The Strategist

What's the problem with GM in Europe?

02/08/2017 - 14:24

This week, General Motors has published its annual financial report. In 2016, net profit of the largest US automaker fell to 2.7%, up to $ 9.4 billion.

Why did the company meet with a loss?

Sales of pickups and sport cars generate the main income of General Motors in the US. The European business, however, deteriorated again after a recent improvement. This means that the company's presence on the European continent is questionable.

Most financial indicators of GM surpassed forecasts of the company’s CEO Mary Barra, yet the company said that Brexit has had a negative impact on the concern’s European figures in 2016.

For several years, GM has been restructuring its European assets. In 2009, when the company was undergoing bankruptcy procedure to fix the case in the United States, the management found a buyer for Opel. However, the deal eventually fell through. To rectify the situation, GM had to close Opel assembly plant in the German city of Bochum in 2014. This event was the first closing of a large car factory in Germany since the Second World since the country has very strict labor laws.

GM is still not able to maximize use of the entire production capacity of its European operations. Opel assembles not enough high-trucks, sports cars and premium class cars, even though their production in the United States brings basic income to the company.

Excess of production capacity is a problem common to all car manufacturers operating in Europe, where a company must obtain permission from the government to shut down a plant or dismiss workers. However, the situation for GM is sadder than for most of their competitors. According to consulting firm LMC Automotive, General Motors used its production capacity by only 63% in the last year, which is worse than industry average 71% and 70% of Ford.

"If anything, Europe is the most competitive market in the world - says Matthew Stover of Susquehanna Financial Group. – It’s not be easy for GM to achieve something more than just yield to zero. "

GM managed to break even in the first three quarters of 2016 despite the company’s losses $ 500 million in the previous years during the same period. According to the company, decline of the British pound in relation to the Brexit referendum jeopardized profit of $ 400 million, which the group hoped to receive by the end of the second half of 2016. However, after the June referendum car sales in Europe were more active than assumed by many analysts, and 5.2% higher than in the previous year.

In the past couple of years, GM’s investment in new products and technologies helped Opel recapture some grounds lost after two decades of unprofitable activities. Opel’s sales jumped thanks to small SUV Mokka and updated compact car Opel Astra, which received prestigious "European Car of the Year" award in 2016. 

However, Opel still produces not enough small trucks and large SUVs, demand for which is getting higher in Europe. According to London-based analyst George Galliers of Evercore ISI, these market segments are crucial for European automakers as small cars bring small profit. "In my opinion, GM must find its product to make a profit in Europe, - Galliers says, noting that sales of Ford’s SUVs exceed Opel by several times. - Even if the market is favorable, it is difficult to earn in Europe if you have only small cars to offer."