(Source: Alisa Priddle Detroit Free Press (MCT) — General Motors Vice Chairman Stephen Girsky — who witnessed the company’s 40-day bankruptcy restructuring in North America — is now in the hot seat to turn around Europe, replacing Karl-Friedrich Stracke as head of its Opel division on Thursday, two weeks into the latest business plan.
He is the third executive to head GM Europe in the last eight months. Stracke replaced Nick Reilly in November.
The newest change of leadership is yet another sign of turmoil in a troubled region with few signs of recovery any time soon. GM and Ford stock have been paying the price for Europe losses and the inability to fix the glut of car factories there.
Shareholders can be forgiven for wishing GM and Ford would exit the troubled market.
But that would be messy, expensive and shortsighted and cause irrevocable harm over the long term, insiders and analysts say.
Still, Europe has a debt crisis, high unemployment and little consumer confidence to spur spending. There are too many plants making too many vehicles for too few buyers. And when consumers do buy, automakers lose money because of deep discounts.
“An estimated 60% of all cars sold in Europe are at a loss,” analyst Erich Hauser of Credit Suisse in London said.
GM stock is flirting with 52-week lows, falling to $19.33 Thursday and swelling U.S. taxpayer losses on their stake. Ford also is trading at lows not seen since December 2009. It closed at $19.13, down 20 cents.
Zacks Investment Research downgraded Ford on Wednesday to “underperform” on the expectation that losses in Europe will be $500 million to $600 million this year.
A Morgan Stanley report expects Ford losses in Europe to exceed GM’s in the second quarter. Ford reports July 25; GM on Aug. 2.
Jefferies analyst Peter Nesvold pegs GM’s loss at $432 million in Europe for the quarter.
No quick fixes
Efforts to close plants are proceeding at a glacial pace.
GM will close an Opel plant in Bochum after 2016, which will be the first German auto plant to close since World War II.
On Wednesday, PSA Peugeot Citroen — in which GM has a 7% stake — said it will close its Aulnay plant in 2014, adding 8,000 layoffs to the 6,000 announced last year. Aulnay will be the first auto plant to close in France in 20 years. GM has a 7% stake in Peugeot.
Fiat CEO Sergio Marchionne is threatening to close a second Italian plant after one in Sicily.
The moves are akin to preparations to put a Band-Aid on a gaping wound years after first aid is required.
In the meantime, GM lost another $256 million in Europe in the first quarter after 12 straight years and about $12.4 billion in cumulative losses.
Ford has earned a cumulative profit of $2.95 billion over eight years, according to Nesvold.
While Ford has been in the black for six of the last eight years, it is on course for its largest losses in the region in a decade. Chief Financial Officer Bob Shanks warned last month that pretax losses outside North America could reach $570 million in the second quarter, without specifying how much is attributable to Europe.
A hasty exit from Europe would be neither simple nor cost-effective.
Exit costs would far outweigh the costs of trying to restructure the operations, said Michael Robinet of IHS Automotive Consulting in Northville. It would take years to unwind the franchise laws and long-term contracts in place.
Untangling Europe from global operations could hobble companies and their supply base, take away their global status, permanently close the door on millions of sales annually and potentially cost more to dismantle than the current loses.
Hauser said it costs about $185,000 for every person laid off.
“People are frustrated and will say Europe is a lost cause,” Hauser said. “I don’t think it properly reflects the profitability of the market over a longer period. To be a global car company, you cannot just give up on a market the size of Europe,” he said of its 16 million sales in a good year.
Robinet agreed. “Eliminating Europe, you cut a quarter of critical global volume,” Robinet said. “The world is littered with regional car companies that could not make a go of it in a major region and have been relegated to the lower rungs of the industry.”
“GM is thanking its lucky stars that in 2009 it was globally diversified,” Robinet said, referring to the downturn in North America that was partially offset by profits in Europe and China.
“Global demand diversification is very important to the well-being of a car company.”
Europe is different
During the economic crisis in North America, automakers tackled plummeting sales and profits with drastic restructuring, including bankruptcy for GM and Chrysler. The cuts were deep and executed quickly.
“It was more important for Ford and GM to get North America profitable,” said Eric Selle, managing director, credit research for J.P. Morgan Securities in New York, noting that five years ago no one could have envisioned the drastic cuts in capacity, jobs, labor wages, debt and legacy obligations that occurred.
