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GM Europe’s Aggressive Profit Target Looks Hard To Achieve

Karl Thomas Neumann

GM Europe president Karl-Thomas Neumann

This would be a very, very ambitious target for 2018, but for 2022 could be a very realistic time horizon which could then be sustainable”

GM Europe’s financially troubled Opel-Vauxhall subsidiary is pledged to return to the black by 2016 and has now set itself some tough sales targets for 2022, but the profit goal looks more like a wish than a possibility.

Opel-Vauxhall is not the only serious money losing European mass car manufacturer. Peugeot-Citroen of France and Fiat Chrysler European operation vie with it for the title of biggest value cruncher. But Ford Europe, although a big money loser too in the past, is praised for its vigorous attempts to shed excess capacity and rescue the bottom line.

GM Europe president Karl-Thomas Neumann set the 2016 break-even target at the Geneva car show in March, but earlier this month he outlined more detailed, long-range plans. This included European market share rising to eight per cent by 2022 from 5.8 per cent in 2013. This implies jumping into second place in the market share stakes over Peugeot, Citroen, Renault, Hyundai and Ford. Last but not least, operating profit or EBIT (earnings before interest and tax) must hit five per cent.

If that wasn’t hard enough, a couple of days later, Opel-Vauxhall declared that it had brought forward the five per cent profit target four years to 2018. Opel later said it had not brought forward the EBIT target. “Opel/Vauxhall categorically denies that its 5% EBIT target date is 2018.  The date is 2022, it has never been ‘revised’,” said Johan Willems, Vice President, Communications, Opel/Vauxhall. (Opel is the mainly German-based company which sells across Europe except Britain, which Vauxhall serves with identical cars). A five per cent operating profit margin might not too difficult for a normal business. But this is no normal business. Opel-Vauxhall lost $844 million in 2013, down from $1.94 billion in 2012, and has trashed around $18 billion since 1999. And while Opel-Vauxhall was declaring its aims, other chronic loss makers like Peugeot-Citroen (which lost more than $9.6 billion between 2012 and 2013) and Fiat Chrysler were also setting down ambitious declarations for more sales and profits. Renault of France, a stronger performer thanks to its tie-up with Nissan of Japan and the success of its Dacia cut-price subsidiary, also has plans to raise sales and market share.

A six year slide in European car sales to 20 year lows since the recession began is at last coming to end, but if all these ambitious plans are to succeed a rising tide of car sales must raise all boats, and nobody predicts much of a rally for the foreseeable future.

Jens Schattner, analyst with Frankfurt, Germany based Macquarie Research, said the five per cent profit margin target would be ambitious whether it was for 2018 or out to 2022 because Opel-Vauxhall mainly operates in Europe where over-capacity of currently between 30 and 35 per cent handicaps all the players.

Schattner said car companies like Opel-Vauxhall could reach breakeven by aggressively cutting costs and R&D budgets, but this would then impair the quality and desirability of future products.

“It’s all about getting a reasonable balance between investment and costs. Yes, five per cent (EBIT) could be feasible, but a lot depends on volume, demand and market share gains. If Opel aggressively cuts costs and neglects investment for the future, this won’t be sustainable. There has to be an efficient cost base and ongoing investment. This would be a very, very ambitious target for 2018, but for 2022 could be a very realistic time horizon which could then be sustainable,” Schattner said.

“Ambitious” was the watchword for thoughts on Opel-Vauxhall.

“It’s very ambitious,” said Professor Ferdinand Dudenhoeffer, director of the Center for Automotive Research at the University of Duisburg-Essen.

“I think the market share gain is possible. It’s a tough objective however, but not impossible. We’ll see what happens with Peugeot-Citroen and Fiat. I think Fiat is the weakest carmaker due to not investing in products for the last three to five years. Whether they (Opel) will make the five per cent profit margin is not clear. However, if they can manage to split costs of platforms across the group, it is not impossible,” Dudenhoeffer said.

Volkswagen of Germany has had some success using common engineering systems or platforms across many brands for its mass market vehicles, and sells what are basically VW’s disguised as Skodas and SEATs. It also helps to have an upmarket brand like Audi to make big profits. Audis also include much anonymous VW content.

John Wormald, analyst with British automotive consultancy Autopolis, reckoned that a brand like Opel-Vauxhall ought be able to reach a market share of eight per cent, but was troubled by the length of the forecast.

“Nobody can forecast economic and social activity by 2022, and car sales aren’t likely to be all that vigorous. There’s no particular reason why Opel-Vauxhall should jump over all the others, after all, everybody is doing the same thing,” Wormald said.

Ford ahead
Wormald praised Ford for getting ahead of the game in Europe, just like it did in the U.S.

Ford has removed 18 per cent of European capacity with the closure of a commercial vehicle plant in Britain and a car assembly plant in Genk, Belgium. International Strategy & Investment (ISI) reckons Ford will return to profit in Europe next year with $372 million, while GM Europe takes until 2016 to merely break-even.

“As a result, we expect Ford delivering material upside for investors next year – a $1.8 billion positive earnings swing versus 2013, but not a similar evolution at GM,” ISI said.

Meanwhile, GM Europe is in the process of shutting a plant in Bochum, Germany, and announced it was withdrawing its Chevrolet brand in 2015 from Europe. Dumping Chevrolet will cost $900 million but, according to Morgan Stanley, will have a four-year payback, adding more than one percentage point to pre-tax earnings. Last year Opel-Vauxhall announced a $5.25 billion investment plan through 2016 to develop 23 vehicles and 13 engines. This has now been expanded to a total of 27 new models and 17 engines between 2014 through 2018.

Ford praised
Per Norinder, Paris-based automotive management consultant, said most of the European mass car manufacturers with the exception of VW, are struggling, and also praises Ford.

“Ford has a chance to be global with its one strong brand and is doing better than Opel and has a better chance of success. They’ve made themselves slimmer and fitter and started earlier. But GM Europe is giving it a serious try,” Norinder said.

Norinder said Opel is keen to leverage its German brand image. He points out that the big (by European standards) Insignia, which is sold in the U.S. as the Buick Regal, has also been a big success in China.

“They are making stacks of money with the Buick Regal in China and this is the main reason to try and save Opel, so they are giving it a serious try. (CEO Mary) Barra is more international looking than previous CEOs, so now there’s going to one global GM. They might have a chance if they really go for it,” Norinder said.

Norinder said the Opel targets may be tough, but a big company like GM almost has to have ambitious goals.

Autopolis’s Wormald doesn’t see why the sales targets can’t be met, but he’s not convinced about the bottom line goal.

“The sales targets ought to be perfectly achievable. More difficult is the (five per cent) margin. Break-even, yes. Five per cent will be tough, and it’s hardly glorious by the standards of most business,” he said.

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