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Why GM Is Bowing Out Of The European Auto Market

Why GM Is Bowing Out Of The European Auto Market

Europe hasn't traditionally been a good hunting ground for U.S. automakers. For example, crosstown rivals General Motors Company (NYSE: GM) and Ford Motor Company (NYSE: F) haven't done as well across the Atlantic as they have done in the United States.

GM On Back Foot In Europe

Both the companies were raking up losses, and it was only recently Ford made a turn for the better, moving back into the black. General Motors' European operations have been bleeding since 2000.

Meanwhile, Ford was unprofitable in Europe from 2011 to 2014, with the company losing a collective $3.1 billion in the said timeframe. Therefore, the latest announcement from General Motors regarding the sale of its European business to Peugeot SA (ADR) (OTC: PEUGY) should come as a no surprise. General Motors lost about $9 billion since 2009 in Europe, according to a Bloomberg report.

Ford Learns From Mistakes

Ford, however, was adept at quickly learning from its mistakes and went through catharsis following losses for four years until 2014. Shutting down of plants, elimination of several thousand jobs and reinvigorating product lineup with new and freshened vehicles, including performance and luxury variants, were all radical strategic initiatives the company undertook to return its European business to profit.

Healthy European Auto Market

The lackluster showing by the U.S. automakers comes despite the European auto market showing life. Recent forecasts released by the ACEA showed that car sales in the European Union would grow 1 percent in 2017 following 6.8 percent growth in 2016, marking the third consecutive year of expansion.

The weak prognostication for 2017 is premised on political developments, including elections scheduled in Germany and the Netherlands, and the Brexit.

A separate survey by the Society of Motor Manufacturers and Traders showed that new car registrations in the U.K. rose 3 percent in January, as demand by private consumers increased for the first time since March 2016. After strong increases, both in 2015 and 2016, the society predicts a contraction for 2017.

GM's Exit From Europe

Unable to stem its more than decade-old losses, GM offloaded its European operations in favor of French automaker PSA Group for $2.2 billion. GM see logic in the divestment, as it can now focus on more profitable markets and products and new technologies such as electric cars, fuel cells and self-driving cars, a report in Detroit New said. The report stated that Opel-Vauxhall business it owned for over 90 years contributed 10 percent its overall sale and accounted for 18 percent of its workforce.

If GM were to have adopted a different strategy to stay alive in Europe, it would have meant billions of dollars of investment. Currently, GM focuses on cars in Europe, which is a misalignment with investor preference for SUVs and crossovers. Additionally, GM's European operations have small profit margins compared to China and Europe.

Under Mary Barra, GM has been slowly and steadily pulling out of poorly performing markets such as Russia. It has stopped manufacturing in Australia and Indonesia and has announced a radical restructuring in Thailand.

Going by Ford's turnaround in Europe, an Automotive News report suggests that what works in Europe is having a right balance of product, capacity, leadership and brand recognition. GM seems to have missed the trick and is paying the price for it by not having a presence in the third largest auto market of the world.

Related Link: General Motors Opel/Vauxhall Sale Doesn't Excite Shareholders

Related Link: February Auto Sales Flattish Amid Copious Incentives


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