The Incredible Shrinking General Motors

The Incredible Shrinking General Motors
David C. Smith
Tue, 2017-04-11 05:31
While it may be a blow to GM’s ego to part ways with Opel, which has been a key source for engineering and product development, not everyone agrees it’s a full-scale retreat.

General Motors remains strong in North America and in China but the decision to sell its German subsidiary Adam Opel to France’s PSA Group will leave it barren in Europe, the world’s second-largest market behind China.
If the deal is completed by year’s end as scheduled, PSA, which makes Peugeot, Citroen and DS-brand cars, will own both GM’s Opel and its U.K.-based Vauxhall operations for a seemingly bargain $2.2 billion. Combined they operate 12 manufacturing plants and four development and test centers and employ 34,500 people.
PSA will boost its European market share to 14.2%, according toWardsAutoestimates, with annual sales nearing 2.75 million vehicles, No.2 in volume but well behind market leader Volkswagen.
By coincidence, GM in 2005 paid $2 billion – slightly less than it should receive for PSA – to Fiat for backing out of a proposal to purchase 90% of the Italian automaker, planning to add it to the 10% it already owned. GM got almost nothing in return.
Following that debacle Fiat Chrysler Automobiles, the name Fiat adopted after acquiring bankrupt Chrysler during the 2009 recession, has tried unsuccessfully to link up with GM. FCA CEO Sergio Marchionne reportedly still thinks he has a chance at some kind of GM deal despite the Opel-PSA agreement.
Perhaps as a harbinger of things to come, PSA and GM inked an alliance in 2012 designed to save $2 billion in annual costs by 2018. That later was scaled back to $1.2 billion and in December 2013 GM sold its 7% ownership in PSA. The following year PSA faced bankruptcy but was bailed out by the French government and China’s Dongfeng Motors, each acquiring a 14% stake.
GM says it will use the PSA cash to buy back shares, a tactic aimed at boosting its lagging performance on the New York Stock Exchange while chopping off a drag on its overall earnings.
But it comes at a huge price: GM launched a $5.2 billion Opel restructuring plan in 2013, which included 27 new vehicles and an aim to become profitable by 2016. Unrest caused by the U.K.’s vote to exit the European Union forced Opel to reset its profitability target for 2018.
Under the PSA deal, GM remains saddled long term with $3.6 billion in Opel’s pension obligations and, besides GM’s cash infusions, Opel over the years has received billions more where it operates in nations anxious to preserve jobs.
“A Very Smart Retreat”
While it may be a blow to GM’s ego to part ways with a company it has owned since 1929 and which has been a key source for engineering and product development, not everyone agrees it’s a full-scale retreat.
David E. Cole, chairman emeritus of the Center for Automotive Research and a longtime industry insider, tells WardsAuto: “Yes, it’s a retreat – but a very smart retreat. I would have felt (in the past) it was a true retreat, but not anymore. It’s a real horserace now, and if you’re not a cost and technology leader you’re going to lose.”
Cole, the son of former GM President Edward Cole, vividly recalls GM’s days as an unparalleled global powerhouse.
“?We’re No.1’ is still around,” he says. “We still have a love affair with volume. But the industry is shifting to advanced technology – autonomous vehicles and mobility – with new entries like Google and Apple, and that reduces the focus strictly on volume” because it’s going to take solid profits to compete.
Cole, however, agrees GM stands “to lose some expertise” long provided by Opel that has included development of cars produced in the U.S.
A series of cascading trends have made it rough going for Opel these days. Among them: European overcapacity, increased competition from Japanese and South Korean automakers, lack of a meaningful light-truck business or high-profit premium car lineup and a strong export market, all of which are enjoyed by its primary competitors. Opel also has been handcuffed by restrictions on plant closures and workforce reductions.
Most analysts, perhaps less emotional than those who view the deal as a blow to GM’s stature, think it bodes well for the company’s future because it frees up money to invest in more profitable ventures.
Still, some GM boosters were stunned by the Opel-sale move. “I could not believe it,” says one GM-watcher. “I think it’s a big mistake.”
That view, however, is not fully shared by former GM Vice Chairman Bob Lutz, who has held high posts in Europe at Ford, BMW and GM.
“It may be sad to see General Motors exit Europe with the Opel/Peugeot merger, but maybe it was time,” Lutz tells WardsAuto. “GM is doing fine in the U.S. and China, while Opel has been a constant and costly drag on (GM’s) profitability.”
Based on GM’s historical record, the Opel spin-off should not be too surprising. It has undergone dozens of withdrawals from major industries, markets and ties with foreign automakers while shedding components- and light-vehicle-manufacturing divisions.
GM, for decades the world’s largest automaker, has slipped behind Volkswagen and Toyota. Losing Opel’s 1.6 million annual sales will drop it even further behind.
Back home, GM typically captured 50%-plus of the U.S. car market in the 1950s and 1960s, and there even were threats in Washington that it should be broken up because it was becoming a monopoly.
As recently as 1976 GM commanded 48% of the U.S. market. It’s still No.1, although its current U.S. light-vehicle share wavers between 17% and 18%.
GM also sold two European automakers it once owned, Sweden’s Saab and England’s Lotus Cars, and recently pulled out of Russia, Thailand, and Indonesia, while its Australian Holden subsidiary exited manufacturing, remaining only as a sales and marketing organization. GM also has terminated a plan to establish Chevrolet in Europe that had befuddled some company-watchers.
