GM Looking to Sell Opel and Vauxhall in Europe

General Motors continues to lose money in Europe.  Despite attempts to reduce costs, the company recorded losses of $813 million in 2015 and $257 million in 2016 before taxes. Even with these losses the French automaker, Peugeot, may be looking to purchase the GM’s European fleet that contains both Vauxhall and Opel.  The announcement of such measures on Tuesday have caused GM’s stock prices to soar, with the potential to unload this segment of its business with such large losses.

GM predicted that the company would break even in 2016.  As such, the first two quarters of 2016 revealed the potential for the European region to yield a profit for GM.  After the Brexit turmoil, the company believes a weak pound and decline in vehicle demand influenced $257 million in losses.  Still, 2016 remains one of the company’s better years in Europe, and the company aims to break even by 2018 now.  With such enormous losses, why then does Peugeot want to buy Opel and Vauxhall?

A major factor inhibiting the profitability of GM’s European division remains its inability to appropriately utilize factory capacity.  Last year, only 63% of its factory capacity was used, lower than industry averages.  This remains a problem across Europe, as the governments makes it difficult to close factories and lay off workers, yet the operating capacity of GM remains 8% below the industry average.  As a global giant in the auto industry, the low production capacity in Europe evidently reveals a large problem; however, Peugeot may seem to think they have the ability to harness some of this capacity.  As such, the acquisition would stand to make Peugeot the second largest player in the European car market, behind Volkswagen.

In 2016, GM’s European subsidiary showed potential for profit.  As such, Opel recorded two straight months of strong sales to start the year in the German market, an increase of over 25% during that period.  These sales were largely driven by the Opel Astra, the European “Car of the Year” in 2016.  Currently, it is difficult to tell whether GM is finally abandoning its European segment after years of losses, approaching almost $20 billion since 1999, or whether the company is selling high after the displayed potential for profits and sales in 2016.  However, it remains to be seen whether the sales in Germany alone will continue to rise across all of Europe.  If they do, the acquisition of Opel and Vauxhall may prove lucrative for Peugeot.

Sources:

http://www.businessinsider.com/gm-reportedly-in-talks-to-sell-european-business-2017-2

http://www.cnbc.com/2017/02/15/general-motors-could-exit-europe-with-1-billion-opel-sale-to-peugeot-analyst.html

https://www.fool.com/investing/2016/08/09/how-general-motors-turned-a-loss-into-a-profit-in.aspx

http://www.freep.com/story/money/cars/general-motors/2017/02/14/gm-opel-psa-group-peugeot/97886608/

https://www.gm.com/mol/m-2016-opel-03-02-sales-increase-february-28-percent.html

http://www.marketwatch.com/story/gm-faces-bumpy-road-to-profit-in-europe-2017-02-05

11 thoughts on “GM Looking to Sell Opel and Vauxhall in Europe

    • In Europe there is a strong “new model” effect. That’s even stronger if a car gets favorable publicity, eg “Car of the Year.” If you’re in Europe, count the number of car magazines at any kiosk!

  1. Do Peugeot’s models directly compete with those of Opel and Vauxhall? If so, cannibalization would be something that Peugeot would need to consider before buying these brands.

  2. Professor Smitka’s comments on the Car Industry at large in class shows just how competitive the overall market is. If GM has factory utilization problems, why do they keep on trying to break into Europe (Factories are key as history shows in the car market). Maybe the European cars’ brand appeal is just too strong.

    • GM was once the largest car company in Europe. When they purchased it in 1929 Opel was #1 in Germany. Vauxhall was strong in the UK (I think Ford was #1). One source of problems was interference from HQ in Detroit, particularly from the 1980s. For example, to boost parent company profits they’d starve Europe of funds for investment. No new models meant poor sales and tarnished reputation. They also tried to centralize management (in Switzerland) while merging the UK and German/continental operations, even though they were quite different markets. That was also a disaster for organizational reasons, compromising designs for one market hoping to be able to sell in the other, but in fact leading to poor sales everywhere.

  3. What doesn’t make sense to me is why Peugeot would want to spend the money to buy the Opel/Vauxhall branch of GM and utilize their European factories. Although stock price isn’t the ‘be all and end all’ determining factor of company performance, Peugeot’s stock is still hovering around their 2009 post recession valuation. Furthermore, Peugeot seem to be taking the bold move of opening up factories in Africa, with a plant inaugurated in Ethiopia in July 2016 http://www.eiu.com/industry/article/1054429889/peugeot-factory-inaugurated-in-ethiopia/2016-07-20 and the decision confirmed to build a circa 560 million euro factory in Morocco commencing in 2019. http://www.africanews.com/2016/04/15/moroccan-car-industry-speeds-ahead//

    Given Peugeot’s decision to invest heavily into the African/Middle East markets, as well as their generally stagnant performance as a company over the last decade, from a business perspective it doesn’t make sense that they would want to purchase the GM Opel/Vauxhall factories that are already underperforming and causing losses, especially given the lecture on mergers/acquisitions on how they generally lead to lower profits.

  4. Look at this through the eyes of our theory of oligopoly: mergers NEVER make sense unless they can lead to big efficiency gains. Does PSA have distribution channels that can sell Opels without hurting themselves (perhaps they do outside of France/Germany)? Can they share platforms? produce each others products to raise capacity utilization (under the assumption that the merger leads to some incremental sales gains)?

    Otherwise this may be an ego trip for PSA management. Higher bonuses, more clout in European policy circles but no shareholder benefits (except to GM, and to the competitors of Opel/Puegeot-Citroën).

  5. Opel and Peugeot have overlapping product lines, and the combined company would have more production capacity than needed — but closing factories in Western Europe, where governments tend to aggressively protect jobs, is very hard to do (source). Like Professor Smitka stated above mergers never make sense, so I am skeptical whether this acquirement will be profitable for Peugeot.

    Source: https://www.fool.com/investing/2017/02/17/will-general-motors-2-billion-deal-to-sell-opel-ac.aspx

  6. I am not too familiar with auto industries so my question is what are the prohibitive factors to companies not producing at capacity? It would appear if the inability to increase output is hurting future profitability yet the factories are not near capacity (63%) then it would require nothing more than increased production. Obviously there are other factors at play I’m just not familiar enough with the auto industry to see them easily.

  7. I wonder if a potential explanation for GM wanting to get out of Europe is the (potential) emergence of Tesla. I would be curious to see how electric cars will disrupt the European market, as opposed to the U.S. where it seems that won’t be a huge issue. However, many cities in Europe already have a lot of Teslas on their road, so perhaps GM thinks the Model 3 will solidify that.

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