So, Europe’s car market is falling in 2012 and the pressures to do something about rising excess capacity are growing. For General Motors, it is a particularly difficult one and one that comes with history/baggage after the planned Opel/Vauxhall sell-off of a few years ago, the associated political furore generated over where future restructuring could happen and the eventual 180 on the sale from GM’s board.
Antwerp closure notwithstanding, GM’s board has more or less sat on its hands on Europe since then with more important things to deal with (like getting back to profitability overall and an IPO). Now that the company is in reasonable shape, US market recovery in place and China doing nicely, the spotlight is not unreasonably shining on the problems in Europe where GM is losing stacks of money – and the losses are structural as well as cyclical.
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Aside from the obvious thorny issue of applying the cost-cutting axe so that operations are left more efficient while avoiding heavy and counterproductive opposition or labour disputes (go for rolling capacity cuts at several plants or take a big plant out altogether?), there’s another sizeable problem. Restructuring comes with unavoidable costs. The pain ahead will come with little short-term benefit to the bottom line.
I have just seen an estimate from Barclays Capital that GM’s European restructuring costs could total US$1.2bn if 4,000 jobs are cut. Other estimates for the European restructuring charge GM will have to swallow are in the US$1bn area, taken this year and next.
Therefore, there’s no magic wand on the Europe losses and the grief will rumble on for GM in the troublesome Europe region for a while yet. But it will be viewed more favourably by investors if it at least faces up to the problems and takes actions that are credible for putting it on a much better profitability footing in Europe a few years out. That’s what happened in the US after all. Companies like GM ‘rightsized’, closed plants and lowered their break-even. That hasn’t happened in Europe to anything like the same extent and it’s viewed across the Atlantic as a long overdue medicine.
Not an easy one though. Will there be voices in Akerson’s ear saying ‘let’s just offload this political problem and fill the gap with Chevrolet’? Yes, there will, but offload? (Or do some kind of capacity/technology sharing deal with Fiat?) But as Saab showed, that comes with other problems due to your embedded technology that you don’t exactly want to present to a competitor on a plate. And there are the proprietary engineering resources that you are effectively giving up, sunk investment that you are saying goodbye to. All in all, knotty and it probably presents a ‘least worst’ decision-making exercise and test for GM’s management. However, with the market heading south and GM’s European operations now seen to be dragging the company’s results down, the time for deferring that exercise is probably up.
