General Motors’ Opel subsidiary could lose at least another $16 billion by 2024 and the only way to avoid this threat to its own future is to dump the European subsidiary as soon as possible, investment bank Morgan Stanley said.
This may take some time, but GM must bit the bullet because its own healthy turnaround is threatened by the gigantic losses from its Opel and Vauxhall subsidiaries in Europe.
“Opel has lost $16 billion over the past 12 years. Losses over the next 12 years could be even greater,” said Morgan Stanley analyst Adam Jonas, in a report.
Jonas said Daimler and BMW have shown how to be rid of chronic loss makers by cutting lose from Chrysler and Britain’s Rover.
“(Opel-Vauxhall) represents the single biggest threat to GM’s long-term financial health and sustainability. In our view, a separation – while expensive – is the best option for both GM and Opel stakeholders,” Jonas said.
“(GM’s) performance may be held back materially as long as the company continues to own and fully consolidate the Opel business. Limiting risks here could trigger significant upside potential. In our opinion, exiting Opel could be the best strategic option currently available to GM and better long-term for Opel itself,” Jonas said.
Opel-Vauxhall’s latest financial data shows a loss of $361 million in the second quarter. Morgan Stanley expects the red ink for all of 2012 to reach $1.5 billion because the numbers were flattered by a buildup in stocks which will have to be accounted for.
Earlier this year, GM took a seven per cent stake in Peugeot-Citroen of France. The two companies plan various measures to cut costs in Europe long–term and produce vehicles together.
GM can’t fix Opel without some outside help.
“We do not believe GM can reasonably be expected to turn around Opel on its own. In our view, Opel would have a far better chance of success if it existed outside of the GM group. We’d rather see GM with a three per cent share in Europe (GM’s forecasted market share with the Chevrolet brand and excluding Opel-Vauxhall) generating profit than an eight per cent market share in Europe generating massive losses,” Jonas said.
Speculation persists that Chevrolet (its results in Europe are included in GM’s international operation, not Europe’s) and Opel-Vauxhall can’t coexist as separate brands, as both chase buyers at the bottom end of the market. In the first half of 2012, Opel-Vauxhall’s West European market share dived to 6.9 per cent from 7.5 per cent the previous year, while Chevrolet increased its share to 1.4 per cent from 1.2 per cent, according to Automotive Industry Data
Jonas said it would cost between $7 billion and $13 billion to get rid of Opel. GM would be able to preserve its European technology, so critical to GM’s global development of fuel efficient engines, because the rights are held in a separate Delaware-based legal entity controlled by the parent company.