Precedent in Shedding Earthmovers and Refrigerators
Anyone who has studied GM over the years has witnessed scores of other market retreats. Names such as Euclid and Terex (both earthmoving vehicles), ElectroMotive (railway locomotives), Class 8 heavy-duty trucks, diesel-engine production (Detroit Diesel), Frigidaire (home appliances), city buses and recreational vehicles long since have been shed. Big acquisitions such as Electronic Data Systems and Hughes Aircraft are a distant memory.
GM acquired EDS in 1984 for $2.5 billion and gained access to information technology, but it returned to independence in 1996 and was sold to Hewlett Packard in 2008. GM won a battle with Ford in acquiring Hughes in 1985 for $5.2 billion, chiefly for its electronics expertise. GM sold Hughes to Raytheon in 1997 for $9.5 billion that, compared with its purchase price, might have made the automaker a tidy profit.
Then consider Saturn, Chairman Roger B. Smith’s answer to fighting imports. Saturn lasted 20 years (1990-2010), although the plant GM built for its “different kind of car company” subsidiary in Spring Hill, TN, still makes GM vehicles. Gone, too, are Oldsmobile (closed 2004), Pontiac (closed 2010) and Hummer (closed 2010) plus a long list of short-lived nameplates.
And who can forget NUMMI (New United Motor Mfg. Inc.) the Toyota-GM joint venture to build small cars in GM’s Fremont, CA, plant? That lasted from 1984 to 2009, becoming a victim of GM’s bankruptcy. Tesla now makes electric vehicles in the Fremont plant that, ironically, compete with the Chevrolet Volt and Bolt EVs.
Most of GM’s sprawling parts-making divisions were folded into the Automotive Components Group in 1994 and transferred into the newly formed and independent Delphi the following year. In 1997 Hughes Electronics operations came under Delphi’s aegis, Delphi became a stand-alone business in 1999, underwent bankruptcy in 2005 and remains a major GM supplier.
Some might view these moves as a massive retrenchment, while others likely would argue it freed GM from managing and investing in operations not intrinsic to its core business of developing and assembling cars and trucks.
Opel historically has contributed technology and platform design and engineering for its U.S. parent, mainly Buick, including the current Buick Regal and the Cascada convertible. Saturn also turned to Opel for a series of Opel-developed models late in its lifetime, and Opel engineering played a key role in GM’s subcompacts introduced in the 1980s and the Cadillac Catera in the 1990s.
Cole, for one, concedes GM may lose some expertise as Opel departs, but the Detroit automaker still has plenty of engineering and product-development muscle.
“I think they are very well positioned now” without Opel, he says.
However, another WardsAuto source suggests Opel and GM likely will maintain “essential technical cooperation.”
Finally Severing Strained Ties
GM has lost billions in recent years attempting to revive Opel. The PSA deal will stanch that flow of red ink. Despite GM’s efforts, Opel’s share of the European market sank to 5.6% by 2016, half that during its halcyon days when it often tied VW for market leadership.
GM has tried to extricate itself from Opel several times in recent years. A proposed sale to Magna International and a group of Russian investors in November 2009 as GM was struggling through bankruptcy failed when GM insiders opposed the deal. Magna and the Russians were to acquire 55% ownership of Opel, GM was to retain 35% and 10% was to go to employees.
After the PSA-Opel alliance fell apart in late 2013 after less than two years, PSA soon returned to profitability under CEO Carlos Tavares, who had been hired away from Renault-Nissan.
Since teaming with China’s Shanghai Automotive Industry Corp. (SAIC) in 1998, GM has enjoyed a sales bonanza, selling more than 4.0 million vehicles there in 2016, mostly Buick and Wuling nameplates.
It has been a far different story in Japan. GM no longer has meaningful ties to a trio of automakers with which it once was aligned: Subaru, Isuzu and Suzuki. Times and priorities change, of course, but these separations have weakened GM’s ties in Asia as SAIC has come on strong.
GM bought a stake in Fuji Heavy (now Subaru) in 1999 and sold its interest in 2005 to Toyota. GM acquired a 34% share of Isuzu in 1972 and later raised that to 49%. Isuzu’s low-cab- Classes 4 and 5 commercial trucks were marketed under the Chevrolet badge and in 2018 will be supplied by Navistar. By 2006 Mitsubishi had become Isuzu’s largest shareholder. From 1980 until 2009, Isuzu also supplied two medium-range commercial trucks, the Chevrolet Kodiak and GMC Topkick, since handed off to Navistar.
GM has had close ties to Suzuki, in which it first invested in 1981. In 1989 they formed CAMI (Canada Automotive Mfg. Inc.) in Ontario to build small SUVs, among them vehicles for the defunct Geo brand. Suzuki sold its share of CAMI to GM in 2009 and exited the U.S. market in 2012.
Although severing ties with the Japanese, GM has built a stronghold in South Korea after acquiring controlling interest in bankrupt Daewoo Motors in 2012. Renamed GM Korea, the former Daewoo exports the Buick Encore/Chevrolet Trax small CUVs to the U.S. GM Korea’s Chevrolet Sonic also is produced in the U.S. and GM Korea distributes its lineup of basically small vehicles globally.
Still, those who recall GM as the world’s leading automaker may lament that by giving up on Opel and exiting other alliances it’s no longer the juggernaut it once was, China not withstanding.
Meanwhile, how PSA and Opel will fit together remains to be seen. After all, for decades they’ve been spirited rivals in Europe. Also consider the centuries of wars and otherwise uneasy relations between France and Germany, two decidedly different cultures.
Relations between Opel and its American owners have not always been smooth, either. Maybe it’ll help that PSA chief Tavares is neutral in that respect: He’s Portuguese.

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