General Motors' Rough Road in Europe
Thanks to that government-assisted bankruptcy and bailout, focused leadership, and products that have come a long way in a hurry, General Motors (NYS: GM) is booking fat profits in North America for the first time in years.
It's a turnaround that hasn't captured the public's attention like Ford's (NYS: F) . Still, since it fell into bankruptcy in early 2009, GM has made enormous progress. That success extends to other parts of the world as well.
GM is China's largest-selling automaker, and is once again the world's largest. Its Buicks and Chevrolets are common sights in Shanghai and other big Chinese cities. And the company is finding strong markets for its revamped model lineup in India, the Middle East, and elsewhere.
But in Europe, GM faces the same kinds of troubles it faced here in the U.S. last decade, with no hope of a bailout or other easy solution.
A situation that is "clearly deteriorating"
All of Europe's automakers have struggled recently, but GM's struggles go way back: The company's Opel subsidiary and related European operations have lost over $15 billion since 1999, including $600 million just last quarter. And it'll get worse before it gets better, say the automakers: Lewis Booth, the chief financial officer of Ford, which has a sizable (and money-losing) operation in Europe, said last month that the company expects overall European auto sales to fall an additional 8.5% in 2012.
That's a shocking number, given the solid growth in auto sales seen in the U.S. in recent months, but GM's own finance chief may be even more pessimistic. CFO Dan Ammann told analysts last week that the situation is "clearly deteriorating" and has "worsened significantly" in the last few months, according to Bloomberg.
What's the problem? There are several, but just as with Detroit in the last decade, the biggest problem is that there are too many car factories and not enough buyers.
The conundrum of closing factories
Much of Europe has fallen back into a deep recession, exacerbated by austerity policies adopted by some European governments in the wake of the financial crisis. Meanwhile, the automakers' production capacity is scaled for a larger market, so many of Europe's car factories are running at well below capacity, and well below their break-even points.
So why not close a few factories and move on? It's not that simple: In European countries like France and Germany, labor unions have tremendous power. Factory closings require elaborate negotiations, and often face fierce resistance even when companies are posting heavy losses.
But as GM's Ammann said last week, substantial reductions in capacity -- i.e., factory closings -- are inevitable. The only questions are who will go first, and when.
The answers may be "GM, and soon."
Big pressure to find a permanent fix
GM CEO Dan Akerson's no-nonsense style was forged on Wall Street, where he made his fortune in private equity. When it became clear late last year that GM's last attempt to turn Opel around had faltered, he made finding a fix for Europe one of his top priorities and took dramatic action.
Several of GM's most senior executives, including Ammann, were placed on Opel's board, and Akerson's right-hand man, Vice Chairman Steve Girsky, was put in charge of creating a restructuring plan that would return Opel to profitability.
GM's restructuring in the U.S., like Ford's, has left the company with the ability to stay profitable even during a deep recession. That's what Akerson wants for GM's operation in Europe, but there are many obstacles. Chief among them are the unions, which want GM to shift more of its global production to Europe, a solution the company is unlikely to accept because of high costs.
Union leaders in recent days have signaled strong opposition to the idea of closing factories and have accused GM executives of trying to pit Opel's labor factions against one another. There has been a lot of tough talk, but it's possible that it's just labor-leader posturing -- a way of showing the rank and file that their leadership did all they could before accepting the inevitable.
Girsky and Opel's senior managers have promised that GM would present its once-and-for-all turnaround plan for Opel within a couple of months. Negotiations are thought to be under way with union leaders and government officials in Germany (and possibly elsewhere -- Opel has factories in Spain and Britain that could be targeted for closure, as well as a few in Eastern Europe.)
It's hard to predict exactly what Girsky will recommend, but it's increasingly clear that one or more of Opel's factories are likely to close. That won't be nearly enough to return the European auto industry to profitability, but if it's enough to put Opel back in the black despite the ongoing economic challenges in Europe, it'll be a job well done for General Motors.
At the time of publication, Motley Fool contributor John Rosevear owned shares of Ford and General Motors.The Motley Fool owns shares of Ford.Motley Fool newsletter serviceshave recommended buying shares of Ford and General Motors and have also recommended creating a synthetic long position in Ford.
At the time this article was published
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