By on June 25, 2012

Over the last 12 years, GM lost $16 billion in Europe, more than a billion each year. Ford is doing a bit better, but it sits on excess capacity of 300,000 units in Europe and expects a loss of $500 million to $600 million. Automotive News [sub] recommends to both: Pack up and leave. Says Luca Ciferri in AN:

The bottom line is that Europe is the biggest trouble spot in GM’s and Ford’s global empires and could prevent both from sustaining their success.

Ending production and sales in Europe would fix a lot of the companies’ financial problems, but it would be a massive blow to each automaker’s brand image because no one likes a quitter.

For decades, the automaker mantra has been “build where you sell.” But if there is not enough of a market to build cars profitably, then drastic steps must be taken.”

At least at GM, Fritz Henderson is being damned each day for not selling Opel and the Russians.

Two weeks ago, Tom Walsh wrote in the Freep:

“Was Fritz Henderson right after all, back in 2009, when he pushed for General Motors to sell its money-losing Opel subsidiary in Germany?”

Even if GM is able to align its European capacity and costs with the depressed sales volumes in the region, real questions persist about whether GM can generate long-term profit margins that would generate an adequate return on capital in a very crowded market.”

There is no salvation in sight at GM. All Steve Girsky, GM’s designated hitter in Europe, can say is this:

I don’t want to lead anybody to believe there’s any bright spot in Europe right now, although I will say it does look like things appear to be bottoming,”

Things may appear be bottoming because it can’t get any worse. Also, the agony will last longer than planned. Agreements with unions prohibit GM from closing plants before the end of 2014. Now, GM proposed a deal to extend this to 2016, in exchange for salary concessions.

Closing one plant alone would cost more than a billion dollars. The only way around this is bankruptcy. Many, among them Arndt Ellinghorst, head of Automotive Research at Credit Suisse in London, say that Ford and GM need their European engineering resources. At a cost of a billion and more a year, these are expensive resources, especially at a time when tech centers move to China and India.

 

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24 Comments on “Automotive News To GM And Ford: Get Out Of Europe Now...”


  • avatar
    mike978

    It is true that a billion dollars is a lot of money and the ROI may be low. However this question cold easily be asked of many other companies who operate in the European area. Opel/Vauxhall and Ford are in the top 5. Sukuzi,Mitsubishi, Volvo, FIAT, Renault, Nissan, Mazda etc could easily be asked the same question “why stay in Europe”.

    As for it couldn`t get much worse – well it is still a 12-14 million market and not likely (unless somethig really disasterous happens) to shrink to just a few million units. So there is money to be made.

    • 0 avatar

      If you lose a billion a year, there is no ROI. You lose your investment, and your profits elsewhere.
      If you lose money for 12 years during uptimes and downtimes, then you have sufficiently demonstrated that this is bad business.
      If you consistently lose money despite a large market share, you once again demonstrated that this is bad business.
      As long as you make money in most of the years no matter how many cars you sell, you demonstrate that this is a worthwhile business

      • 0 avatar
        Toad

        Kind of sad that Bertel has to explain very basic economics.

        Sort of like telling somebody that you “lose money on every sale but make it up on volume.”

      • 0 avatar
        alluster

        By that argument should Toyota and Honda should pull out of Japan?

        Toyota Japan financial results

        FY2009 – Yen 237.5B loss ($2.96B Loss)
        FY2010 – Yen 225.2B loss ($2.81B Loss)
        FY2011 – Yen 362.4B loss ($4.55B Loss)
        FY2012 – Yen 207.0B loss ($2.58B Loss)

        Note: These $13B losses in the last 4 years are for Japan only. Not included are losses from Europe where Toyota (and Honda) has consistently lost money or barely break even. Opel’s losses are a fraction in comparison.

        I would say there is hope the EU economy eventually turns around. GM and Ford would need to align production with sales. It will be costly and will take time. Has to be done nevertheless. Japan on the other hand has no hope of a turnaround. The population is aging, family formations are at their lowest levels, 2/3rd the men are sterile, the women are no longer interested in having kids, the population is moving away from a car based culture. The govt desperate attempts to devalue the yen or prop up their auto industry is falling on its face. The Yen may never go down to 85 to the dollar, a level Toyota needs for Japanese operations to break even. Its time the Japan fan boys realized the picture isn’t so rosy for their overlords.

      • 0 avatar
        mike978

        Toad – I don`t need basic economics explained. If you read my comment properly you will see that I said the same question asked of GM and Ford could be asked of other companies who have also made repeated losses in good times and bad. Do you have an issue with that comment or just like to sprout crap?

        Another person did make the point later on that if you closed all GM or FOrd operations then their margins would shrink on those same cars sold in other regions – example if Ford pulled out of Europe they would loss >300000 Focus sales per year. Don’t you think that would have a negative effect on the development and profitability of the Focus in the rest of the world?

  • avatar
    racingmaniac

    And you have to question if the tech centers in China or India has the same value to offer to Ford and GM, when both are aspiring to compete upmarket…

  • avatar
    Tstag

    If GM and Ford left Europe then it would be party time at every major European / Asian car company. VW for example would swallow a lot more market share which would make them a lot more profitable than they already are today. Ford and GM would also start to look vulnerable to takeovers particularly as their own costs start to rise on lower economies of scale.

