Editor/Reporter - CheersandGears.com
May 10th, 2012
General Motors’ European operating firm Opel recently lost $256 million dollars in the first quarter of 2012, and changes are underway to stem the losses.
The waves of red ink washing in overseas at Opel are cutting deep into the Detroit automaker’s earnings. While GM posted net earnings of $1 billion dollars for this year’s first quarter, it knows things could’ve been much better if its European outpost were operating profitably.
Compared to the first quarter of 2011, GM’s earnings this time around were down by almost 69 percent because of its losses in Europe.
This has given GM CEO Dan Akerson especially some cause to worry. Akerson described the situation in a recent radio interview as a “four-alarm fire,” going on to say that Opel would “have to restructure again.”
It was barely six months ago that GM reorganized its European operations in a previous effort to turn the German brand around. During the shake-up, former president and CEO Nick Reilly was forced into retirement and replaced by Karl-Fredrich Stracke. Also transferring to Europe, among a host of others, were GM chief financial officer Dan Amman and GM Vice Chairman Steve Girsky. Girsky is now chairman of the board at Opel.
Eurozone malaise squeezing Opel, automotive industry
Opel’s troubles stem from a serious financial and economic crisis currently sweeping Europe.
Just last month, the economy of the United Kingdom skidded into its second recession since 2008. As many as one out of four people living in Spain are currently unemployed. Many European countries, such as Greece, are swimming in sovereign debt and are requesting bailouts from the European Union.
The crisis in Europe has understandably debilitated consumer confidence, and new car sales there are expected to drop as a result. European buyers are expected to buy almost 1 million fewer vehicles than their American counterparts this year and recovery isn’t expected overnight.
When the CFO of rival Ford spoke to CNN Money recently, he said that he didn’t expect European sales to return to a “normal” level of 15 million vehicles a year for the next four to five years.
Over at Opel, signs of a faltering market for 2012 are already beginning to show as it watched its market share decline 0.7 percent in the first quarter — from 7.3 percent in the previous year to 6.6 percent this year.
While Opel CEO Karl-Fredrich Stracke is confident that some market share can be regained in the future with new models like the upcoming Mokka subcompact crossover and Adam city car, he said that he didn’t foresee significant growth in the market for the next two years.
While Opel is feeling the burn of a weakened European economy and automotive marketplace, it isn’t going the ride alone. It’s worth noting competitors Fiat, Renault, and Ford Europe are also similarly struggling, as is GM’s new business partner Peugeot-Citroen PSA.
Earlier this week, Opel labor boss Wolfgang Schaefer-Klug said to reporters amidst 4,000 striking workers at Opel’s Russelsheim plant that a restructuring deal could take 2 to 3 months.
Schaefer-Klug said a deal to bring the money-burning automaker back to profitability was “necessary and realistic.”
In early March, Opel CEO Karl-Fredrich Stracke also said that restructuring talks could take 2 to 3 months. Just last week, however, he told reporters that it could take an additional 2 months before he could disclose the complete details.
The restructuring at Opel is expected to mainly focus on cutting costs and over production, in order to adjust to the shrinking European market.
“We’ve got to get the break even point lower, get the revenue higher, in order to be profitable in that kind of market environment,” CFO Dan Amman told analysts back in January.
CEO Stracke would go on to say to reporters this month: “We're working intensively on increasing efficiency to improve profitability of the company in a difficult market environment as soon as possible.”
Opel lost an average of $628 dollars for each of the 1.19 million cars it produced last year. This is because its fixed costs are geared toward an additional half-million vehicles — a number worth the equivalent of two major manufacturing plants.
Plant closures out for now
While Opel will trim back production capacity, it denies rumors that it will shutter its plants in Ellesmere Port, UK and Bochum, Germany as part of the restructuring talks.
“We are not addressing any plant closures until 2014,” Stracke said recently.
Although labor boss Schaefer-Klug didn’t comment on the future of the Bochum plant, he didn’t think Ellesmere Port was in danger of closing. “I’ve heard no speculation that they want to close the plant,” he said.
In fact, it seems that Opel has considered relocating production of its compact Astra hatchback after 2015 exclusively to Ellesmere Port and Gliwice, Poland from Russelsheim, Germany. While such a move would cut costs and could boost production, it was met with red-hot disapproval from employees in Germany.
Schaefer-Klug especially rejected that the fact the Russelsheim plant produced only 18,000 Astras out of a total of 330,000 last year made producing the model there relatively insignificant.
“It’s complete rubbish to say that the Astra isn’t important for this plant,” he said, noting that Opel’s home plant is set to build 70,000 Astras this year.
Is saving GM’s burning European ship hopeless?
Since 1999, Opel’s losses have continued to mount and, since 1993, its market share has continued to shrink, leaving some observers to almost dismiss any prospect of the German brand returning to good health.
As much as $13 billion dollars has been lost by the European firm over the past 13 years, and its market share has deflated by 5.3 percent in EU and EFTA countries during the course of almost two decades.
“I almost see Opel’s problems as not solvable,” said industry watcher Maryann Keller in a Bloomberg report back in January.
Analysts also point out that Opel has significant image issues to trump, that it doesn’t have the standing of competitors like Volkswagen to charge prices that would cover costly German labor rates.
But there is some hope for GM’s troubled Euro brand. GM could expand Opel’s dealer network in China with the help of partner SAIC. Morgan Stanley analyst Adam Jonas even went so far as to suggest in a research note written at the beginning of the year that an alliance with SAIC could improve business efficiency at Opel.
The German brand is also set to launch in Australia this year, and that could bring about a slight upward nudge in sales if buyers there respond favorably.
There’s also Peugeot PSA’s partnership with Opel’s parent company. In March, board chairman Steve Girsky said that the union would begin to generate cost savings by the second half of this year.
The alliance between the two firms is expected to eventually save $2 billion annually within 5 years and give GM and PSA better leverage when purchasing components and raw materials. GM and PSA are also expected to share development costs on future vehicles.
While there’s still a rough economic storm ahead for Opel to weather, if GM restructures its European operations to be smarter and leaner, the 150 year-old German company could very well have a second big turnaround story to tell since it came back from the brink after WWII revenged Germany in the 1940s.