Last week General Motors startled the industry by confirming the company is in talks with France’s PSA to potentially offload its Opel brand. The news comes as a bit of a surprise given the Detroit automaker is financially healthy and far beyond the point it once was when liquidating assets meant continued solvency. However, their apparent willingness to sell Opel shouldn’t be a surprise because it’s the smartest management decision from GM yet.
The strategy behind essentially leaving the European auto market is far deeper than anyone can analyze within the confines of an editorial piece, but the thought process can be condensed fairly simply.
GM enthusiasts and loyalists will contend that selling Opel is a bad idea. Selling it means expelling a decent chunk of sales volume, successfully knocking GM far from the number-one sales spot globally. Selling Opel also generates a certain level of uncertainty in the GM world, such as what happens to Buick’s future and what about those diesel engines that are technically under the Opel umbrella inside GM?
Questions will remain until the deal is finalized for all to see, but the positives of offloading Opel certainly outweigh the negatives for General Motors.
Regulatory and political uncertainty are unquestionably at record highs throughout the global economy, including right here in the U.S., but Europe is even worse. The UK’s pending exit from the European Union (EU) is causing shockwaves throughout Europe and is directly to blame for Opel meeting its previous goal of profitability in 2016. Brexit is also negatively impacting Opel/Vauxhall’s ability to utilize its two UK assembly plants as the British Pound tanks in value.
However, Brexit is just the beginning.
Last October the German legislative body passed regulations that essentially ban internal combustion engines from the German market by 2030. As part of the passed regulation, the Germans are encouraging the entire EU to adopt the plan as well, though it is worth noting that the German government has no direct say in EU regulations, only influence.
Compounding matters is the fact that Europe is notorious for protecting jobs at the expense of business, particularly in Germany. Over half of Opel’s employment base is in Germany, where its plants are unionized by the IG Mattel union. Opel’s excess production capacity cannot easily be removed due to the politically charged nature of doing so. As such, Opel plants run under 80-percent capacity at grave consistency.
No Path to Profits
Perhaps the biggest problem GM faces with Opel is that there is no clear path for consistent profitability. GM has literally spent the last eight years attempting to restructure its European operations to offset the $9 billion in losses it has racked up since emerging from bankruptcy in 2009. While some success has been had—Opel losses are now only in the hundreds of millions—Opel still lacks consistent profitability.
Opel is saddled with a high cost structure (largely due to its German roots) and too much production capacity to ever yield profitability.
GM has taken nearly every step it can in recent years to adjust Opel’s revenue in a way that yields positive margins. They moved the Opel brand up-market with premium products after realizing the company literally can’t afford to be a mainstream nameplate in Europe. GM then followed up by sharing Opel products with Buick and Holden, in some cases having the Buick and Holden products produced at Opel’s expensive German plants to increase plant utilization.
Basically, GM has exhausted all of its internal options with Opel at this point. Throw in regulatory uncertainty and it becomes obvious why GM is frustrated with Opel to the point of selling it.
GM’s calculus regarding selling Opel is likely factoring in the macro level future of the automobile industry as well. Perhaps it would be more appropriate to say the future of the mobility industry.
There’s no denying that the future of the industry includes self-driving cars, more services-based mobility solutions and less vehicle ownership. Europe is seeing these trends just like North America and GM knows it. This complicates the outlook for Opel even further in GM’s eyes and isn’t likely to generate macroeconomic conditions that yield greater sales volumes for Opel in Europe.
Last May GM announced plans to begin offering its Maven car sharing service in Europe. This could ultimately end up being the company’s replacement for Opel in Europe. It’s a dramatic, bold strategy step on the part of GM management, but one that would be low-risk and likely yield significantly higher margins than Opel.
If this strategy pans out, GM would effectively be converting itself from an automaker to a mobility provider in the entire European market. The idea of that was inconceivable a few years ago, but given the popularity of ride hailing services such as Uber and GM’s own Lyft, it seems like a completely plausible strategy today.
Regardless of how this Opel situation pans out, there is one seismic wakeup call for this industry: this isn’t your father’s General Motors anymore. Perhaps cultural change at RenCen has been successful under the leadership of CEO Mary Barra.