GM headed to China?

Source: autocar.co.uk

Shedding an unprofitable operation

On March 7, in a hefty €2.2-billion (2.33 billion) deal, GM gave up its regional flagship brands, Opel in Germany and Vauxhall in Britain, to PSA Group, effectively turning the latter into the continent’s second largest car-manufacturer after Volkswagen.

The deal, in essence, means the transfer of GM’s Opel/Vauxhall automotive operations to PSA for €1.3 billion ($1.38 billion) and GM Financial’s European operations to PSA and French bank BNP Paribas for approximately €0.9 billion ($956.65 million).

According to CNBC, the move signals the end of an era, as GM has been present on the continent since 1920. However, the brand has accumulated a loss of $20 billion since 1999, its last year of profitable operation in Europe.

While trumpeting straight-out retreat from Europe shocked the media that has been accustomed to GM’s enormous market share all over the world, the numbers speak for themselves: cutting loose a business that has been operating at a loss for more than a decade-and-a-half would have been seen a long time coming in other cases.

According to CNBC, GM Chairman and CEO Mary Barra sounded the alarms by saying some of GM’s international businesses need to be put in order and if the company finds no alternatives, a similar line of action may be resorted to.

Barra added that Brexit—Britain’s referendum on leaving the European Union—was part of this decision as it brought down the pound.

GM President Dan Ammann agreed that Brexit was part of GM’s considerations, along with the stricter pollution regulations that elevated the importance of investing into electric vehicles. Altogether, these factors made operations too risky in Europe.

The GM leadership sounded the alarm for the company’s losing markets by saying they will focus on markets where they are strongly positioned. This bodes good or ill to individual markets.

"Unloading Opel-Vauxhall and the European part of the financing greatly improves GM's balance sheet, allowing investments in growing markets, such as China and India," said Rebecca Lindland of Kelley Blue Book, as quoted by CNBC.

However, GM’s readiness to quit unprofitable markets has been made apparent by the decimation of its operations in Russia, Australia, Indonesia, Thailand, and India, according to David Tracy on automotive blog jalopnik.com, quoting Automotive News as saying that GM may continue trimming these markets even further.

Where does the road lead?

According to CNBC, GM is planning to use part of the proceeds of the PSA deal to accelerate its stock buyback programme. Additionally, another $1 billion will go to developing autonomous cars and ride-hailing apps, as well as pension obligations.

As recognised by Martin Sosnoff on Forbes, GM’s impressive global market share covers strong reliance on its North American market, which accounts for nearly all of EBITDA and of earnings: “Europe, South America and China net out close to breakeven with no turnaround at hand.”

GM’s attention, however, is turning heavily towards China, the biggest auto-market in the world by sales volume. The intensity of the Chinese connection has been noted (and decried) earlier on account of the $500-million bailout package from Shanghai Automotive Industry Corporation in 2009.

This bailout package and the subsequent feelings that GM is shifting research and development as well as production operations to China have produced a newfound group of sharp-tongued critiques to the car-maker, who assert that despite the US Government’s $50 billion bailout package specifically granted to save American jobs, the Chinese corporation bought its way with a measly $50 million.

Whether there is credence to these claims remains to be seen, however, in the current political climate of the United States, where freshly-elected President Trump has gone head-on speaking against corporations shifting operations from the US (China was expressly mentioned as a destination), hearsay and rumours could cause a backlash.

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