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GM Europe Loss Estimate Raised Again

Stock Buildup Boosted Second Quarter Bottom Line

“Opel must cut 30,000 to 40,000 units of inventory, taking third quarter production down 15 per cent year on year”

General Motors Europe’s Opel-Vauxhall subsidiary managed a less horrendous than expected loss of $361 million in the second quarter, but one investment bank now expects red ink for all of 2012 to reach $1.5 billion, because the numbers were flattered by a buildup in stocks which will have to be accounted for.

In a report, Morgan Stanley said inventory build at Opel will weigh on second half results, and its analyst Adam Jonas isn’t confident the turnaround process will soon show success.

“How many more billions will Opel lose before tough decisions are made?” Jonas asked in the report.

GM Europe has lost $14 billion in the last 12 years.

Jonas raised his estimate for losses in 2012 to $1.5 billion from a previous estimate of $1.4 billion. Earlier this year Jonas was predicting a $1.5 billion loss.

“We lower our EBIT (earnings before interest and tax) to $1.5 billion from $1.4 billion. Opel must cut 30,000 to 40,000 units of inventory, taking third quarter production down 15 per cent year on year,” Jonas said.

Last month Deutsche Bank said GM Europe would lose about $1.3 billion in 2012.

Management upheaval
GM Europe is not only facing weak European markets, but is in the midst of a management upheaval after dumping its President and Opel board chairman Karl-Friedrich Stracke. Rumours abound that Detroit might run out of patience and shut the whole serial European loss-maker down.

Speculation persists that Chevrolet (its results in Europe are included in GM’s international operation, not Europe’s) and Opel-Vauxhall can’t coexist as separate brands, as both chase buyers at the bottom end of the market. In the first half of 2012, Opel-Vauxhall’s West European market share dived to 6.9 per cent from 7.5 per cent the previous year, while Chevrolet increased its share to 1.4 per cent from 1.2 per cent.

Ominously for Opel output in Germany, GM has invested $1 billion to raise output of mainly Chevrolets and some Opels in St Petersburg, Russia, to 230,000 a year in 2015 from 98,000 now, while its Avtovaz joint venture can produce 350,000 vehicles a year. These plants are ostensibly to serve the Russian market, but if the red ink persists in Europe, rocket science wouldn’t be needed to find a way of cutting costs.

Vic Heylen, director of the Flanders Centre for Automotive Research based near Antwerp, Belgium, points out that a recent seven year, $559 million sponsorship with soccer giant Manchester United was signed by GM on behalf of Chevrolet, not Opel-Vauxhall. Heylen said Opel-Vauxhall’s market share has been on the slide since 1993, while since Chevrolet first appeared in 2004 its share has been gradually moving up.

“If this trend keeps up, Chevrolet’s market share curve will join Opel’s,” Heylen said.

Neil Winton – August 15, 2012

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