General Motors’ European division, Opel, is having a tough time reaching profitability this year in light of Britain’s decision to leave the European Union and GM’s pull-out from the Russian market.
“The exit from Russia was really painful. Brexit is yet another issue to deal with and that is why the path toward breakeven is difficult for us,” the division’s CEO Karl-Thomas Neumann said at a conference in Berlin last Wednesday.
Opel, which includes British sister brand Vauxhall, has been working towards profitability. According to internal GM objectives, the subsidiary was targeted to break even in 2015 and begin to turn a profit in 2016 by optimizing costs, taking advantage of a recovering European auto market and introducing new products — widely considered to be the lifeblood of European carmakers. The division also absorbed the Russian market from GM’s International Operations division, adding sizable sales volume to its bottom line.
But in early 2015, GM pulled the Chevrolet and Opel brands from the Russian market as it slowed, removing notable scale and operational efficiencies. In doing so, the automaker also shut down its Russian factory.
Things started to look up when GM reported its first quarterly profit in Europe in Q2 2016, marking the division’s first profitable quarter in five years, but all hopes were shattered when the division posted a $100 million loss in Q3 2016 on decreased sales volume and revenue. In doing so, GM warned that it if current, post-Brexit market conditions are sustained through the remainder of 2016, its European operation could lose another $300 million in the fourth quarter.
Comments
Brexit is an opportunity for GM Europe but only if it will invest in Britain to make cars and components rather than simply moan about the cost of selling imports to the country. The work forces at Luton and Ellesmere Port have proven themselves to be as skilled and as productive as their counterparts in Germany and the rest of Europe – and that’s without the investment largess that GM Europe sprinkles on its mainland plants. It would be a very bad business decision if GM decides that it would be easier to close down the British manufacturing operations and still hope it can turn a shilling in Britain by shipping in high cost imports.
Most of the components which are assembled (not manufactured!) in Britain come from the continent including all the engines, transmissions etc. Most of the suppliers are located in Europe not the UK. How should GM shift the component production to Britain? That would cost billions. Despite that, no one knows if there will be any tariffs after UK leaves the EU. It would be too risky to shift the production to UK. GME sells more than 75 % of its cars outside the UK. Tariffs from exporting the cars from UK to Europe would be a dramatic negativ impact.
How is that an opportunity?
The revaluation of the pound is not a temporary matter. The pound has been overvalued for many years. Therefore, if GM wishes to continue to sell profitably in the UK, it needs to reduce its reliance on imports – be they whole vehicles or components.
The lower value of the pound compared to currencies such as the dollar and the euro (and indeed many other currencies as the world wakes up to the reality that the UK is, after years of official antagonism to manufacturing, now to all intents and purposes industrially a developing economy) will add to the competitive advantage that Britain, with the right management (Nissan being a prime example) can offer manufacturers. For those looking medium and long term, it will make sense to invest in the UK for sale domestically and for exports. It will take time to invest in new production facilities but that was no barrier to investment in China, Korea, Poland etc etc.
While GM sells between two thirds and three quarters of its products outside of the UK, that still leaves the UK on its own as one very important single market. Can GM afford to gamble on being able to import high cost product and sell at a profit in a market where it will face more profitable competition from BMW/Mini, Nissan, Toyota, Honda and even Ford thanks to its engine production facilities?