General Motors CEO Mary Barra and Opel/Vauxhall chief Karl-Thomas Neumann have outlined – in some detail – the reasons behind GM’s decision to rethink its Russia market strategy and reduce its exposure there.
GM recently announced that it would axe Opel sales in Russia and idle production facilities in St Petersburg.
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Speaking at a briefing in Detroit, Barra stressed that the decision to ‘change the business model’ in Russia was not simply based on short-term prospects or an immediate reaction to recent events.
“I want to make it clear that our decision is not a reaction to short-term market conditions,” she said.
“It’s based on a very clear look at the long-term capital return, as well as the extensive risk in that market. Unlike some other competitors, we were at a point where we couldn’t avoid investments in a market where we really had no clarity on when the returns would justify those investments. That allows us to look at other places that will deliver more return. This is really part of a comprehensive look that we’ve done around the world: that we’re looking in the markets that we can truly win; that we can truly distinguish ourselves and that we can earn the right return.”
She also confirmed that GM’s long-term goals for Europe, where it is losing money, remain unchanged. “By 2022 we expect to raise our market share in Europe to a total of 8% and achieve profit margins on EBIT of 5%.”
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By GlobalDataOpel head Karl-Thomas Neumann added that the collapse of the rouble and subsequent price rises for cars with a high level of imported parts content were compounding a deteriorating outlook.
“A year ago we still thought Russia would be the largest market in Europe by latest 2020,” he said.
Neumann noted that the deteriorating outlook for car demand due to the political and economic crisis has been made worse by the falling rouble and subsequent new car price rises, that GM was not in a position to mitigate easily via increased local sourcing.
“Our manufacturing footprint is not highly localised,” he conceded. “We are on a path to do this, this was our strategy, but today, we aren’t. So that means we are very exposed to the rouble and the valuation against both the euro and the dollar and also the Korean won.”
Neumann said the large price rises necessary due to the rouble collapse were making the position worse.
“So we couldn’t sell, we were losing money with every car. We started raising prices up to 45% and that of course led to us selling even fewer cars than our [main] competitors. We already – within a year – went from a three-shift operation at St Petersburg, to a one-shift operation and we already had announced that we were closing the factory for 8 weeks but all of that didn’t lead us to a situation where we thought we can succeed.”
GM then embarked on a discussion process “that went on for a few months” and led to the “change in business model”.
“We planned to sell 70,000 cars in Russia this year and it will be much, much less. But I think we can make up for that in our other markets, so it’s not a good story, but it’s not a story which will derail us,” he believes.
GM won’t return to selling Opels in Russia anytime soon. “It is not an exit of the market but I do admit of course that we can’t just come back tomorrow,” said Neumann. “It’s a process which will take time, but we also want to behave like good [corporate] citizens and we’re trying to do this in Russia. This is why we are trying to behave in a socially responsible way.”
Neumann also said that GM is talking to the Russian government. “We are explaining to them, first of all, it’s not at all a political decision and it’s a decision where we have an interest and Opel should have an interest to come back when things really develop much differently, but it comes to the point that we don’t believe that this opportunity will come back very quickly because the crisis has deepened I think.”
See also: RUSSIA: General Motors closing Russian assembly lines, axing Opel
