Why General Motors Left Europe

In 2017, General Motors, America's largest automaker with brands known around the world, took perhaps one of the boldest steps in its history. It sold its European brands Opel and Vauxhall to French carmaker PSA, known for brands such as Peugeot and Citroen. It was the end of an era for GM that had first ventured into Europe almost 90 years earlier. It also marked the end of nearly two decades of losses for brands under GM. GM executives said the deal would alleviate a difficult and struggling business and allow the company to focus on its most profitable North American market and free up cash to make necessary investments in new technologies such as electric cars and autonomous driving.

But the measure carried risks. The European new car market is almost as large as the United States, and abandoning it would not only hurt 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 generated huge costs. GM suffered a loss of $3.9 billion in 2017, mainly due to the $6.2 billion in costs it had to pay for the sale. So why did GM leave? Did the automaker simply make a mistake or fail? Was it wise to leave Europe? And what does it mean for the future of GM and the future of the auto industry?

In reality, the decision says a lot about how difficult it is to be a global automaker today and the sometimes subtle ways in which markets around the world increasingly favor local players that can adapt their products to specific markets. specific. In the end, GM may have failed in Europe in part because it simply isn't European. The figures show that General Motors was having a difficult time on the continent in the nine years before it sold GM's European business. It bled money into the EBIT line each year for a total of about $14 billion in losses on $208.4 billion in sales over its nine-year weighted loss of 6.9 percent.

EBIT stands for earnings before interest and taxes and is the metric GM uses to report the money its international business divisions earn. Its worst year during that time was during the 2009 financial crisis. Where GM incurred a 15 percent loss of $3.6 billion. The best year in that period was 2016, where it still had a 1.4 percent loss for a total of around $257 million. That sounds like an improvement and in absolute terms it was. But consider that over the same nine-year period, GM earned a North American profit of $28 billion on $823.7 billion in sales. This represents a weighted gain of 3.4 percent over nine years;

An automaker typically aims to achieve an EBIT of 8 percent for any given region and for the world as a whole. GM rival Ford, for example, has an EBIT target of 8 percent for its European business. The cars never sold well with consumers. And one of the reasons they couldn't achieve profitability is because what they sold 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 a big part of it. They also faced many obstacles on the cost side of the equation: the cost of labor, unions and also stricter regulation, particularly from an emissions point of view.

So a lot of those reasons are why they had such mixed results and from a market share perspective, when they pulled out, they only had 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 its competitors. Consider that the automaker had a 9.3 percent share of the European car market in 2008, but 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 are doing better. And once GM sold its European business, its profits soared. The automaker earned global EBIT of 9.9 percent in 2017 and 8.4 percent in 2018.

But why did GM struggle in Europe when it is doing so well in the United States and even leads the American automakers in China, a market that is by no means easy to reach? do business. One reason is that Europe is quite unique. To be fair to GM, it's not the only automaker that has had problems there. American cars have never been an easy sell in the European market. Ford, for example, has reduced its presence in the region. GM is not alone in its struggles. You see Ford coming out of Europe and American cars have never sold very well there.

That market is really dominated by the big three German manufacturers and others. But it is also a fairly fragmented market. So they were never able to compete and consumers just didn't like their cars. There were larger economic and political factors, such as the Great Recession and tightening emissions regulations, that made it more difficult for companies to do business there. Another factor is the distinctiveness of European tastes. At the time, GM CEO Mary Barra said that 80 percent of the vehicles in Opel's portfolio did not 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 or portfolio perspective, only 20 percent of the portfolio overlapped with the rest of General Motors' portfolio. That's why we think the real opportunity for PSA is to take advantage of that specific scale in Europe. That put the company in a difficult position. Major automakers

general

ly 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 much-desired economies of scale. However, there are forces that make it difficult to exchange parts and platforms.

Cars tend to be highly regulated products and many of the markets where they are sold and the regulations can sometimes vary greatly from region to region. An example of this is fuel economy and emissions regulations. Both the United States and Europe have them. But they tend to differ, and producing cars to comply with each regulatory regime costs more money. It requires the company to design and test each vehicle to conform to each set of rules. But many industry observers say GM made a series of mistakes over the years that contributed to the brand's problems in Europe.

Opel and Vauxhall are often thought of as sensible cars, but they don't have the glamorous reputation of more premium brands. GM typically sold Opels and Vauxhalls in large volumes, usually to keep costs down. But simple supply and demand shows that this has a way of driving prices down. And while GM produced a lot of cars, it had a hard time making 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 were already struggling to distinguish themselves in Europe's competitive landscape, and selling very similar Chevrolets right next to them further confused buyers.

Furthermore, the company did not have the right products. Opel's portfolio was heavily weighted toward traditional passenger cars, such as subcompacts and sedans. And the brand missed the boom in sales of crossovers and small SUVs. At the end of the day, Europe is a large, but mature market, and it doesn't offer the growth opportunities that companies can find in China and other emerging markets, or even the kind of opportunities that the United States offers. reflection of Europe's economic growth in relation to China. We have one of the fastest growing countries in the world and the United States, which is now getting much stronger than Europe.

If you look at European GDP in recent years, it has really lagged behind the North American market in Asia. China is now the world's largest auto 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, it is becoming an increasingly profitable market as consumers turn to higher-priced crossovers, SUVs and trucks. So GM cut the cord on Europe and said it would use the money to focus more on its strong truck sales business in North America, while pouring piles of cash into its investments in electric vehicles and self-driving cars.

Those are not cheap aspirations and it may be a long time before GM or anyone else makes money on them. Meanwhile, GM's sales in North America have grown fairly steadily, from $56 billion in 2009 to $113 billion in 2018, according to FactSet. In the meantime, he was able to sell the business to Peugeot and a large automaker that has had success focusing on Europe but also plans to return to the U.S. They have been very open over the past few months about their interest specifically in Fiat Chrysler. . . Which I think they see as an opportunity to gain a foothold in the North American market and obviously you know the 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 returned the Opel and Vauxhall brands to profitability partly by cutting costs and introducing new, more profitable models.