GM's Opel Exit Is Rare No-Confidence Vote in European Market

By Mike Colias and John D. Stoll 

General Motors Co. sent a message Monday with the sale of its money-losing Adam Opel AG operation to Peugeot SA: the world's third-largest auto market isn't worth the trouble.

GM executives said pulling out of Europe allows the Detroit car maker to slash engineering costs and lower the amount of cash it needs to keep on hand. European buyers have fickle tastes and European Union regulators have drawn up rules that would have forced GM to spend heavily to meet mandates in a market where it only has 6% market share.

The move is a rare vote of no-confidence in the continued globalization in the auto industry, out of step with most industry peers. Many executives have argued car companies need to get bigger to pay for what is expected to be a convergence of consumer tastes and regulatory mandates around the world.

Only a few years ago, GM appeared to be steering the relationship with Peugeot in another direction. In 2012, GM took a 7% stake in then-struggling Peugeot, saying the deal could be the start of a potentially broader alliance.

Less than two years into that agreement, however, GM sold its stake. The two companies continued, however, to collaborate on vehicles and technology.

GM's inability to reverse nearly two decades of losses in Europe doesn't reflect the broader trend. Ford Motor Co., with 7.7% market share in Europe, made $1.2 billion in 2016, representing 12% of global profit.

"It was more than just the bottom line," GM President Dan Ammann said in an interview, noting a multiyear turnaround plan put Opel on a path to eventually breaking even. "It became clear the European market was diverging from the rest of our business elsewhere in the world."

Europe represents about 20% of global sales volume, slightly less than North America's share.

Mary Barra, chief executive officer, said GM found only 20% of the portfolio in Europe overlapped with the rest of GM's product line, lessening opportunities to find commonality across regions. Unlike American and Chinese buyers, European customers prefer diesel engines and passenger-car body styles.

GM said it would continue to collaborate with Peugeot on certain technology endeavors, including autonomous vehicles or electrification.

The decision comes as U.S. auto makers are getting positive signals from the Trump administration regarding corporate tax reform and relief on emissions standards. GM will use savings from the Opel exit for share buybacks and to sharpen focus on areas where it aims to dominate -- the U.S. truck market, China and autonomous vehicles.

GM Chief Executive Mary Barra, a member of President Donald Trump's economic policy advisory team, in January announced more than $1 billion in fresh U.S. investment. The auto maker earned $12 billion in North America last year and took about $2 billion in dividends from its China joint ventures; it lost $300 million in Europe, part of a $15-billion losing streak since 2000.

Over the past one or two years, Europe, which has always been cutthroat due to a glut of capacity and national interests in auto makers, became even more difficult from political, regulatory and consumer-preference standpoints, Mr. Ammann said. Developing "a winning plan in that environment" was too steep.

The U.K.'s vote to leave the European Union last year prevented Opel from its first annual profit since before 2000. Meanwhile, European environmental scrutiny has tightened amid the fallout from Volkswagen AG's emissions scandal, forcing what many analysts expect to be a broad and costly transition toward electrification and away from diesel as the dominant engine technology in Europe.

"Despite the strong progress in recent years, as we look forward we see risks potential outweighing opportunities" for Opel without adding the scale that PSA can provide, Mr. Ammann said. Peugeot will now hold 16% of the European market, compared with 10% before the deal.

Peugeot will pay EUR1.32 billion ($1.4 billion) for the Opel and its sister Vauxhall U.K. brand, and it will team with BNP Paribas SA to pay an additional EUR900 million for Opel's finance arm.

Write to Mike Colias at [e-mail] and John D. Stoll at [e-mail]

(END) Dow Jones Newswires

March 06, 2017 11:00 ET (16:00 GMT)

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