 cars from these countries by 2016.

Opposition from workers unions is another stumbling block the company has to overcome. Workers unions are naturally against the idea of GM shutting down factories, and the labor-friendly laws prevailing in certain countries such as Germany only add to the problems.

The Foolish takeaway
GM still has a long way to go before it can hope to fully incorporate the restructuring moves and get out of the red. Yet, I think the 2011 figures indicate a good start. I think Fools should watch General Motors from the sidelines.

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At the time this article was published Navjot Kaur does not own shares of any of the companies mentioned in this article. The Motley Fool owns shares of Ford Motor. Motley Fool newsletter services have recommended buying shares of Ford Motor and General Motors. Motley Fool newsletter services have recommended creating a synthetic long position in Ford Motor. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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