Bloomberg News

GM Seen Accelerating Opel Restructuring as Sales Plunge: Cars

January 31, 2012

Jan. 27 (Bloomberg) -- The financial crisis in Europe is adding new urgency to General Motors Co.’s attempt to turn around its money-burning Opel unit.

GM, which has already trimmed its European work force by 5,800, is considering a variety of additional steps to stem the losses. The company is looking to find greater cost savings between Opel and Chevrolet operations in Europe, Tim Lee, president of GM’s international operations, told reporters this month at the Detroit auto show. GM may move some work from Korea to Europe to boost revenue and use assets there, according to three people familiar with the matter.

In addition, Stefan Bauknecht, a Frankfurt-based fund manager for Deutsche Bank AG investment vehicle DWS, said this is the time for GM to work more aggressively with unions to lower costs.

“The negative swing in the European automotive market increases the pressure for both the management and trade unions to find a compromise,” said Bauknecht. DWS holds $5 million GM shares, according to Bloomberg figures, while Deutsche Bank as a whole holds $316 million of GM stock.

Chief Executive Officer Dan Akerson has lost more than $2.34 billion on GM’s European operations since pushing to call off the sale of the Opel brand in late 2009. Plans to reach break-even on an operating basis were scrapped in November as the continent’s economy teetered.

GM’s European sales dropped 15 percent in December, led by an 18 percent plunge at Opel, according to data from the Brussels-based European Automobile Manufacturers’ Association. Opel’s share of the market in Western Europe fell to 7.3 percent last year from 12.6 percent in 1993.

Once Mighty

Opel, founded in 1862 by Adam Opel, started out making sewing machines and bicycles before going on to produce cars, including its “Laubfrosch,” or tree frog, model. GM purchased 80 percent of Opel in 1929 after asset prices plunged worldwide. Two years later, GM bought the rest of Opel, establishing itself as the biggest carmaker in Europe through the 1930s.

Models such as the Kadett helped place Opel at the forefront of the post-war German economic miracle. Opel was finally overtaken by Wolfsburg, Germany-based Volkswagen in 1998 and has continued to lose ground ever since, according to ACEA figures, as a lack of investment in new models gradually eroded its market share and image.

Akerson, before becoming chairman and CEO, was one of the GM board members who agitated to keep Opel and call off the sale in November 2009 to Magna International Inc. and Moscow-based OAO Sberbank. Akerson joined GM’s board after the automaker’s U.S.-backed bankruptcy earlier that year and became CEO in September 2010.

Off Track

The restructuring in Europe by post-bankruptcy GM was going according to plan, executives told reporters as recently as the Frankfurt auto show in September. Two months later, GM said it couldn’t meet its target of breaking even before restructuring costs. Europe operations lost $580 million before interest and taxes from January through September, the Detroit-based automaker said Nov. 9 in a statement.

“What we are looking at is an increasingly challenged economic environment going forward, with a lot of uncertainty,” Dan Ammann, GM chief financial officer, told analysts. “We’ve got to get the break-even point lower, get the revenue higher, in order to be profitable in that kind of market environment.”

GM had $900 million in restructuring and early-retirement costs in Europe and cut 5,800 jobs there through Sept. 30, GM said in the regulatory filing. Those efforts included closing an assembly plant in Antwerp, Belgium, the company said.

The company said it expects an additional $300 million in costs by the end of this year to complete the programs, which will affect 1,600 more employees. GM won’t rule out cutting more jobs or closing additional plants, Ammann has said.

GM fell 1.4 percent to $24.37 at the close in New York. The shares rose 20 percent this year.

Government Pressure

Political interference has slowed restructuring in the region’s auto industry, as governments supported demand in 2009 with sales incentives and hindered efforts to close factories to protect local jobs.

French President Nicolas Sarkozy summoned PSA Peugeot Citroen CEO Philippe Varin on Nov. 17, asking him to reconsider plans to cut as many as 6,800 jobs, including temporary staff employed by partners.

Fiat SpA shuttered an auto factory in Sicily this year, marking only the second European plant closure since the 2008 financial crisis.

Work Force Options

While GM has avoided compulsory dismissals, it has other options, said a union official.

“There’s always an opportunity where they’re not looking to remove people who don’t want to be removed: for people who want to go self-employed, emigrate, find some other job, retire, take early retirement or whatever it is,” Andy Faughnam, a Unite the Union representative for the Opel/Vauxhall plant in the London suburb of Luton, said by telephone.

Akerson appointed Lee, whose responsibility includes Chevy in Europe, Amman and Vice Chairman Steve Girsky to the Opel supervisory board as they look to further the turnaround. Girsky was named chairman of the board.

Girsky reiterated to reporters during an industry conference earlier this month that Opel is not for sale.

Mary Barra, GM’s senior vice president for global product development, joined the supervisory board yesterday. Johan Willems, a longtime GM spokesman, joined Opel’s management board as head of communications.

“There are significant opportunities yet remaining in Europe in terms of the operation of Opel/Vauxhall and the operations of Chevrolet and Cadillac,” Lee said. For example, he said, Chevrolet and Opel run separate warehousing and spare- parts operations. “We’ve not brought back together a lot of the behind-the-curtain things that could be together,” he said.

Savings Needed

The automaker is also looking to control rising material costs and better offset fluctuations in currency, said a person familiar with the effort. One idea being discussed involves transferring work from Chevrolet in Korea to Europe, said three people familiar with the matter. The people asked not to be identified because the planning was private.

Klaus-Peter Martin, a GM spokesman, declined to comment on the plans.

Opel, based in Ruesselsheim, Germany, lacks the cachet of Volkswagen and others in Europe and has been unable to charge enough to cover high German labor costs.

“They still need to skinny-down the operation,” Joe Phillippi, principal of consulting firm AutoTrends Inc. in Short Hills, New Jersey, said. “Their costs are clearly still too high.”

Selling Opel is difficult for GM because the automaker has relied on the unit for engineering work on small and mid-sized cars, such the Chevrolet Malibu and Cruze.

Vexing Problems

“I almost see Opel’s problems as not solvable,” said longtime industry watcher Maryann Keller, principal of a self- named consulting firm in Stamford, Connecticut. “The question is how do you get rid of it and still protect your intellectual property because that’s where your small-car development is.”

GM is investing 11 billion euros in the Opel brand through 2014, Karl-Friedrich Stracke, president of GM Europe, has said.

While ruling out a sale, GM hasn’t dismissed reports in Germany that it is talking about a sales and distribution alliance with its partner in China, SAIC, to extend Opel’s network of dealerships in the country.

Adam Jonas, an analyst at Morgan Stanley, has written in a research note that Opel could form an alliance with SAIC to help run the business more efficiently.

--With assistance from Chris Reiter in Berlin and David Welch in Detroit. Editors: Jamie Butters, John Brecher.

To contact the reporters on this story: Tim Higgins in Washington at thiggins21@bloomberg.net; Alex Webb in Frankfurt at awebb25@bloomberg.net

To contact the editors responsible for this story: Jamie Butters at jbutters@bloomberg.net; Chad Thomas at cthomas16@bloomberg.net


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