    Ford won’t leave Europe its losses are relatively small. If GM leaves then things will get interesting

    • 0 avatar
      raph

      Agreed

    • 0 avatar
      Pch101

      Good post. To add to that, eliminating European sales would reduce the base of sales volume over which to amortize development costs, which would have the effect of reducing margins in other markets, which adds to that vulnerability.

      It’s not as simple as leaving vs. not leaving. The problem for these companies in Europe is with their lack of branding power. Their absence from the executive sedan market probably contributes to that lack of cachet value. If the consumer isn’t given a ladder with enough rungs to serve their aspirations, then their inclination will be to either climb someone else’s ladder or else to expect a discount.

  • avatar
    jpcavanaugh

    If GM leaves Europe, where will all of its new product development for the US be done? An awful lot of it seems to be coming from Opel these days.

  • avatar
    analoca

    Besides that bankruptcy laws in various countries where GM and Ford operate are not as simple as in USA, and therefore bankruptcying will not be free at all, exiting the European market, where still both makers have a strong footprint, will certainly impact Ford and GM results over the medium term, so it appears not a wise advise, probably driven by VW wishfull thinking…

  • avatar
    Conslaw

    You would think that if they can’t make automobiles at a profit, if they have a paid-for plant and equipment, and some smart engineers, there should be SOME product that that they could make economically.

    There doesn’t seem to be a lot of “repurposing” in the auto industry either in the US or in Europe.

  • avatar
    dwford

    Ford at least has commonized its platforms so they sell the same car allover the world. GM is still making different cars for Europe and the US, adding to costs.

    • 0 avatar
      mike978

      GM is following Ford’s lead – Regal aka Inisgnia, Verano aka Opel Astra sedan, Cruze, Malibu, Sonic (or Aveo in Europe) and Spark all common cars between US and EU.
      More to do but they are heading in the right direction.

  • avatar
    challenger2012

    Why not get the hell out of Germany and go to Poland or strike a deal with almost any country with cheaper wages and wants a car plant? GM could still sell in Europe and get to a more friendly wage country.

  • avatar
    Felis Concolor

    Ford, I have a suggestion regarding your European problem. Send a portion of your excess capacity to the USA; I’m certain you’ll find more than a few buyers for the 300+ hp Focus RS. And please allow us to purchase that engine with a compact wagon wrapper.

  • avatar
    Toucan

    Can someone please explain me, in plain English, how is it possible for companies like Ford or GM to sell so many cars and make such losses?

    To sell a wide range of cars in Europe following is needed:
    - two diesel engines (different states of tune don’t count), usually co-developed with others
    - two gasoline engines
    - three platforms (small, compact, midsize)

    These are (should be) be KEY real cost drivers. After bearing them, the results can be sold AROUND THE WORLD increasing ROI over and over again.

    Technically, all other components (gearboxes, ESP, headlights, AC, seats, seatbelts, door handles, whatever) can be sourced from OEMs. The 8-speed cog swappers from BMW and Audi of today, for instance, come all off the shelf from ZF. Most of the tricky engine tech (2000 bar direct injection, for instance) is made by Bosch and comes off the shelf as well.

    Since Tesla, Koenigsegg, Pagani managed to build their vehicles from scratch with so few employees, it cannot be that manpower-consuming to make a car.

    So how on Earth does GM and Ford lose so much?? Can some insider please enlighten me on the subject?

    My only suspicion (I do not know car industry at all) is that at GM or Ford, 20% of the workforce is producing value (engineering, designing, testing, selling, servicing stuff) and all the rest does nothing (hangs around, attends meetings does telcos, sends emails, conducts processes no one needs). Plus maybe some unions ruin employment elasticity and inflate salaries/benefits.

    • 0 avatar
      Type57SC

      Low capacity utilization or mad rebates to keep utilization high, but utterly destroying contribution margin and resale.

    • 0 avatar
      Pch101

      “Can someone please explain me, in plain English, how is it possible for companies like Ford or GM to sell so many cars and make such losses?”

      The ARPU (average revenue per unit) and capacity utilization are too low.

  • avatar
    doctor olds

    General Motors will not leave Europe. The Manchester United deal and Chevrolet’s commitment (and success) in the WTCC series are good evidence.
    As GM’s global product portfolio is fleshed out, Opel/Vauxhall/Buick products and volumes will grow. GM had to fix NA first, and is cranking in great profits at home now. Europe will be fixed. The Peugeot deal alone is expected to erase all of the red ink, and that is before production capacity rationalization. GM does have an array of options as the largest volume carmaker in the world.

  • avatar

    Yikes! Stupid short sighted advice. In case of GM sounds like at least a talking pont. In case of Ford, reeks of America-myopic-disastor advice. Most of Ford world wide sales come from Europe…

  • avatar
    iainthornton

    To make it simple, can you imagine the complexity of GM or Ford leaving Europe? The redundancy payments, the complication of adding production elsewhere, setting up new engineering centres elsewhere.

    At least now they can justify Europe as an expensive engineering consultancy. They do, however, need to increase either sales or decrease capacity in order to provide better capacity utilisation.


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