General Motors, Considering Exiting Europe, Talks About Selling Opel

http://www.nytimes.com/2017/02/14/business/dealbook/general-motors-peugeot-opel.html

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FRANKFURT — General Motors floated the possibility on Tuesday that it could exit the large but troubled European market by selling its chronically unprofitable Opel unit to the French maker of Peugeot and Citroën cars.

The potential deal would create Europe’s second-largest carmaker, challenging the market leader Volkswagen, which is vulnerable because of an emissions scandal.

For General Motors, a sale would free it from persistent losses in Europe and help fulfill pledges by its chief executive to improve overall profit margins and increase returns to shareholders.

At the same time that the company has been struggling in the European market, it has been become increasingly reliant on China and its core North American market. More losses in Europe could undercut its ability to invest in those more lucrative regions, as well as fund new ventures into autonomous vehicles and mobility services.

“While G.M. has ambitious long-term plans for Europe, we currently see the business as mediocre at best,” Brian Johnson, an analyst with Barclays, wrote on Tuesday. “Why not sell now, when Europe is steadier, versus trying to sell at a time when the market is in a downturn.”

Still, an agreement, between G.M. and PSA Group in France, would also link two of Europe’s weakest carmakers, which have more production capacity than they need and few products able to compete in the lucrative luxury market.

PSA is the European Union’s third-biggest automaker, with 9.9 percent of the market in 2016, according to the European Automobile Manufacturers Association. The purchase of Opel, which holds 6.7 percent of the market, would help the company vault past Renault into second place.

G.M. and PSA confirmed the talks, but they cautioned that “there can be no assurance that an agreement will be reached.” Indeed, a previous deal to sell Opel to a group including a Russian bank fell apart in 2009.

The latest potential deal will most likely face its own challenges. Opel’s powerful labor representatives signaled that they would oppose a merger of the carmakers, which have little prospect of being competitive in the crowded European market unless they cut their work forces.

Opel has been a problem for G.M. for decades. Once a serious rival to Volkswagen, it began losing market share in the 1990s, which was also the last time it made a profit. While the Volkswagen Group has become the world’s biggest carmaker, Opel slipped to Europe’s margins.

“Opel has been hemorrhaging money for the last 16 years, so hard decisions are on the table in Mary Barra’s version of a profitable G.M.,” said Rebecca Lindland, an analyst with the auto-research firm Kelley Blue Book.

The G.M. unit suffered from frequent turnover in top management, friction with labor representatives and products that buyers perceived as dull or inferior. Among other things, Volkswagen was faster to offer cars with diesel motors, which are popular in Europe because of their superior fuel economy compared with gasoline vehicles.

Shares of G.M. closed up 4.8. percent on Tuesday.

In 2009, the company was on the verge of selling Opel to a consortium made of Magna, an auto parts supplier based in Canada, and the Russian lender Sberbank. But the American carmaker pulled out of the deal at the last minute, reportedly because of fear that the takeover would give the Russians access to its patents and technology.

Since then, Opel’s financial situation has improved under the leadership of Karl-Thomas Neumann, a former Volkswagen executive. News of the merger talks came as G.M. reported that its European division had posted a loss of $257 million in 2016, an improvement from a loss of $813 million the year before.

Volkswagen’s emissions scandal also presents a chance for competitors to challenge the German carmaker’s dominance. Volkswagen’s market share, including other company brands like Audi and Porsche, slipped in 2016 to 23.9 percent from 24.6 percent the year before.

But even combined, PSA and Opel would have a lot of catching up to do. Both lost market share in Europe last year to Renault and Fiat Chrysler. And all of the mid-price brands have lost buyers to BMW and Daimler, which makes Mercedes vehicles. Those two companies have increasingly offered products priced within reach of middle-class customers.

For PSA, one advantage of a deal with Opel would be the potential to draw on German engineering expertise coveted by many buyers. A design center at Opel headquarters in Rüsselsheim, Germany, provides G.M. with expertise in smaller cars.

But Opel and PSA, based in Paris, suffer from a surplus of production capacity and are in countries where it is extremely difficult to close factories or lay off workers.

Opel’s future is further clouded by Britain’s decision to leave the European Union. The country, where Opel vehicles are sold under the Vauxhall brand, is the unit’s strongest market, accounting for almost a third of sales.

The company also has factories in the British cities of Ellesmere Port and Luton, and its ability to move vehicles, components and people in and out of Britain will become more complicated after the country exits the European Union.

Opel’s labor representatives signaled skepticism about the deal. In a statement on Tuesday, the IG Metall union and the Opel workers council said they were surprised to learn of the talks. They said the talks represented an “unprecedented violation” of workers’ legal rights in Europe to be consulted about major decisions.

The labor representatives also said the deal bore scrutiny because of the past record of cooperation between PSA and G.M.

PSA and G.M. announced an alliance in 2012 to save costs by buying components jointly and building some vehicles together. G.M. took a 7 percent stake in PSA at the time, but sold it the next year as PSA’s finances worsened. The French government owns about 14 percent of PSA after providing the automaker with badly needed cash in 2014.

The French company and G.M. continue to jointly produce some vehicles.

Opel, which employs about 35,000 worldwide, sold 1.2 million vehicles last year. PSA, with about 180,000 workers, sold 3.1 million vehicles last year. Both companies depend heavily on sales in Europe, which has been suffering from slow economic growth for a decade.

If the deal goes through, G.M. would be without a major presence in Europe for the first time in nearly 90 years.

Adam Opel founded Opel in Rüsselsheim in 1862. It originally produced sewing machines, later switching to bicycles and then automobiles. General Motors acquired an 80 percent stake in the company in 1929.