General Motors Co.’s decision to peddle its Opel AG unit to the French and bolt the European market shows that Job One for the Detroit automaker is to make money.
Not to build the most cars and trucks in the cutthroat global auto industry. Not to claim a presence in the world’s leading markets. Not to throw good shareholder money after bad in an apparently futile quest to reverse a downward spiral now nearly a generation old.
When CEO Mary Barra stood on a Paris stage Monday to confirm GM is selling its Opel and Vauxhall brands, six assembly plants, five component plants, a finance company and an engineering center in Rüsselsheim, Germany, to PSA Group for $2.2 billion, she sounded the coda on Old GM.
How? Because her predecessors could seldom muster the courage to back words with deeds. They refused to exit money-losing markets and redeploy capital to endeavors that promised faster growth and higher returns if doing so meant imperiling GM’s position as the world’s automaker.
But that’s exactly what GM under Barra and President Dan Ammann, a former Wall Street banker, is doing. It’s flipping a script decades in the making, gutting the notion that GM must be a player in the world’s major markets whatever the cost in technical cred, market position and shareholder dollars.
Not anymore. Assuming the PSA deal closes as advertised by the end of the year, GM effectively will be gone from Europe (not counting tiny sales totals of Corvettes, Camaros and the occasional Cadillac). It’s already yanked the Chevrolet brand from Europe and exited Russia. It left Indonesia, ended manufacturing in Australia, restructured in Thailand, and Barra signaled more of the same may be coming soon.
“You don’t sell significant assets in a 10-million plus region without having a re-entry strategy in your back pocket,” says Warren Browne, a former GM executive-turned-industry consultant whose stints included tours in Russia and Germany. For now, what that re-entry strategy might be is unclear.
This is a big move, a signal that the political ferment and regulatory change pressuring the European auto space demand stark choices: stay and negotiate the implications of Britain’s decision to exit the European Union, or the fallout from Volkswagen AG’s “dieselgate,” or quit.
More, GM’s largely car-centric Opel-Vauxhall lineup increasingly is out of step with European tastes skewing more toward SUVs and crossovers. And it lacks a profit-rich light commercial vehicle that can compete with the likes of Ford Motor Co.’s Transit portfolio — discrepancies addressed only with time and billions of dollars.
GM under Barra and Ammann said no. They see the automotive space morphing into distinct, if inter-related, pieces: the high-profit world of North American pickups and SUVs, the promise of South America, the fast growth of Asian markets led by China and the “transformative technology” of mobility — everything from car- and ride-sharing services to self-driving cars powered by fuel cells.
In that is little room for assembling cars in a lower-profit, lower-growth, cash-eating Europe. There, GM figured to continue being an also-ran player with no meaningful luxury presence (and the margins to match); a challenged brand tarnished by serial restructurings over the past 17 years or more; a business case that promised to demand more investment than Barra & Co. are willing to make.
“Over the longer term, divesting Opel will allow the company to focus future investments on products and regions with higher return potential,” Fitch Ratings Inc. said in a note. “Shedding Opel will allow GM to focus its research and development and capital investments in global regions and on products with significantly more profit potential.”
GM is out to use deeds to show that it’s serious about becoming the “most valuable automaker” in the world, about putting capital into growth and giving investors a reason to, well, invest. That means respecting the numbers, practicing honesty and making tough calls, even if they include abandoning Europe after more than 90 years.
The numbers are harrowing. Page 7 of charts GM presented to investors Monday says it all: over 17 consecutive years between 2000 and 2016, GM lost a total of $22.5 billion in Europe. Its market share slipped nearly 35 percent to 5.7 percent, less than a quarter of the share arch-rival Volkswagen AG claims across the continent.
The numbers also are revealing. A few pages later, GM offers a rationale for exiting the continental Opel and United Kingdom-based Vauxhall businesses that is hard to ignore. If the sale had closed at the end of 2015, GM would have lost $17.4 billion in revenue the next year — by itself reason enough for the old GM to balk at such a gambit.
But GM’s earnings per share would have increased to $6.40 from $6.12; pre-tax earnings and profit margins would have increased; capital expenditure would have declined, and the cash on-hand needed to run the business would have slipped to $18 billion from $20 billion; automotive free cash flow would have increased to $7.8 billion from $6.9 billion; and return on invested capital would have increased to 30 percent.
“As we look forward, we see risk outweighing opportunities in the Opel-Vauxhall businesses,” Ammann told investors. “A mass-market position is no longer compelling for our company.”
Given the arc of GM’s long history as the world’s leading mass-market automaker, that’s a stunning statement. Not because it’s not necessarily true, but because it signals such a radical departure from the overly cautious worldview that culminated in bankruptcy.
Whatever tendency there may be to mourn the passing of all-powerful GM should be tempered by the realization that its leadership now is taking a clear-eyed view of the world as it is — not as they want it to be.
It’s true that GM’s rivals remain planted in Europe, even if some of them are not making as much money as they probably should. It’s also true that the industry is moving into a phase where surging selling rates can no longer mask troubling trends demanding answers.
GM just answered a big question that has been weighing on it since Bill Clinton was president. The message: Detroit’s No. 1 automaker is in business to make money. Without that, its own history shows not much else matters.
Daniel Howes’ column runs Tuesdays, Thursdays and Fridays. Follow him on Twitter @DanielHowes_TDN, listen to his Saturday podcasts, or catch him 3 and 10 p.m. Thursdays on Michigan Radio’s “Stateside,” 91.7 FM.