GM Targets Small Car Segment To Regain Profitability In Europe

+1.85%
Upside
40.82
Market
41.57
Trefis
GM: General Motors logo
GM
General Motors

In 2008, General Motors (NYSE:GM) held a 10.4% market share in the European car market, but over the last six years that share has declined to just under 8%. [1] Over the same period, the European car market has shrunk from 15.6 million vehicle sales annually to about 12 million sales by the end of 2013, a decline of 23%. [2] GM’s car sale volumes, which were at a level of 1.5 million in 2007, have shrunk by over a third to ~950,000. Meanwhile, makers of entry-level mass-market cars, like Renault’s Dacia, Hyundai and Kia, have increased their market share from 4.9% to 9.1%. Dacia, a Romanian manufacturer owned by Renault, has managed to grow the sales of its $10,000 hatchbacks and $16,000 SUVs by over 60% over the last two years. [1]

GM, which previously operated in Europe under the Chevrolet and Opel/Vauxhall brands, is primarily seen as an upmarket brand and considered on the same level as Mercedes-Benz, BMW and Audi. Neither Chevrolet nor Opel or Vauxhall cars are seen as budget cars. But now, GM is restructuring its operations in Europe, as part of which it is planning to entry entry-level cars in a radical re-haul of its brand image. In our discussion below, we take a look at the changes made by GM to its European business, outline the possible rationales behind those moves and consider the validity of those rationales.

We have a $40 price estimate for General Motors, which is about 18% more than the current market price.

Relevant Articles
  1. Down 12% YTD Will General Motors Q3 Earnings Help It Rebound?
  2. Rising Volumes And Cooling Inflation Will Drive GM’s Q2 Results
  3. What To Expect From GM’s Q1 Earnings?
  4. What’s Next For GM After A Solid Q4?
  5. Company Of The Day: General Motors
  6. With Deliveries Picking Up, How Will GM Fare In Q3?

See full analysis for General Motors

Chevrolet Closure: Late last year, GM announced that it will be stopping the deliveries of its Chevrolet brand in Europe in 2015. The brand was introduced by the company in Europe in 2005 to make up for the losses made by the Opel and Vauxhall brands in Europe has seen its market share decline over the last two years, while Opel and Vauxhall have maintained their regional shares. [3] Chevrolet had never been a popular brand in Europe, mostly because the perception of its cars did not gel with the brand image they were being sold with. The brand which is known for large U.S. road cruisers was being used to sell low-cost vehicles made by the Daewoo brand in South Korea. [3] This incoherent brand strategy backfired in two main ways: 1) it turned off customers who realized that they were being asked to pay much higher prices for low-cost cars, and 2) it ate into the market share of the company’s own Opel and Vauxhall brands. Instead of segmenting the car market by price and aspiration levels, like the market leader of the European car market Volkswagen does with its VW, Skoda, Audi and Seat brands, the company was trying to operate with two brands in the same segment. What’s more each brand was sourcing its vehicle parts and design from two different places-Opel relies on Peugeot Citroen and Fiat for the development of its cars, while Chevrolet’s European operations are connected to its U.S. and worldwide operations. [4]

Opel Restructuring: In April last year, GM pledged to invest $5 billion in Opel to support the development of 23 new cars and 13 new engines by 2016. The company has now expanded that target to 27 new cars and 17 new engines by 2018. [5] This investment is being undertaken with the target of becoming the second biggest shareholder of the passenger-car market by 2022. The company is targeting a share of 8% for its Opel and Vauxhall brands by that time period, 2.2 percentage points ahead of its current share of 5.8%. [5] In addition to those targets, the brand is also targeting profitability by 2016 and an operating margin of 5% by 2022. GM, which has posted losses worth $18 billion in total since 1999 in Europe, can achieve this target in two ways: 1) by cutting costs and improving operational discipline, and 2) by gaining market share either by stealing it from competitors or capturing the growth in the market. Opel has lacked both these avenues in the past but will gain access to the first as part of this restructuring. As its factories were based in high-cost countries Germany and the United Kingdom, Opel could not manufacture its cars as cheaply as its competitors in the past. Opel will now start using GM’s platforms in the manufacturing of its cars. [4] This will allow the company to gain from GM’s considerable efficiencies of scale, which should help cut down the marginal costs associated with the production of incremental units. Opel will try to achieve the second goal by introducing cars in the budget car segment. These cars will be directly competitive with the Dacia, Hyundai and Kia brands. With the exit of the Chevrolet brand from Europe, there is a lot of potential market share for the Opel brand to gain.

Can Opel Achieve Its Targets?: As outlined above, Opel can achieve this target by cutting manufacturing costs or by capturing growth in the market or both. While the integration with GM’s manufacturing platform will help somewhat with the first, it would be unwise of Opel to cut costs too much as that would affect the quality of its cars, which can in turn affect sales. As far as the second is concerned, the introduction of models into the budget car segment is targeted at the rising number of first time buyers. However, this trend is unlikely to be sustainable. The growth in sales of entry-level cars was driven by the decision of first time buyers to become more budget conscious in the aftermath of the Sovereign Debt Crisis. However, as these people get older, they’ll want to upgrade their cars, which will drive up sales in the upper segments of the market and reduce the pool of buyers for budget cars. Additionally, given that Opel is only concentrating on improving manufacturing efficiency and not attempting any radical disruption of the car market, it is highly unlikely that it will be able to capture any significant growth in this market in the coming years. Moreover, the pace at which the European car market grows will be determined by the performance of the automobiles market in key countries like Italy, Spain and France, which along with Germany and the U.K. form the top five auto markets in the continent. The French and Italian auto markets declined by 5.7% and 7.1% in 2013, while the Spanish auto market grew by 3.3%. [6] The trends in these key markets will have to reverse in order for the broader market to register significant growth, which depends on macroeconomic factors outside GM’s control.

See More at TrefisView Interactive Institutional Research (Powered by Trefis)
Get Trefis Technology

Notes:
  1. GM plans budget car range for Europe, Financial Times, July 2014 [] []
  2. European Vehicle Market Statistics Pocketbook 2013, ICCT[PDF] []
  3. GM Pulls Chevy From Europe After Decade as Opel Expands, Bloomberg, December 2013 [] []
  4. Opel plans return to profit focusing on small cars, GM technologies, Auto News, June 2014 [] []
  5. Can Opel Really Meet Its Ambitious 2022 Sales Goals, GM Authority, June 2014 [] []
  6. Growth of 2% forecast for Europe car market, Automotive News Europe, January 2014 []