Bloomberg News

GM Seeing No Return in Opel Less Than Audi Plans Options: Cars

June 28, 2011

June 28 (Bloomberg) -- General Motors Co.’s European Opel unit is introducing models with advanced options typically sold on luxury cars, seeking to revive a business that’s lost $14.5 billion since 1999.

The GM unit is working with AlixPartners LLP on how to tweak options packages or production plans to spur higher prices, said two people familiar with the matter. They are also studying ways to reduce engineering and manufacturing costs, said the people, who asked not to be identified disclosing private plans. Some new features include headlights tuned to high-speed driving on the Autobahn.

Opel Chief Executive Officer Karl Friedrich Stracke, who has predicts an operating profit for the year, has been unable to raise prices to compensate for high German labor rates because its models lack rivals’ cachet. The GM brand’s Astra fetches 15 percent less than a comparably equipped Golf by Volkswagen AG.

“They can’t price their cars like Audi or BMW,” said Thomas Stallkamp, principal of Collaborative Management LLC, a Naples, Florida-based consulting firm. Stallkamp, a former Chrysler Corp. president, was a partner at private-equity firm Ripplewood Holdings Inc. when it tried to buy Opel in 2009. “They’re like the Chrysler of Europe.”

The high cost of making Opels and their low prices, especially in Germany, make the company unattractive for sale, Stallkamp said. GM has declined to comment on reports about the unit being available for sale, saying they are based on speculation.

Gaining Ground

While GM executives have discussed a sale, the talks didn’t advance to a serious stage, said three people involved in the matter. GM hasn’t started a sale process or enlisted its usual banking advisers -- JPMorgan Chase & Co., Morgan Stanley, Evercore Partners Inc. or Germany’s Commerzbank AG -- about selling Opel, the people said.

Opel has gained market share in Europe so far this year and is breaking even on an operating basis. The challenge is to go beyond stemming the losses and make consistent profit in the region, said Barclays Capital analyst Brian Johnson.

“It is stabilizing,” said Barclays Capital analyst Brian Johnson. “They could run it near break-even in a recovering European market. Perhaps management’s ambitions are higher and that it has to hit some kind of internal target.”

GM’s first-quarter loss in Europe was because of a $395 million writedown of goodwill. Without that charge, GM’s European operations would have made a $5 million profit.

Engineering Needs

Selling Opel outright is problematic for GM because the automaker relies on Opel to engineer small and midsize cars, said Michael Robinet, vice president of Lexington, Massachusetts consulting firm IHS Automotive. Opel performs much of the engineering for the Chevrolet Malibu midsize sedan and Cruze compact, as well as cars of similar size sold by other brands.

In the future, even more vehicles -- such as the popular Chevrolet Equinox crossover SUV -- could be built using vehicle platforms engineered by Opel, Robinet said.

Management could also decide to form an alliance with a trusted partner like SAIC, GM’s sidekick in China, to help run the business more efficiently, Morgan Stanley analyst Adam Jonas said in a research note.

Opel has gained market share in Europe’s core markets with sales rising 6 percent through May to give the company a market share of 7.4 percent, up from 7 percent last year.

A base model Opel Astra compact costs 20,240 euros ($28,900) in Germany, while Volkswagen charges 23,400 euros for a comparably equipped Golf. The base model of the midsize Opel Insignia is priced at 26,280 euros compared with 28,025 euros for Volkswagen’s Passat.

In England, where Opels are sold under the Vauxhall brand, the Corsa sells at an 11 percent discount to the Golf.

Lost Customer

Stefan Wilke, 33, a mechanical engineer at Siemens AG in Berlin, sold his Astra and bought a Golf saying GM’s brand is uninspiring.

“Opel lacks a coherent model portfolio like Volkswagen or Audi,” Wilke said. “And in terms of design and image, the cars are anything but inspirational. The brand is just not in the same league as VW and Audi although they’re not of bad quality.”

Reaching the next level will be difficult because Opel doesn’t even get the kind of prices in Europe as rival Ford Motor Co., said Jim Hall, principal of consulting firm 2953 Analytics Inc. in Birmingham, Michigan. Opel needs new models to attract consumers and overcome ill will over job cuts made by the brand’s U.S. owners, Hall said.

“Building up the brand could take four or five years,” Hall said.

New Zafira

Later this year, Opel and Vauxhaul will launch a new Zafira minivan that will have more upscale features and sell at a higher price, said Klaus-Peter Martin, a GM spokesman. The European brands will continue to sell the current Zafira to offer a lower price for other buyers, Martin said.

GM is investing 11 billion euros in the brand through 2014, Stracke said this month.

Opel is trying to offer high-tech options normally sold on luxury cars as a way to boost vehicle profits, as well. The Insignia and Astra now have an option called “forward lighting” that adjusts the headlight angle for high-speed driving. The headlights also turn with the front wheels.

Opel is also trying to increase sales outside of Germany, where Volkswagen dominates, said Garel Rhys, president of the auto industry research center at Cardiff University in Cardiff, Wales. Opel’s sales are up 23 percent in both Spain and France. Those gains are from a small base of sales. Opel has just 4.1 percent of the French market, according to IHS Automotive.

“The problem for Opel is that Volkswagen has deepened and widened its position in Germany,” Rhys said in a telephone interview. “They’re really out of sight. Opel will have to increase penetration in markets like Italy, France and Spain and eastern Europe.”

--With assistance from Craig Trudell in Southfield, Michigan, Andreas Cremer in Berlin and Aaron Kirchfeld in Frankfurt. Editors: Jamie Butters, Bill Koenig

To contact the reporter on this story: David Welch in Southfield, Michigan at dwelch12@bloomberg.net

To contact the editor responsible for this story: Jamie Butters at jbutters@bloomberg.net


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