GM Management Confident Of Returning To Profitability In Europe Soon
At a conference organized by Deutsche Bank, General Motors (NYSE:GM) CEO Mary Barra and other senior executives said that the company expects its pre-tax earnings and operating profit margins to increase in 2015, even after taking into account last year’s recall costs. Management said that modest global industry growth and the introduction of a series of new products should lead to improved results in each of the company’s regional business units. GM expects an operating margin of about 10% in North America, strong margins in China, and a return to profitability in Europe. [1]
The last bit is important because GM has lost a fortune in Europe in the last 15 years. Specifically, the company has lost $20 billion in the region since 1999. The U.S. based auto maker is not alone in this. All Detroit based auto makers have suffered the same fate in the region and for the same list of reasons: too many factories, too many employees, production below capacity, and not enough vehicles capable of generating good profits. These companies faced the same problems in the U.S. post-recession. Ford had to take on huge amounts of debt, GM went into bankruptcy, and Chrysler was bought out by Fiat to form Fiat-Chrysler. In the process, a number of factories were shut down and a lot of facilities were discarded. The result of the downsizing coupled with a recovering market and increased demand for newer products kept the remaining factories operating at full capacity. A similar process is needed in Europe. Both GM and Ford have closed a number of factories in Europe already, but their operations are still running at capacities far higher than the European market can support.
We have a $40 price estimate for General Motors, which is about 20% higher than the current market price.
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GM’s Recovery Plan
Both GM and Ford find themselves in the same boat. They are also trying the same strategies to reach safer shores. They have both closed some factories and have worked on expanding the production of some models that they think can improve their profitability. However, Ford’s recovery plan was given a major setback due to the company’s operations in Russia. Its market share has declined from close to 4% at the end of 2013 to close to 2% currently. Sales volume has declined by more than 40% on a year-to-date basis. Ford operates a joint venture with Sollers in St. Petersburg in Russia that makes the Ford Focus and Mondeo sedans. The joint venture also makes other vehicles from imported parts. Earlier this year, Ford cut 950 jobs at its two factories in Russia. In June, the company wrote down the value of its investment in Russia by $329 million. Ford, which formed the joint venture in 2011, had previously stated that it valued the investment at $367 million. [2]
GM’s business in Russia includes the sale of Opel, Chevrolet, and Cadillac vehicles in Russia. In addition, GM also operates a joint venture with AvtoVAZ in Russia that produces the small SUV sold under the Chevrolet brand called Nina. GM’s market share has dropped from 9.2% in 2013 to below 8% this year and its sales volume has dropped by more than 20%. An even bigger problem for GM is that its factory near St. Petersburg is faring poorly. The company had planned to invest $300 million to expand production at the plant, but declining sales volume and the uncertainty surrounding the occupation of Crimea in Ukraine have put those plans in doubt for the time being. In the months of September and October, the plant was operational for less than two weeks in total. The plant produces the Chevrolet Cruze, the Opel Astra, and the Chevrolet Trailblazer. The company announced this week that it plans to put sales of its cars to deal makers on hold for the time being in order to manage the risk associated with operations in a volatile market environment. [2] GM’s announcement last week means that the impact of Russia on the bottom line will be considerably smaller than feared.
Under the stewardship of former Volkswagen China chief Thomas Neumann, GM has managed to integrate its European brands more completely with its global product-development operations, resulting in reduced costs and improved product quality. The company has launched a number of products that have been a hit with consumers in Europe, such as the Opel Mokka SUV and the Opel Corsa subcompact. [3] As a result, Opel’s market share of the European car market has increased for two years in a row.
Through the first nine months of 2014, GM lost close to $1 billion in Europe. This followed a $850 million loss in 2013 and a $1.2 billion loss in 2012. If the company had merely broken even last year, its pre-tax bottom line for the year would have improved by almost 10%. Making GM profitable in Europe again is a huge challenge for the company, and if it manages to achieve that goal, it will be able to generate profits in the same breath as competitors like Volkswagen and Toyota.
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- GM expects profitability to improve in 2015, Detroit News, January 2015 [↩]
- Russian crisis forces GM to cut sales, Ford to ax jobs, The Detroit News, December 2014 [↩] [↩]
- Opel/Vauxhall Sales Figures, Left Lane, January 2015 [↩]