Brexit Impact Could Offset GM’s Europe Gains
General Motors (NYSE: GM) has lost over $ 18 billion in Europe over the last eighteen years. The company decided to undertake a restructuring of its operations on the continent a couple of years ago. The U.S. auto maker launched a radical overhaul of its European operations by shutting down deliveries of its Chevrolet brand in most European markets and investing significantly in the growth of Opel and Vauxhall, its two remaining brands in Europe. As part of this plan, GM targeted manufacturing close to 27 new vehicles and 17 new engines for sale in the region by 2018, so as to secure the position of at least the second biggest market share holder by 2022. At the end of the second quarter of the fiscal year 2016, the company had a market share of 6%. It is targeting a share of 8% by 2022.
In the second quarter of 2016, GM posted earnings before interest and taxes (EBIT) of $ 137 million, a huge improvement over the minor loss of $ 6 million it made in the first quarter and the $ 45 million loss it made in the prior year quarter. The profitability was the result of a 2.8% year-over-year increase in new vehicles sold and a 5.1% increase in average unit price. Even though operating expenses increased year over year by 4.3%, the higher unit sales and higher average transaction price resulted in a 3.4% increase in EBIT for the company. For the first half of the year, new vehicle sales have increased by 4.6% year over year with average unit pricing up 2%. Pre-interest and tax profits are up 4.3%. The gains are mostly attributable to the success of the new models of Opel Astra and Opel Corsa.
It is unlikely that the company will be able to maintain this performance in the second half of the year, largely because of the effects of Brexit. According to company management, the company expects to lose around $400 million as a result of the decline in the exchange rate of the Pound Sterling and lower vehicle sales in the U.K. auto market, which is one of Europe’s biggest markets. Only a very small proportion of GM’s manufacturing is based in the U.K. As a result, even though the fall of the Pound Sterling will make sales of these vehicles more profitable, the effect will likely be extremely small.
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Notes:
1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for General Motors
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