In 2017, General Motors, the largest U. S. automaker with brands known around the world made perhaps one of its boldest moves in its history.
It sold its European Opel and Vauxhall brands to the French automaker PSA known for brands such as Peugeot and Citroen. It was the end of an era for GM which had first ventured into Europe nearly 90 years before. It also marked the end of nearly two decades of losses for the brands under GM's stewardship.
GM executives said the deal would unload a difficult and struggling business and allow the company to focus on its more profitable North American market and free up cash to make needed investments in new technologies such as electric cars and autonomous driving. But the move came with risks. The European new car market is about as large as that of the United States and leaving it would not only hit GM's volume but also increase its exposure to the ups and downs of the U.
S. auto market. The sale of the unit also racked up huge costs.
GM took a $3. 9 billion loss in 2017 owing mostly to the $6. 2 billion in costs it had to shell out for the sale.
So why did GM leave? Did the automaker simply screw up or fail? Was it wise to get out of Europe?
And what does it mean for GM's future and the future of the auto industry? The decision actually says a lot about how difficult it is to be a global automaker today and the sometimes subtle ways markets around the world increasingly favor local players who can tailor their products to specific markets. In the end GM may have failed in Europe in part because it just isn't European.
The numbers show General Motors was having a rough time on the continent in the nine years or so before the divestiture of GM's European business. It bled money at the EBIT line every single year for a total of about $14 billion in losses on $208. 4 billion dollars in sales it's nine year weighted loss of 6.
9 percent. EBIT stands for earnings before interest and taxation and is the metric GM uses to report the money its international business divisions make. Its worst year during that time was during the financial crisis in 2009.
Where GM incurred a 15 percent loss of $3. 6 billion dollars. The best year in that period was 2016 where it still had a 1.
4 percent loss totaling about $257 million. Now that sounds like an improvement and in absolute terms it was. But consider that over the same nine year period GM turned a profit in North America of $28 billion on $823.
7 point billion in sales. That's a nine year weighted gain of 3. 4 percent an automaker generally tries to target an 8 percent EBIT for any given region and for the world as a whole.
GM's rival, Ford for example has an 8 percent EBIT target for its European business. The automobiles never really sold well with consumers. And one of the reasons they weren't able to achieve profitability is because what they did sell were primarily passenger cars and not the higher margin trucks and SUVs that they saw a lot of in the U.
S. . So that's that's a big part of it.
There's also a lot of headwinds that they faced on the cost side of the equation with with the cost of labor, unions, and also more stringent regulation particularly from an emissions standpoint. So a lot of those reasons are why they had such mixed results and from a market share perspective when they pulled out they were they only had about 6 to 7 percent market share. So it wasn't really a dominant market for them.
And GM was losing ground during that time to competitors. Consider that the automaker had a 9. 3 percent share of the European car market in 2008 but that fell below 7 percent in 2014 and stayed there for two years and then fell again to around 6 percent in 2016.
Meanwhile European competitors seem to be faring better. And once GM sold off its European business its earnings shot up. The automaker earned a global EBIT of 9.
9 percent in 2017 and 8. 4 percent in 2018. But why was GM struggling in Europe when it does so well in the United States and is even leading U.
S. automakers in China a market that is by no means easy to do business in. One reason is that Europe is pretty unique.
To be fair to GM it is not the only automaker that has had trouble there. American cars have never been an easy sell in the European market. Ford for example has dialed back its presence in the region.
Gm is not alone in their struggles. You see Ford pulling out of Europe and American cars just never have really sold very well there. That market is really dominated by the big three German manufacturers and others.
But it's also a fairly fragmented market. So they just really were never able to compete and consumers just didn't really like their cars. There were larger economic and political factors such as the great recession and tightening emissions regulations that made it tougher for companies to do business there.
Another factor is the distinctiveness of European tastes. At the time GM CEO Mary Barra said 80 percent of the vehicles in the Opel portfolio didn't share parts or platforms with those sold in any of GM's other markets. When we look at the portfolio going forward from a vehicle perspective or a portfolio perspective only 20 percent of the portfolio overlapped with the rest of the General Motors portfolio.
So we think the real opportunity for PSA is to leverage that Europe specific scale. That put the company in a tough position. Major automakers generally want to build flexible platforms and parts that can be used in a variety of models in different markets.
This helps them keep costs low and achieve those highly desired economies of scale. There are forces however that make it difficult to share parts and platforms. Automobiles tend to be highly regulated products and many of the markets where they are sold and the regulations can vary sometimes widely from region to region.
One example of this is fuel economy and emissions regulations. Both the U. S.
and Europe have them. But they tend to differ and producing cars to meet each regulatory regime costs more money. It requires that the company engineer and test every vehicle to fit every set of rules.
But many industry observers say GM made a number of missteps over the years that contributed to the brand's struggles in Europe. Opel and Vauxhall are often thought of as sensible cars but they do not have the glamorous reputations of more premium brands. GM typically sold Opels and Vauxhalls in high volumes usually to keep costs low.
But simple supply and demand shows this has a way of driving down prices. And while GM produced a lot of cars it was hard for it to make money on the cars it made. It also introduced its Chevrolet brand into Europe which had the effect of undermining sales of Opel and Vauxhall.
Both brands already had difficulty distinguishing themselves in Europe's competitive landscape and selling highly similar Chevrolets right next to them further confused buyers. Furthermore the company didn't have the right products. Opels portfolio was heavily weighted toward traditional passenger cars such as subcompact and sedans.
And the brand missed the boom in crossover and small SUV sales. At the end of the day Europe is a large market but it is a mature one and does not offer the opportunities for growth companies can find in China and other emerging markets or even the kinds of opportunity in the U. S.
. A lot of it is really reflection of the economic growth in Europe relative to China. You have one of the fastest growing countries in the world and the U.
S. which is growing stronger a lot stronger than Europe now. You know if you look at European GDP over the last several years just has really lagged the North American market in Asia.
China is now the world's largest car market with 28 million new vehicles sold in 2018. That number is likely to continue to rise as the auto market continues to grow. In North America particularly the United States, is becoming an ever more profitable market as consumers turn toward higher priced crossovers, SUVs, and pickup trucks.
So GM cut the cord in Europe and said it would use the money to focus more on its strong business selling trucks in North America while sinking piles of cash into its investments in electric vehicles and self-driving cars. Those aren't cheap aspirations and it may be a long time before GM or anyone else makes money off them. Meanwhile GM's North American sales have grown pretty consistently from 56 billion dollars in 2009 to 113 billion dollars in 2018 according to FactSet.
Meanwhile it was able to sell the business to Peugeot and a large automaker that has been successful focusing on Europe but who also has plans to return to the U. S. .
They've been very open over the last few months about their interest in specifically Fiat Chrysler. Which I think they view as a opportunity to gain a foothold in the North American market and obviously you know that company has said some very well-received brands with Jeep and a lot of the new products that they're introducing. In a comment to CNBC, General Motors said: Peugeot surprised the industry by saying it had restored the Opel and Vauxhall brands to profitability in part by cutting costs and introducing new more profitable models.
