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GM Future In Jeopardy Unless It Dumps Opel, Report Says

But Girsky Vows To End Losses, Turnaround The Company
How Will Chevrolet-Opel Rivalry Turn Out?

GM Europe’s Opel-Vauxhall could lose at least another $16 billion by 2024 and the only way to avoid this threat to parent company General Motors’ own future is to dump this European subsidiary as soon as possible, investment bank Morgan Stanley said.

This may take some time and money, but GM must bite the bullet because its own healthy turnaround is threatened by the gigantic losses from its Opel and Vauxhall subsidiaries in Europe.

“Opel has lost $16 billion over the past 12 years. Losses over the next 12 years could be even greater,” said Morgan Stanley analyst Adam Jonas, in a report.

GM vice-chairman Steve Girsky hit back, saying it was the company’s intention to slash losses and turnaround Opel-Vauxhall.

“We’re going to support this company and this brand, and we’re going to give Opel tools to help them be successful,” Girsky said in an interview with Bloomberg. “You can’t have a mindset that it’s OK to lose a billion a year. That’s the mindset we’re trying to change,” Girsky said.

Opel-Vauxhall has said it plans 23 new models by 2016, including the new Mokka compact SUV, and Adam mini car. Opel is also unveiling the new four-seat convertible, the Cascada, at the Paris Car Show later this month.

Girsky had some support amongst investment banks, with Deutsche Bank’s Rod Lache believing that Opel-Vauxhall was on the road to recovery, although he didn’t discount the possibility of GM dumping its European operation.

Turnaround plan
“GM is further along in developing a European turnaround plan than is widely perceived. We also believe that GM has the means to significantly mitigate its losses, and potentially even exit this business down the road. While the latter scenario is unlikely to be discussed anytime soon, we are hopeful that a critical mass of cost savings will lead investors to conclude that GM’s European losses have peaked. If GM conveys that they are able to cap losses in Europe, we believe that investors would likely turn their attention to the very positive story emerging in North America,” Lache said.

GM is expected to announce details of its European turnaround programme on October 31 when it releases third quarter financial results. This is expected to include confirmation that the Bochum, Germany plant will be closed in 2016.

Jonas, in his report, said Daimler and BMW showed how to be rid of chronic loss makers by cutting loose from Chrysler and Britain’s Rover.

“(Opel-Vauxhall) represents the single biggest threat to GM’s long-term financial health and sustainability. In our view, a separation – while expensive – is the best option for both GM and Opel stakeholders,” Jonas said.

“(GM’s) performance may be held back materially as long as the company continues to own and fully consolidate the Opel business. Limiting risks here could trigger significant upside potential. In our opinion, exiting Opel could be the best strategic option currently available to GM and better long-term for Opel itself,” Jonas said.

Opel-Vauxhall’s latest financial data shows a loss of $361 million in the second quarter. Morgan Stanley expects the 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.

Earlier this year, GM took a seven per cent stake in PSA Peugeot-Citroen of France. The two companies plan various measures to cut costs in Europe long–term and produce vehicles together.

GM can’t fix Opel without some outside help, Jonas said.

“We do not believe GM can reasonably be expected to turn around Opel on its own. In our view, Opel would have a far better chance of success if it existed outside of the GM group. We’d rather see GM with a three per cent share in Europe (GM’s forecasted market share with the Chevrolet brand and excluding Opel-Vauxhall) generating profit than an eight per cent market share in Europe generating massive losses,” Jonas said.

Whither Chevrolet?
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.

Jonas said it would cost between $7 billion and $13 billion to get rid of Opel. GM would be able to preserve its European technology, so critical to GM’s global development of fuel efficient engines, because the rights are held in a separate Delaware-based legal entity controlled by the parent company.

Girsky is also temporary chief of GM Europe, following Karl-Friedrich Stracke’s demise after only seven months in the job of Opel CEO. Girsky had voted against the 2009 plan to sell Opel.

Edward Lapham, executive editor of Automotive News, reminded his readers that Girsky had once been lead auto analyst for Morgan Stanley, like Jonas. Lapham mused that if he returned to his old job, whether Girsky would be so aggressively backing GM to hang on to Opel.

“It makes you wonder whether Girsky might see things differently if he were still at Morgan Stanley,” Lapham said.

Neil Winton – September 15, 2012

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