GM gets ready to fix European subsidiaries

By Jorn Madslien

GM says it is very focused on new products, such as the Ampera

Having emerged both leaner and stronger from bankruptcy in 2009, the US-based automotive giant General Motors (GM) is firmly back on its feet.

The company is making a profit again, its global sales are powering ahead, and it is so confident about the future that it recently withdrew an application for $14.4bn (£8.8bn) of cheap loans from the US government.

“It does send a signal,” says motoring analyst Itay Michaeli from Citi Investment Research, “that this company is running things on their own.”

As the Geneva motor show gets underway in Europe, however, it is clear that GM’s challenges remain largely on this side of the pond – especially in Germany.

With just less than 13.4 million cars sold, the overall European market – which was hit by the end of scrappage schemes that were widespread in 2009 – shrunk 5.5% last year, according to ACEA, the European automobile manufacturers’ association.

Sales of GM’s European brands fell roughly in line with the rest of the market, with one notable exception. In Germany, Opel sales fell 29.5% in 2010 to some 270,000 cars.

In the past, much of the loyalty to the brand in Germany had been linked to Opel being seen as a local manufacturer.

Hence, when GM Europe started cutting costs, laying off workers and threatening factory closures, many – both customers and workers – felt let down.

“As far as the overall image in the market place [is concerned], it was affected mostly in Germany,” Nick Reilly, chief executive of GM Europe, told BBC News in an interview at the Geneva motor show.

Matters were made worse when a drawn-out plan to sell Opel and its sister-marque Vauxhall ended abruptly and acrimoniously in 2009, with the German government, which had offered financial backing for the plan, left hanging.

As GM Europe’s restructuring plan is nearing completion, with a much reduced cost structure in place, the task now is to regain trust and loyalty.

“We’re working hard at that,” says Mr Reilly, insisting that relations with the German government have been patched up.

“They know we’re investing in Germany. We’re hiring engineers. We are one of the most advanced companies in the industry on electrification of vehicles. So the somewhat unfortunate occurrences of the last year I think are behind us.”

GM’s effort to revive its European brands cannot rely on any expansion of European production capacity and thus large-scale job creation.

“The industry still has a lot of overcapacity in Europe,” says GM’s chief financial officer, Chris Liddell.

Nick Reilly admits that the GM brand suffered the most in Germany

“The chances of us adding capacity in Europe over the next couple of years are slim.”

Moreover, though profit margins in the US seem solid now that the burden of healthcare costs equivalent to about $2,000 per vehicle has been lifted, in Europe competition remains fierce.

So GM is unlikely to make the sort of profit margins that it does in North America, Mr Liddell acknowledges.

“I think that’s going to be very difficult given the industry dynamics,” he says, pointing to additional pressures from rising costs.

“It’s not just higher fuel prices for consumers, it is also commodity prices,” he says.

“Commodity price inflation, mainly steel prices, has become a concern across the board.”

So to lure back customers in Europe, GM will have to rely on its ability to make better cars.

“We’re very focused on new products, such as the Ampera – the world’s first extended-range electric vehicle,” says Mr Reilly. “Our new products are doing well.”

Mr Liddell, however, believes there is still plenty of work to be done.

“The quality of the product we have in Europe is probably better than the brand image,” he laments.

“On the sales side, it’s all about the reinvigoration of the brand.”

The carmaker has made great strides in recent years.

“Every car we build now has to be first class. It has to be able to be a market leader in its segment,” says Mr Liddell.

Armed with a new model line-up, Mr Liddell is hopeful that the turnaround can be swift in Europe too – the way it has been in the US and in Asia.

He is not, however, prepared to sacrifice profits in order to bolster sales.

“First and foremost, we’ve got to get out of the market share driven mentality,” Mr Liddell says, pointing to how GM used to offer large discounts to ensure it remained the world’s biggest carmaker by volume.

“The focus has got to be on producing world-class vehicles on a profitable basis,” he says.

“And the objective in Europe is still to break even this year.”

This article is from the BBC News website. © British Broadcasting Corporation, The BBC is not responsible for the content of external internet sites.