General Motors Co’s deal on Monday to sell its European operations to France’s PSA Group doubles down on a bet that the company can win by being less global but more profitable in an auto industry increasingly dependent on software and services.
Without the German Opel and British Vauxhall brands, GM last year would have sold about 8.8 million vehicles, far behind Germany’s Volkswagen AG and Japan’s Toyota Motor Corp in the race to be the world’s largest automaker.
Opel and Vauxhall combined sold nearly 1.2 million vehicles and generated $18.7 billion in revenue in 2016, about 11 percent of GM’s total.
However, all of GM’s activity in Europe – the investments in new model designs and cleaner engines, the efforts to make factories more efficient and the wages paid to 38,000 employees – has generated nothing but losses since 1999.
GM said on Monday that if it had not had Opel last year and had instead used the $2 billion shedding the unit will free up from its cash reserves to buy back stock, earnings per share would have risen 5 percent, even though revenue would have been 10 percent lower.
Meanwhile, business in North America has boomed. GM’s home market operations were reborn as a smaller company due in part to the U.S. government-led bankruptcy in 2009, with fewer brands, fewer dealers, fewer employees and far less money owed to creditors and retirees.
Since 2009, cheap gasoline has powered a boom in sales of high-profit pickup trucks and sport utility vehicles, lifting GM’s North American pretax profit margins to just above 10 percent in 2016.
To keep the North American profit machine revved up, GM must invest in new SUVs and trucks, as well as expensive technology to enable them to meet rising federal fuel economy targets.
Europe is demanding cleaner cars, too. But far less of the technology GM would buy to clean up European diesels and tiny gasoline engines would be useful in the United States, where larger gasoline engines – including eight-cylinder motors used in pickup trucks – dominate the market.
“Only 20 percent of the (European) portfolio overlapped with rest of General Motors’ portfolio,” Chief Executive Officer Mary Barra told analysts on Monday. That is why GM has concluded it cannot achieve significant economies of scale in emissions technology for Europe on its own.
PSA CEO Carlos Tavares is betting Opel’s revenue and sales volume would help give his company, which makes Peugeot, Citroen and DS cars, an advantage against rivals such as Volkswagen and Renault SA. GM is in on that bet because it will receive warrants equivalent to a 4.2 percent non-voting stake in the French company.
GM’s decision to walk away from Western Europe highlights two other profound shifts since 2009, when the board scuttled a deal to sell Opel and Vauxhall to a group led by auto supplier Magna International and Russia’s Sberbank.
The first is China, now the world’s largest auto market, with roughly 28 million vehicles sold in 2016 and more growth forecast to come.
As China grows, GM will need to shift more vehicle engineering money and capital investment to feed that market, which could eventually replace much of the global sales volume sacrificed by the sale of Opel.
Buick, GM’s primary brand in China, outsold Opel and Vauxhall in 2016. So did the Wuling brand of small commercial vehicles the company builds with partner Shanghai Automotive Industry Corp.
Also since 2009, automakers have begun racing to transform cars into electrified, intelligent devices that are paid for by the mile instead of purchased on installment plans.
Asked last month whether GM needed more radical restructuring to lift its share price, Barra said “the way that we are investing in the future, which I think is a huge opportunity, with transportation-as-a-service” and “the opportunity that technology has to transform this industry” could change how the company is valued.
GM does not need factories in Europe to offer ride services there, she said.
However, investors have not changed their views yet. Gary Silberg, head of KPMG’s Americas automotive practice, said Silicon Valley companies such as Alphabet Inc and ride services leader Uber Technologies Inc had the edge in the digital systems and the people needed to work with the terabytes of data required to make a car drive itself.
“The war for talent is absolutely essential to winning in the marketplace,” Silberg said. And those adept in artificial intelligence systems “are not going to work for the auto industry.”
GM demonstrated the industry’s new economics last year when it agreed to pay $500 million, and potentially more, for tiny San Francisco robotic driving technology startup Cruise Automation. Ford Motor Co followed suit with a $1 billion deal to bring aboard and fund the future work of robotic vehicle startup Argo AI.
GM’s Barra has promised investors returns of 20 percent or more. The company said on Monday that after completing the European sale, it would have $2 billion to accelerate share repurchases, and capital spending would be reduced by about $1 billion a year.
The pressure on GM to deliver high returns to shareholders forces tough decisions, Barra and other senior GM executives have said. The decision to abandon Opel after nearly 80 years is the most momentous yet, and the success or failure of that bet could define her legacy.
