“GM Would Rather Kill It Than Sell It To Chinese Car Manufacturers”
If GM Spoke Up For Opel-Vauxhall, The Rumours Would Soon Die
“Profitability Of GM Europe Is Whatever GM Accountants Want It To Be”
“Opel is one of the weakest links in GM’s global strategy, but at the same time is one of its most important.”
That’s what Adam Jonas, Morgan Stanley auto analyst, said in a report published this week, and that almost schizophrenic verdict underlines why negative rumors about the future of GM Europe’s Opel-Vauxhall subsidiary are not easily dismissed.
A couple of weeks ago the German media started carrying reports that GM might sell Opel-Vauxhall to Volkswagen or to Beijing Automotive of China. Opel’s restructuring plan, which calls for break-even in 2011 and profits thereafter, was not impressing GM bosses in Detroit who were said to be impatient at slow progress. Denials from Detroit were thought to be insufficiently committed to convince Germans that Opel, and its British affiliate Vauxhall, were crucial to GM’s future.
And yet European experts tell a different story. Opel, they say, is a sound company, which is gradually rebuilding lost market share in Europe. Its products like the VW Golf competitor Astra, the Meriva minivan, and big-by-European-standards Insignia (the Buick LaCrosse in disguise) are selling well. The extended range electric Opel-Vauxhall Ampera, a Volt with a different badge, is years ahead of the opposition, as sales of the battery-only Nissan Leaf stall. The bottom line is improving, although one analyst says Opel profits and losses have less to do with its own performance, and more with the politics of how much GM wants to allow the company to be seen to be making by manipulating the numbers. Others say that interest from Beijing Automotive underlines the value of Opel, and wonder why GM in Detroit can’t embrace the European operation with a little more fervor.
Morgan Stanley’s report contains these seeming contradictions. Opel’s current cost, brand and product position is unsustainable. But closing down Opel is not only not an option, but that GM needs its technology because of its engineering and technology expertise in the compact car segment and fuel economy, crucial for success in global markets.
Chronic cash burn
“Opel’s E.U. (European Union) market share has dropped from 12.5 per cent in 1995 to near 7.5 per cent today. While GM Europe may achieve a break-even on an accounting basis in 2011, we estimate chronic cash burn leaves a value of around negative $5 billion,” the report said, adding this “on the other hand” thought.
“Closing down Opel is not an option. We estimate a full closure of Opel would cost $15 to $20 billion over several years with enormous reputational damage to GM’s global image,” says Jonas’s report.
The report recommends that GM seek alliances for Opel.
“Properly structured, a repositioning of Opel could create significant value for GM shareholders,” the report said.
Morgan Stanley says GM is a significantly stronger auto company with its European operations, even though its profit forecasts are not very reassuring.
“We believe GM Europe can generate low single digit EBIT (earnings before interest and tax) margins while in a bad year GM Europe should still be expected to post large losses,” the report said.
The report assumes the company will achieve the forecast of breakeven in 2011, although EBIT profits will not rise above one per cent in 2013, before falling back into losses by 2015. It lost $1.6 billion in 2010.
Exasperate
This preoccupation with GM Europe’s notional profitability exasperates Peter Schmidt, editor of European fortnightly newsletter Automotive Industry Data (AID).
“It’s nonsense to just look at the bottom line figure for GM Europe. My view is that these losses were to an extent politically influenced and used to persuade politicians to get subsidies to keep plants going and help towards new ones. What would be gained for GM if it could show a handsome profit for GM Europe? It would just make it more difficult to negotiate deals with German unions and so on,” said Schmidt.
Schmidt says that for instance within Volkswagen, Audi has to pay a royalty to VW when it produces a product like the A3 which is basically a VW Golf. It makes no sense to look at GM Europe’s notional bottom line, without knowing how it accounts for internal transfers. The company can easily manipulate the books to show huge profits or losses at Opel.
“Without knowing how that is done in Opel, looking at the profit or loss within Opel is nonsensical without knowing the rules. The profitability of GM Europe is whatever GM accountants want it to be,” Schmidt said.
Schmidt agrees that Opel’s worth to GM is huge because it designs most of the small cars and their engines and transmissions which will be sold in the big markets of the future like China, Brazil, India and Russia. The idea that Chevrolet and its small products mostly made in Korea could step into the breach if Opel was sold, doesn’t impress Schmidt. North America too is likely to need more small cars.
Acknowledgement please
Professor Ferdinand Dudenhoeffer, who heads Duisberg-Essen University’s automotive research center (CAR), believes that Opel is doing all the right things to restructure and regain its strength in the market, and would appreciate some acknowledgement of that from GM in Detroit.
“Opel is now at the point where it has the capacity it wants and has stabilized and is winning market share. The new Astra station wagon has been well received by the market, the new Meriva (compact minivan) also. The Opel-Vauxhall Ampera (a rebadged Chevrolet Volt) has a two to three year advantage before similar (extended range electric vehicles) appear from its rivals,” Dudenhoeffer said.
Dudenhoeffer said Germans believe that Beijing Automotive has made an offer for Opel, and describes GM CEO Dan Akerson’s denial of the deal as a “very soft rejection”.
“We and a lot of Germans think there is an offer from Beijing. It’s not the worst thing in the world that someone realizes that Opel has a value, and a larger value than which GM seems to think. Working with GM is always a tricky thing because GM is more or less a financial company; they think about selling products and value, while Beijing Automotive wants to play a strategic role in the world wide car business, and Opel would have great value for that,” Dudenhoeffer said.
Professor Stefan Bratzel from the Center of Automotive Management in Bergisch Gladbach, Germany, said it was a mistake for GM in Detroit to leave the impression that it wasn’t committed to Opel’s future. This was demotivating for the workforce and damaged Opel’s brand image.
Despite that lack of formal commitment, Bratzel believed that GM would stick with Opel. The Chevrolet operation could never get close to the kind of European market share Opel-Vauxhall has now.
Where would Opel be in five years time?
You never know
“I hope Opel and Vauxhall will start to earn some money. They have to get into the black as fast as possible and I think they will be within the GM company in five years time, but you never know,” Bratzel said.
AID’s Schmidt agrees.
“In five year’s time in my view Opel-Vauxhall will have a larger influence on GM’s structure and a larger say in the organization than they ever had. Through design and development it will provide the absolute lifeblood of GM’s world-wide future,” Schmidt said.
You can forget any sale to China.
“If Opel-Vauxhall were handed to a leading Chinese car company which was good at manufacturing but had no development and design skills, if they sold this capability of meeting the needs of sophisticated markets, if they sold it lock, stock and barrel, it would effectively shoot themselves in both feet. (GM) is far too bright in terms of strategy to even consider that. They would rather kill it than sell it to Chinese car manufacturers,” Schmidt said.
Neil Winton – July 1, 2011
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