Analysts: GM should sell Opel despite likely job cuts


The sale of General Motors’ European division would be good for the Detroit automaker and give French automaker PSA Group greater market share, but it is likely to lead to thousands of job cuts in Britain and Germany.

The Detroit automaker’s decision to put its money-losing European division up for sale has caused alarm across Europe, with politicians and union leaders looking for assurances that it will not cost jobs. But most analysts say any sale of Opel only makes sense with job cuts.

Still, PSA Group Chairman Carlos Tavares vowed on last week “to protect the future of Opel and its employees,” when he met with Jörg Hofmann, first chairman of German union IG Metall, and Wolfgang Schäfer-Klug, chairman of the Opel/Vauxhall European Works Council.

“This meeting highlighted a mutual desire to enter in a dialogue in the interest of the future of Opel and its employees,” Tavares said in a statement. “The common goal is to prepare the rebound of the company and its iconic brands.”

A GM spokesman declined to comment on any potential job losses. GM Chief Executive Officer Mary Barra met with Opel’s leadership and union officials in Germany the other week while GM President Dan Amman met with Britain Business Secretary Greg Clark to explain the deal.

Precarious future for workers
Opel employs 34,500 people in Europe, with more than 16,500 in Germany and 4,500 in Britain. Analysts say Britain’s exit from the European Union and the reality that it is harder to close plants in Germany make it likely that workers at the two plants in Britain’s face a more precarious future.

Meanwhile, Wall Street analysts have largely cheered the idea of a sale of Opel, even if GM is unable to get much money for the division, which has been losing money for years.

Here’s why: A sale is good for the industry, even with job cuts

Despite Tavares’ carefully worded assurances to honor Opel’s “commitment to respect the existing [labor]agreements,” analysts say the PSA Group would eventually need to cut jobs and production in Europe for the deal to make sense and argue that it would benefit the entire European auto industry.

For years, automakers have been able to make more cars and trucks in Europe than consumers are willing to buy, a situation that leads to incentive wars, financial losses and unused plant capacity.

“We would welcome a move to consolidate the overcrowded European automotive market. On balance, a combined PSA/GM Europe business would undoubtedly lead to more rational pricing behavior, which is good news for all players in the market,” Arndt Ellinghorst, an analyst for Evercore ISI, said in a report published last week.

Ellinghorst estimates the PSA group would eventually eliminate about 5,000 jobs if it acquires Opel.

“Given the massive overlap of the two businesses, there should be no illusion as to what will need to happen in order to make a business combination work,” he said.

Stop the bleeding
While GM believes it would have broken even in Europe in 2016 if Britain had not voted to exit from the European Union, the automaker has been losing money there for nearly 20 years.

“The decision to exit is Business Strategy 101 — move resources away from unattractive markets with weak competitive positions, toward attractive markets with strong positions — especially areas that are likely more crucial for GM’s long-term success,” Barclays’ analyst Brian Johnson said in a research note.

Since leaving bankruptcy in 2009, GM has lost about $9.1 billion in Europe, according to Bloomberg.

“Without the negative impact of Brexit, we would have achieved break-even in 2016,” GM Chief Financial Officer Chuck Stevens said last month. “However, we’re not satisfied with these results, and the team is focused on mitigating the effect through further cost efficiencies.”

GM was the world’s largest automaker for years. In recent years it has been one of three automakers to sell 10 million vehicles annually and vies for the sales crown with Toyota and Volkswagen.

But the automotive industry has frequently proven that the largest automaker frequently isn’t the best or most profitable. Since its bankruptcy in 2009, GM has been trying to shift its mentality to putting profits over size and sales growth. Selling Europe, analysts say, would be the biggest step yet in that direction.

“We believe a sale of GM Europe would represent the next logical step in GM’s strategy to be the best rather than the biggest, properly focused on return on capital and return of capital — on investing in the business where appropriate and not investing where not appropriate. GM is no longer focused on being the world’s largest automaker, but on being the best,” said Ryan Brinkman, an analyst for JP Morgan.

GM’s European division isn’t pulling its weight

North America, china profitable
No matter how you look at it, GM’s European division isn’t pulling its weight. While GM is losing money in Europe, GM’s money machine, North America, accounts for 81 percent of its profits and China accounts for 19 percent of profits, according to JP Morgan.

By region, Europe accounts for 11 percent of GM’s global sales compared with 39 percent for North America and 39 percent for China. Sales of Opel and Vauxhall account for 12 percent of GM’s overall sales while sales of Chevrolet represent 41 percent of global sales. GM’s Chinese brands — Wuling, Baojun and FAW — account for 23 percent and Buick accounts for 14 percent.

“A sale of GM Europe would help bolster the case that GM can be profitable in future recessions and industry downturns,” Brinkman said.

Self-driving cars
The steep research and development costs related to the development of self-driving cars are going to put stress on every automaker over the next five years.

GM told the Wall Street last month that its spending on autonomous vehicle technology could run as high as $800 million annually.

Meanwhile, sales of the small cars GM has been developing at its European research and development center are declining globally as more consumers have embraced crossovers and SUVs, and the image of diesel engines has been marred by Volkswagen’s emissions scandal.



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