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The time has come for General Motors to cut ties with its money-losing Opel division, which has been a drag on the U.S. carmaker for years, a Wall Street analyst has said.
The Detroit company has lost the equivalent of R131-billion in its European operations (Opel and Vauxhall), over the last 12 years, Morgan Stanley analyst Adam Jonas said.
The eurozone debt crisis led consumers in the region to pull back on spending, causing GM last year to abandon its target for break-even results in Europe for the full year.
THE SENSIBLE CHOICE?
GM's losses in Europe do not seem to be nearing an end, so dumping Opel (while costly upfront) would make sense, Jonas said in a research note to clients.
"One of the worst things in the motor industry is owning a cash-burning, resource-consuming business," wrote Jonas, who has an "overweight" rating on GM shares. "We believe the time has come for GM to find a new home for Opel."
GM said it remains committed to Opel, however.
"Despite the tough environment for the automotive business in Europe, we believe we have an opportunity to turn the Opel/Vauxhall business around and bring it back to long-term profitability," said GM spokesman Jim Cain.
GM has reduced the number of temporary and contract employees in Europe, and is working with the German union IG Metall to cut costs further, including cutting the hours of several thousand workers at two of its plants.
Opel's persistent woes have led it to push for changes including the ouster of the unit's chief executive in July. GM is also introducing new cars and realigning its business in the region, including forming an alliance with Peugeot/Citroen.
ALMOST SOLD BEFORE
In 2009, GM almost sold Opel to Canada's Magna International before pulling out of the deal after deciding Opel was too strategic a part of its global business. At the time, GM CEO Dan Akerson favoured the sale, but in recent months he has said he is more concerned with fixing Opel than in dwelling on the past. Jonas said that GM likely "wishes they had a 'do-over'" on the 2009 sale.
Jonas called Opel the "single biggest threat to GM's long-term financial health and sustainability," adding that a separation was in the best interest of not only GM but of Opel as well. He compared it to when Daimler AG sold Chrysler in 2007 to Cerberus to escape what was a financial drag for the German carmaker.
"We'd rather see GM with a 3 percent share in Europe," Jonas said, referring to the company's Chevrolet business in the region, "generating a profit than an 8 percent market share in Europe generating massive losses." He forecast Opel to burn a further $12.3 billion of cash from 2012 to 2021.