Has GM Really Fixed Europe?


During a conference call with analysts and media on Wednesday, General Motors (NYS: GM) executives seemed to be at pains to convince listeners that it had finally addressed the chronic problems with its European operation.

GM has lost a fortune in Europe in recent years, and Wednesday's earnings report added another $478 million loss to the total. But CEO Dan Akerson and his chief lieutenants now say they think those losses will end by 2015.

That was a big surprise. But investors liked it, sending GM's stock up 9.5% on the day. Is it likely to pan out?

Incremental actions addressing long-standing problems
Akerson's right-hand man, GM Vice Chairman Steve Girsky, is personally leading the charge to overhaul Opel, GM's long-troubled German subsidiary. Opel has lost more than $15 billion since 1999, and several previous efforts to restructure the business have proven ineffective. With Europe now stuck in a protracted economic downturn and auto sales near a two-decade low, the need for action has become acute.

Analysts have long said that Opel's problems are structural in nature. They've argued that Opel, like the European auto business as a whole, has too many factories, too-rich labor deals, and too much bureaucracy. Only by making big painful cuts, many say, can GM hope to restore Opel to sustainable profitability.

GM -- and Opel's unions -- have long appeared to resist plant closings. While GM has said that its Bochum, Germany factory will get no further new products, that leaves the factory open at least through 2015. Pressure has mounted on Akerson to do something dramatic to "fix" Opel sooner than that.

At least one high-profile analyst, Adam Jonas of Morgan Stanley, has argued that GM should dump the company altogether. The pressure on Akerson reached a new intensity last week after archrival Ford (NYS: F) announced a comprehensive plan to fix its own troubled European operation -- a plan that included three factory closings.

"Green shoots" may already be appearing
Hoping to mount a convincing response, GM added Girsky to the roster for its quarterly earnings conference call. Girsky went through the changes that have happened so far and made a strong argument that "green shoots" may already be appearing in Opel's business:

  • Key management changes. Akerson stacked Opel's Supervisory Board with some of GM's most talented top executives, including product development chief Mary Barra; CFO Dan Ammann, Timothy Lee, who heads GM's International Operations unit; and Robert Socia, global purchasing chief. He also named Girsky its chairman. Turnaround specialist Thomas Sedran was installed as Opel's interim CEO. As Girsky said on Wednesday, of the top 18 people at Opel a year ago, only four or five are left; the others have been replaced by a mix of inside and outside talent.

  • Major product overhaul. Opel will get 23 new models and 16 new engines by 2016. Just as Ford is doing, Opel is adding models from GM's global portfolio in order to compete in segments it hasn't previously taken on. One of those, a new small SUV called the Opel Mokka, is already a hit: Girsky said Opel has about 45,000 orders for the Mokka and can probably only fill about two-thirds of those before year-end. Meanwhile, Opel is working to improve the profitability of its existing vehicles by reducing discounts and cutting production costs, as well as sending its products to new markets, including Russia and China.

  • The alliance with Peugeot. Opel and French partner PSA Peugeot Citroen (NASDAQOTH: PEUGY.PK) are working to jointly develop several vehicles on four shared platforms, which will allow for significant economies of scale in parts purchasing that could save $2 billion a year.

  • Cost reduction actions. Opel has reduced its huge standing inventory of vehicles by more than 100,000 units since February, and Girsky expects to move another 20,000 by year-end. Overall fixed costs are expected to be down by $300 million a year in 2012 and another $500 million next year as voluntary buyouts of 2,600 employees and other restructuring moves are completed. And while Bochum is the only factory slated to close -- and that not for several years -- shift reductions and other production consolidation moves are happening elsewhere.

Will all that be enough?

Breakeven by "mid-decade"
Girsky and Akerson say it will be enough for Opel to break even by mid-decade, though there will be more money lost between here and there. GM expects to lose more than $1.5 billion in Europe this year, with only "slightly better" results in 2013.

Only time will tell whether Opel is really on the mend. I won't be surprised if GM continues to explore more drastic steps, such as the hinted-at merger of Opel with Peugeot's auto operations into a new joint venture.

But many investors seemed to find Girsky's argument -- and Akerson's confidence -- convincing. We'll see how it holds up in the months to come.

GM's stock has risen a bit recently, but it's still not far from its post-bankruptcy low. But if Akerson can harness GM's potential, deal with Opel, and get the Feds to exit honorably, then GM's stock could have significant upside over the next couple of years. However, investors need to stay attuned to fluctuating demand and the ability of automakers like GM and Ford to respond in unison. For starters, one of our top equity analysts has compiled a premium research report with in-depth analysis on Ford's competitive edge. To find out what could propel Ford down the road, click here for instant access to this premium report now.

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