GM to drop Chevy brand in Europe to focus on Opel

Reuters

* GM to shut Chevy in Europe in response to downturn

* GM to focus resources on expanding Opel/Vauxhall brands

* To result in net special charges of $700 million-$1billion

* Attempted Chevy revamp put it in competition with Opel

* Chevy wind-down in Europe to hurt auto production in Korea

By Edward Taylor and Ben Klayman

FRANKFURT/DETROIT, Dec 5 (Reuters) - In a strategicabout-face, General Motors will drop the Chevrolet brandin Europe by the end of 2015 after it failed to buildsignificant market share, and the company will focus instead onits Opel and Vauxhall lines to try to return to profitabilitythere.

The world's second-biggest carmaker behind Japan's ToyotaMotor Corp said on Thursday that the decision wouldresult in one-time charges of up to $1 billion, but it shouldlead to production, marketing and distribution savings.

GM shares were up 1.1 percent at $39.13 in afternoon NewYork Stock Exchange trading.

Reintroduced in Europe in 2005, Chevrolets were to competeat the budget end of the market with the likes of South Korea'sHyundai, Volkswagen's Skoda andRenault's Dacia while turning GM's mainstreamnameplate into a global brand.

But the Chevy brand, by far GM's biggest in its home U.S.market, failed to make much headway in Europe as its largelySouth Korean-made cars struggled against rivals, some of whichare customized for European markets.

Hurt also by a brutal downturn in European demand, Chevroletresponded by slashing prices and introducing more high-endmodels. But that pitted it against Opel and Vauxhall, andChevy's sales showed little progress at about 200,000 cars ayear.

"Getting rid of Chevy seems to be a little about-face forthem," said Scott Schermerhorn, managing principal and chiefinvestment officer with Granite Investment Advisors, whoselargest investment position is in GM stock.

"They talked about a global brand, which is led by Chevy,"he added. "However, given the state of the market, focusing onthe brands that sell well and no longer trying to swim upstreamin growing the Chevy brand over there makes sense."

While RBC Capital Markets analyst Joseph Spak described thedecision as "flip-flopping" that nonetheless made sense, oneinvestment banker said it was about time GM threw its supportcompletely behind Opel, given the brand's storied heritage.

"It's been a long time and a waste of a lot of money toeventually come to the right decision," said the banker, whorequested anonymity because of the sensitivity of the topic.

GM almost sold Opel in 2009 before deciding the 151-year-oldbrand was too important to its business.

NordLB analyst Frank Schwope said the decision to drop theChevy brand was great for Opel and likely to ease some of thepressure on a European market suffering from overcapacity.

"GM hopes Chevy customers will now migrate to Opel," hesaid. But he raised the possibility that they might instead buyother value brands like Dacia and Hyundai.

GM's decision will also be felt in South Korea, where thecompany produces most of the Chevrolet vehicles sold in Europe.Those exports reached 186,000 in 2012.

"We will phase out exports to Europe by the end of 2015," GMKorea spokesman Park Hae-ho said. "We will discuss with theunion how to enhance the operating efficiency of our plants."

GM said it would honor its contracts with its 1,900 Chevydealers in Europe, but declined to provide other details. Morethan half of its Chevy dealers in Western and Eastern Europealso sell Opel vehicles.

CONFIDENCE IN OPEL

GM has made a turnaround of its European business a toppriority after racking up some $18 billion in losses over thepast 12 years, and it is investing billions more despite callsfrom Morgan Stanley to sell Opel and Vauxhall atvirtually any cost.

In April, GM pledged to invest 4 billion euros ($5.2billion) in money-losing Opel by the end of 2016 to support newmodel launches, renewing a commitment to its struggling Europeanbrand.

By 2016, GM's investment will replace 80 percent of thebrand's engine portfolio with new fuel-efficient versions.

"Chevrolet's business results in Europe were unacceptable,"GM Vice Chairman Stephen Girsky said in a telephone interview."It's a 1 percent share company. Meanwhile, we are gaining moreand more confidence with Opel and Vauxhall."

Girsky declined to say how much GM would save, but said someof the savings would accrue in Europe and some in other parts ofthe world. He said the company's target to break evenfinancially in Europe by mid-decade had not changed with theannouncement.

Morgan Stanley analyst Adam Jonas said the time line tobreak-even could be accelerated to late next year.

"We get more bang for our buck spending the money in Opeland redirecting the resources to Chevrolet in other parts of theworld," Girsky said, adding that Chevy remains a global brandeven if it is a small player in Europe.

Abandoning Chevy in Europe shows that GM, unlike Volkswagen,is unable to manage several brands there, NordLB's Schwope said.

Stifel Nicolaus analyst James Albertine said the streamlinedapproach in Europe would eliminate cannibalization across thecompany's brands, help GM fine-tune advertising spending in theregion and save money in its supply chain, but it still had away to go to end losses there.

"Relative to peer Ford, we think GM has further toclimb as it relates to EU profitability, but this is clearly astep in the right direction," he said.

As part of its efforts to push Chevy globally, GM signed a$559 million, seven-year sponsorship deal with English soccerchampions Manchester United in July 2012, which is due to putthe Chevy brand on the club's famous red shirts in 2014-2015.

Girsky said that deal remains unaffected. "We always lookedat Man U as a global deal," he said. "They're exposed around theworld, and Chevrolet will be exposed around the world."

GM said the decision to drop the Chevy line in Europe wouldresult in net special charges of $700 million to $1 billion,primarily in this quarter but continuing in the first half of2014.

Of that amount, $300 million will be noncash expenses. Thecharges also include asset impairments, dealer restructuring andseverance-related costs.

GM said it also expected to incur restructuring costs thatwill not be treated as special charges, but would affectearnings at its international operations in 2014.

Dropping the Chevy brand in Europe was not influenced by apartnership GM has with French carmaker PSA Peugeot, Girskysaid.

GM, the No. 1 U.S. carmaker, took a 7 percent stake inPeugeot after the companies announced what was billedas a broad-based alliance in February 2012, promising eventualsavings of $1 billion each. But that was followed byunsuccessful talks on a deeper combination and a steady scalingback of plans.

GM also said it was completing expansion plans in Europe forits Cadillac luxury line, which has been more a niche brand inthe region. The company said it would expand its distributionnetwork for the brand over the next three years as it preparesto introduce more products.

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