GM's Turnaround in Europe

As General Motors works to stem losses in the U.S., European sales and profits are up, thanks to new models from its Opel division

by Gail Edmondson

It's been a brutal year of painful restructuring and, at best, meager profits for General Motors (GM) Chairman and Chief Executive Richard G. Wagoner Jr., but the once-embattled chieftain can at least point to a long-awaited turnaround at GM Europe. Powered by successful new models at GM's German Adam Opel unit, which accounts for 80% of sales, GM Europe posted an after-tax profit of $196 million for the first nine months of 2006, as it rolls toward the first profitable year since 1999. Last year, GM Europe lost $375 million, bringing six years of steady losses to a total of $3.9 billion.

And analysts are betting the cure will stick. "GM's Opel operations are in good shape. Things are pointing upward," says Christoph Stuermer, senior auto analyst at market researcher Global Insight in Frankfurt.

The latest burst of power for GM Europe is the successful launch of the new Opel Corsa, a subcompact that sells for €10,900 ($14,300, a price distorted by the weak dollar). At the time of its launch on Oct. 7, Opel management banked on selling 75,000 Corsas in 2006, but orders already have topped 150,000 for the sassy-looking car, and sales are now expected to far overshoot the initial target. In 2007, Opel is aiming to sell 375,000 of the sporty Corsa, challenging Volkswagen's Polo for European leadership in the subcompact segment.

Turning the Corner

Even more important, Opel's entire brand image has taken on a new sheen among European buyers. Five years ago, Opel suffered a reputation for poor quality and lackluster design. GM Europe President and former Opel boss Carl-Peter Forster invested heavily in better engineering and vastly improved handling, quality, and design. That strategy is now starting to pay big dividends. European warranty claims for Opel and the sister Vauxhall brand have declined 70% since 2000, while warranty costs per vehicle are down 36% over the same period. "It seems they have turned the corner," says Juergen Pieper, auto analyst at Metzler Bank in Frankfurt. "The Corsa is off to a good start."

A much-improved brand image hits the bottom line directly, since European car buyers are now willing to pay more for Opel's cars than they did in the past. It also drives younger and wealthier buyers into showrooms, where they then spend more on high-margin options. The average sale price for the Astra compact launched in 2004, which starts at €15,752, is €2,000 more than that of the previous-generation Astra, thanks to buyers who are loading up on options, says Forster. The edgy-looking three-door version racks up even higher spending on options. Forster believes the 2006 Corsa will also enjoy the same kind of added margins that the Astra is earning, compared with its predecessor model. "Our capability to improve our margins has exceeded expectations," says Forster, a former BMW manager.

The shift to earning higher revenues per vehicle is vital for mass-market automakers like Opel, since the European car market, which totaled 16.9 million vehicles in 2005, is stagnant. In the first nine months of 2006, total European car sales are up a paltry 0.4%. Since it is impossible to increase sales without cannibalizing from tough competitors, Forster's strategy of buffing its brand image and attracting customers that spend more per vehicle on options is a savvy way to boost revenues and margins.

Taming the Trouble Spots

Another key aid in boosting margins, Forster says, has been cutting back on the cheap fleet sales to rental agencies that end up slamming Opel's residual values in the used car market. So even though Opel sold 2.8% fewer cars in Europe in the first nine months of 2006, revenues are up and the average increase in profit per GM car sold in Europe in 2006 is €500 ($660).

No question, GM Europe is also reaping the benefits from a massive restructuring launched in late 2004, which eliminated 12,000 jobs at GM Europe, including 10,000 in Germany, where production costs are the highest in the world.