It worked. North America is now a profit center.
But the same fixes won’t work in Europe, where laws, policies, labor contracts and politics in about 15 countries building vehicles make it difficult to lay off workers and close plants, even though there are no signs of economic improvement this year or next.
Volumes continue to fall — sales could be as low as 12.5 million this year with no signs of a rebound, said Hauser, the Credit Suisse analyst in London.
Sales in Spain and Italy started the year 40% and 30% off their respective highs. “It was difficult to see how it could get much worse, but Italy is down another 16% and Spain down another 16-18%.”
“Extremely difficult to call when the consumer will come back. You think the market is depressed and then it loses another 15%. That is really scary. There is no underlying level of demand.”
Staying the course
GM was poised to pull out of Europe with a potential sale of Opel/Vauxhall to Magna in 2009, leaving Chevrolet — which has no plants in Europe — to shoulder European sales.
But GM remains committed to Opel and Europe.
“The economy is terrible, but we have to assume we will eventually be able to get back on track,” spokesman Jim Cain said. “When you have strong brands and cost structure, you can make money there.”
Said Robinet, the IHS Automotive consultant: “If you’re an investor, I understand your impatience and frustration. But these companies need to be in Europe and ensure their operations are as efficient as possible.”
And pulling out would be costly.
Severance for European workers is generally two times their annual salary, so there is a huge human cost of shutting down a plant,” said Selle, the managing director from JP Morgan. “The restructuring cost is probably more than what Ford is losing this year.”
“You don’t just push a button and things stop. It does cost money. You have to give people money to not work.”
A regulatory filing by GM shows closing its plant in Antwerp, Belgium, as well as some restructuring and early retirement programs in Spain and the United Kingdom, affected 6,700 employees and cost $1.1 billion in 2011. A further charge of $100 million will be incurred this year as the actions affect another 500 employees.
“Europe doesn’t have the will or way to get it done,” Selle said. “Their bankruptcy laws are not set up to restructure companies, they’re set up to liquidate companies.”
“And you are permanently giving up on that market share,” Hauser said. “You are saying you will never get back to that market share level.”
Revising strategy
Ford was ahead of the game with restructuring efforts a decade ago, but this latest slump has forced more small actions, such as slowing line speeds and temporary shutdowns and layoffs. As Ford reworks its five-year business plan, analysts say they expect the revised strategy for Europe could include a plant closure.
Europe is still considered a design and engineering hub for global platforms of subcompact and compact cars, as well as diesel engines and technology, Robinet said. “To transplant that to North America or Asia would be a difficult proposition.”
Europe also has tight regulatory requirements and high customer expectations.
“If you can crack Europe, your product is much more credible and more valuable,” Hauser said.
In the meantime, “we have not reached the point where we have to question the very existence of these operations in Europe,” Hauser said.
“I would not want to be the CEO to make that call. You could turn out to be the absolute genius, but in five years, people could look at that call and say you were out of your mind, pressing the button at the worst possible time.”
Contact Alisa Priddle: 313-222-5394 or apriddle@freepress.com
More Details: European footprint
GM
• 79,000 employees, 40,000 of them with Opel/Vauxhall
• 9,000 dealers: 6,500 Opel/Vauxhall and 2,500 Chevrolet
• 18 Opel plants, including assembly, engine and transmission
• Engineering and design centers
• 1.7 million sales in 2011 of which 1.2 million were Opel/Vauxhall
Ford
• 66,000 employees
• 6,100 dealers
• 23 plants including assembly, engine, transmission, stamping, casting
• Engineering and design centers
• 1.58 million sales in 51 markets
More Details: Stephen J. Girsky
• Age: 50
• Vice chairman of General Motors since March 1, 2010. Also served as special adviser to the CEO and CFO of GM, August 2005 to June 2006.
Education
• BS in mathematics from UCLA
• MBA from Harvard University
Life before GM
• Managing director of PaineWebber’s Automotive Group
• Managing director and senior analyst at Morgan Stanley
• President, Centerbridge Industrial Partners, an investment fund with $8 billion of assets under management
• Lead director of Dana Holdings
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Source: Alisa Priddle Detroit Free Press (MCT)
