Analysis - GM moves to boost profit in Asia, Europe long overdue

Reuters
The General Motors logo is seen outside its headquarters at the Renaissance Center in Detroit
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The General Motors logo is seen outside its headquarters at the Renaissance Center in Detroit, Michigan …

By Ben Klayman

DETROIT (Reuters) - General Motors Co's decision to pull the plug on Chevrolet in Europe is one of several calculated moves the U.S. automaker appears to be making around the world that analysts and investors say are long overdue if the automaker wants to boost profits in line with its rivals.

GM said on Thursday that by the end of 2015 it will drop its mainstream Chevrolet brand in Europe, except for certain vehicles, like the Corvette sports car.

It made the decision, which the board approved in October according to a person familiar with the plans, so it could instead focus on rebuilding its Opel brand after failing to garner significant market share for Chevy in the region.

Meanwhile, Australian media reported on Friday that GM has decided to end its manufacturing operations there as early as 2016. While GM has not confirmed those plans, a source told Reuters that GM Korea, which stands to lose Europe as an export market for the Chevy vehicles it builds, may in turn boost exports to Australia.

One banker said the decision to cut Chevy in Europe was 10 years late, but at least the company finally made the right move. The banker, who asked not to be identified discussing a sensitive topic, said GM still has about half the operating earnings of global rivals Toyota Motor Corp <7203.T> and Volkswagen AG even though their sales are similar.

"GM is under-earning relative to its size," said the banker, who described GM's current moves as finishing unfinished business from its 2009 bankruptcy reorganization. "Maybe it's them finally deciding that they have to restructure the company in a much more comprehensive way."

Morgan Stanley analyst Adam Jonas called the moves part of a more coordinated approach at a Detroit-based company that now seems more willing to upset some of its constituents - dealers in Europe and employees in Korea - in its quest to improve its long-term financial health.

"Maybe this is new GM," he said. "The old GM had this culture of very powerful fiefdoms that could hide around the company's lack of internal financial transparency and controls, and fight wars with each other and Detroit.

"The new GM is kind of uncluttered a lot of those arteries, made the internal accounting far more transparent and the controls vastly improved," Jonas added. "And that, with new leadership at the top, means what we're witnessing is - oh my goodness - a coordinated global strategy."

Analysts and investors said GM's about-face in Europe, where it had previously insisted Chevy could work alongside Opel, and its move to gradually shift work away from its Korean operations finally show a willingness to tackle a bloated bureaucracy left over from its bankruptcy reorganization.

"It's actually showing that management's really committed to rationalizing its cost base," said Leah Bennett, co-chief investment officer with San Antonio, Texas-based South Texas Money Management, which owns GM shares. "They're operating more strategically at a global level."

Bennett called GM's recent moves positives, but warned the cash-rich company will be under greater pressure in the coming year from activist investors. She said that attention will only intensify once the U.S. Treasury completes its planned exit from its GM shares at the end of this month.

BETTER LATE THAN NEVER

The move in Europe to drop Chevy was called the correct decision by most analysts and investors.

The signs it was in the works were in place, starting in June when GM announced that long-time executive Susan Docherty, who was leading Chevy in Europe, would be leaving later in the fall. Her replacement was restructuring expert Thomas Sedran, whose fate GM has not disclosed given the new plan.

Chief Executive Dan Akerson in interviews over the next several months spoke of a need for a fresh perspective about Chevy's place in Europe and the need to end the confusion between the Opel and Chevy brands.

That is a far cry from earlier comments that Chevy would be GM's global mainstream brand. GM Vice Chairman Steve Girsky said Chevy, the fourth-bestselling nameplate globally, will still be a global brand even with a small presence in Europe, citing strong sales in the United States, China, Brazil, Russia and Mexico.

"We get more bang for our buck spending the money in Opel and redirecting the resources to Chevrolet in other parts of the world," he said in a Thursday interview.

Guggenheim Securities analyst Matthew Stover said Chevy does not need to be sold everywhere for GM to have global success as long as the company is cutting costs by building all its cars on fewer vehicle platforms, using common parts.

Morgan Stanley's Jonas said GM can make up for its lost European Chevy sales in markets where the brand is stronger, and perhaps the U.S. automaker may reintroduce Chevy in Europe 10 years from now when the landscape is very different.

Some analysts also wondered whether GM will use Chevy's exit from Europe as a way to further distance itself from its Korean operations, which shipped 187,000 vehicles to Europe last year.

Sources told Reuters in August that GM had begun gradually cutting its presence in South Korea after mounting labour costs and militant unionism triggered a rethink of its reliance on the country for a fifth of its global production.

"GM over time is going to distance itself from Korea," Stover said. "It's not a competitive place to make low-priced cars anymore and that's what they make there."

(Reporting by Ben Klayman in Detroit, editing by G Crosse)

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