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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
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. The structural cuts are now generating €600 million ($792 million) in annual cost reductions. Getting Europe turned around is part of the company's plan to boost profits even as rising health care costs and slimmer truck profits hurt business at home. "Geographic diversity will smooth out earnings bumps," says GM Vice Chairman Robert A. Lutz. "That's my answer to our cyclicality."
But some trouble spots remain: GM Europe's premium unit Saab is still racking up heavy losses. GM Europe doesn't break out results for individual brands, but analysts estimate that Saab, which sold only 80,000 cars in Europe last year, lost €300 million ($400 million) in 2005. And Opel's plant in Russelsheim, Germany, is operating at only 60% of capacity, a level analysts say is unprofitable for any automaker.
To make the turnaround stick, Forster will have to continue to cut costs and boost productivity, Pieper says—or achieve an even higher premium for Opel's cars, which is a hard sell in a European market crowded with small premium cars like the BMW 1 Series or the Mercedes A Class from DaimlerChrysler (DCX).
The 52-year-old Forster, hired from BMW as managing director at Opel in 2001 and named president of GM Europe in June 2004, insists GM has a medium-term plan to boost production at Russelsheim by producing other GM brands in the factory, and that lower costs and a new generation of models in the pipeline will help put Saab back in the black. Saab's European sales for the first 10 months of 2006 are up 13.7%. Forster is also looking to Eastern Europe and Russia for growth and he plans to bid on a factory in low-cost Romania.
And to stretch its research-and-development dollars further, Forster, together with General Motors Vice-Chairman Robert Lutz, another BMW veteran, are ramping up a transatlantic collaboration between Opel and the U.S.-based Saturn brand that has shown early success. "It leverages our engineering costs and will allow us to introduce models that otherwise might not have been viable alone," says Forster.
Learning Lessons in Europe
One example is Saturn's hot Sky roadster, introduced in early 2006 and based on the 2005 Opel GT. The Sky has flown out of showrooms and now boasts a lengthy waiting list. The next Opel-based hit looks to be the new Saturn Aura (starts at $20,595), which trade magazines are praising as one of the best cars GM has ever built. Lutz says collaboration like the joint development between Opel and Saturn will save GM "hundreds of millions a year in development costs." He says Opel would have had a tough time justifying the cost of the GT roadster if GM didn't have similar cars being sold in the U.S. Says Lutz: "Opel will have a roadster like the [Saturn] Sky for almost no investment."
Though larger in size, the Aura was derived from the successful Opel Astra compact. Even though the Astra is a smaller car, its design and engineering were fresher than the Opel Vectra, Forster says. Sales of the Astra through October totaled 424,082, or 2.32% of the European market, slightly behind the market leader in the compact segment, the VW Golf, which sold 471,060.
What's the lesson for Wagoner and his U.S. management team? European analysts point to Forster's strong focus on better products—as opposed to the typical GM focus on financials—which produces weak products. "It's get the brand right and listen to the market," says Global Insight's Stuermer.