Banker Says Situation Unsustainable; Sees Losses Through 2016
Possibilities Include Reopening Union Contract, “Contained Bankruptcy”
But Others Point To Action Already Taken, Urge It To Hang In There
“GM would be better off with a profitable three per cent share of Europe than a loss making eight per cent”
GM’s attempt to fix its loss-making European subsidiary Opel-Vauxhall is failing, and drastic measures like reopening contract talks with labour unions are required if the drain on resources is to be stopped, Morgan Stanley said in a report.
“We view the situation at Opel as unsustainable. GM’s abundance of cash and expressed frustration suggest changes are in the offing. We see a confluence of factors that could drive GM to a tipping point on Opel,” said Morgan Stanley analyst Adam Jonas in the report.
GM CEO Dan Akerson has made clear that Opel-Vauxhall losses were on his radar when he said GM Europe needed to reverse its flow of red ink.
Morgan Stanley’s Jonas said recent statements by GM management suggest far more aggressive action, such as IG Metall contract renegotiation or Opel reorganisation, are possible options.
“We believe GM would be better off with a profitable three per cent share of Europe than a loss making eight per cent share. This is the decision GM faces and it appears to control is own destiny. We value Opel at negative $7.6 billion and estimate a legal separation could cost $5 billion to $6 billion, creating value for shareholders,” said Jonas.
GM Europe, which includes Opel, Vauxhall and Chevrolet, lost $292 million in the third quarter, an improvement on the loss of $559 million a year earlier, but then dropped its earlier target of breaking even in 2011.
Last week German union leaders responded to Akerson’s remarks that nothing was off the table by saying GM’s current labour deal in Europe barred factory closures and job cuts through to 2014.
Material adverse change?
Morgan Stanley’s Jonas said this wasn’t necessarily so.
“We believe GM’s German labour contract could be re-opened if it can prove a material adverse change has occurred,” he said.
Jonas said GM Europe would lose $600 million in 2011, after he had earlier estimated a $160 million profit this year.
“On our calculations, without significant and immediate additional restructuring efforts, we would expect GM Europe losses to approach $1 billion in 2012, with losses continuing each and every year through the 2016 horizon,” Jonas said.
GM has said its European operation spent $900 million on restructuring and early retirement programmes in 2011 in Spain, the U.K., Belgium and Germany affecting 5,800 people and the closure of the Antwerp assembly plant. GM expects a further $300 million of spending through 2012 to complete this action, leading to a further 1,600 job losses.
Jonas said GM had various options for its European operation, including what he called a “contained bankruptcy”. When GM nearly sold the Opel operation in 2009, one of the reasons GM held on was because it might lose the world-class engineering skills in Germany. Jonas said in fact the European technology is “ring-fenced” and sits in a separate legal entity owned by GM, similar to the ownership of Saab technology.
GM Europe’s prospects have been thrown into reverse because car sales in Europe are being undermined by the financial turmoil surrounding the possible collapse of the euro single currency zone.
What can GM Europe’s new board chairman Steve Girsky and recently appointed CEO Karl-Friedrich Stracke do to turn the ship around?
Not much, just more of the same, says IHS Automotive analyst Tim Urquhart.
“The new management team faces an uphill battle, with options limited in a declining European market, and further job losses and plant closures the only effective options to reduce costs and improve productivity,” Urquhart said.
“The prognosis for Opel/Vauxhall is not good and it is looking increasingly likely that the new management team will look to take swift action on the company’s cost base and balance its production output with demand. The high cost of manufacturing in Germany would appear to make the company’s large production footprint in the country an obvious target, although any move in this direction would lead to prolonged and potentially damaging labour unrest,” Urquhart said.
Done the fundamentals
But many analysts, including Garel Rhys, Emeritus professor of Motor Industry Economics at Cardiff University Business School, point out that Opel-Vauxhall has already taken harsh and effective measures to realign the company.
“GM has done the fundamentals, now it has to hang in there. It’s got rid of the cost base and absurd wage rates in Germany and now it has to wait like everybody else for the upturn. The competition, excepting VW, is also in a dreadful state particularly Fiat. GM has been forced to take action. In fact both Americans (Ford Europe too) have probably been the most active in trying to match longer term capacity to longer term demand,” Rhys said.
Neil Winton – December 1, 2011