Will GM Abandon Europe?

To save its U.S. market, GM may have to leave Europe. Saab is now in reorganization, and Opel could be up for sale

The dismantling of General Motors' (GM) huge stable of global brands has begun. The company's Swedish Saab unit went into reorganization Friday, Feb. 20, preparing it for a spin-out from GM.

At the same time, GM is exploring options for its German Opel unit, including a possible sale. When GM unveiled its restructuring plan to the U.S. Treasury Dept. on Feb. 17, company President and Chief Operating Officer Frederick A. "Fritz" Henderson said that everything is on the table with regards to Opel. Opel is Europe's fifth largest brand.

A "Second-Tier Player"?

The net result could eventually be a much smaller GM. That's true not only in the U.S., where GM is shrinking its archipelago of factories, but also globally, as the automaker pares away business units whose contribution has been minimal at best. Take away Opel, Saab, and some of the U.S. brands that GM is phasing out and you're looking at a GM that sells about 6.5 million cars and trucks a year, compared with 9.4 million in 2007 and 8.4 million last year.

If GM off-loaded Opel—a big if—what would be left is a GM that retains its U.S. business while focusing its remaining global brands—namely Chevrolet, Buick, and Cadillac—on emerging markets like China, the rest of Asia, India, Russia, and South America. "Without Europe, GM almost becomes a second-tier player," says Joe Phillippi, principal of AutoTrends in Short Hills, N.J.

Investors kept backing away from GM. The stock finished Friday down 11.5%, at 1.77 a share, giving the company a value of about $1 billion.

Saab has already been given the ejector seat. GM has spun the company out and is negotiating with the Swedish government for loans to capitalize it. Meanwhile, the Swedish courts are trying to find investors to take it over and other creditors to give Saab more capital. If no new owner or investor group is found in three months, the company could be liquidated.

That will hardly be a big loss for GM. Saab sold just 93,000 cars around the globe last year. The spin-out will mark the end of nearly 20 years of ownership by GM. The auto giant bought 50% of Saab in 1990 and the rest in 2000. Under GM, Saab rarely made money and GM could never really give it the kind of product and marketing muscle it needed to take it beyond a small, niche brand.

Opel: No Buyers in Sight

Selling off Opel would be a more wrenching divorce. Its headquarters in Russelsheim, Germany, does the basic engineering work for GM's global compact cars and midsize family sedans. GM would have to relocate the basic engineering of those kinds of models either back to Detroit or to its Korean GM-Daewoo operation. Plus, GM would lose the global scale for those models. Opel and its British Vauxhall brand sold 1.5 million vehicles globally last year, mostly passenger cars.

GM hasn't lined up any possible buyers for Opel. Armin Schild, regional manager for the German metalworkers union IG Metall, who sits on the Opel supervisory board, said a sale to another carmaker or an equity stake owned by the German government are possibilities. "I wouldn't exclude any automakers," Schild said in an interview. "It could also be companies in [Central] Europe or Germany that could use the dealers and market positioning. We need such a business model."

To be sure, GM may have the Opel business for a long time. Even though the company is open to a sale, its options are narrow. One investment banker who works on auto industry mergers says that there are no buyers for Opel right now, but down the line it could happen.

Other Options

German labor would welcome a deal if it helped guarantee job security. Plus, the German workers and managers have long thought that Opel was too tightly managed from Detroit. A divestiture of some kind "would give us independence from a company that was too centralized," says Schild.

Opel's options could be less dramatic. GM is also looking at partnerships with other automakers and borrowing money from European governments. In its plan for Treasury, GM said that the company should be profitable in two years, but Opel's biggest problem now is liquidity.

In any case, GM is exploring all options to raise cash and simplify its business. If GM can survive the downturn, it could emerge as a leaner, more focused, and profitable company. But a lot has to go right between now and then. And GM will certainly be smaller.

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