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Can This Company Successfully Negotiate Rocky European Roads?

Monday - 4/15/2013, 4:07pm  ET

Tough economic conditions are getting the better of everyone in the European auto market. In 2012, car sales hit a 17-year low and the situation is likely to get worse in 2013. Even giants like General Motors are left with no choice but to bow down to the pressure. In its quest for breaking even by 2015 (read survive in Europe), the company is taking many hard decisions. The latest among them is a wage freeze in Spain.

The situation in Spain

The factory in question is an auto-assembly plant in northern Spain at Figueruelas. General Motors manufactures the Opel Corsa and Opel Meriva models here. This decision is part of a five year collective bargaining agreement, and around 6,000 employees would be affected by the move. According to company sources, the decision was voted upon and 67% of the total employee strength had participated in the poll. Around 65% employees participating in the poll agreed to the wage freeze.

I think the move is in the right direction. A wage freeze means the company is in the grips of a tight situation for sure, but it also means that the company is reasonably confident of turning things around. I think that is the message which General Motors is trying to convey. The decision is helped by the fact that the Spanish government has introduced labor reforms which allow companies more flexibility in restructuring operations.

However, the next two years will remain challenging, as Spain, like most European countries, is in recession. In 2012, registrations for new cars dropped 37%. March car sales were down 14% year-over-year.

The bigger picture

General Motors has already lost around $18 billion in Europe since 1999. The sheer magnitude of the loss is enough to challenge the viability of the company’s operations in the continent. However, the U.S. auto giant is repeatedly pledging allegiance to its cause of breaking even in Europe by 2015.

It has chalked a turnaround plan named ‘Drive 2022’ for its European loss making subsidiary Opel. The company has not yet indicated any further layoffs or plant closures, although it remains on track to close the Bochum plan by end of 2014.

What would be most critical for the company is to be able to hold on to its market share. It is heartening to see that General Motors intends to do just that by coming out with new models. The company will introduce 23 new models and 13 new engines by 2016. It will also work on a small car in collaboration with PSA Peugeot Citroen. CEO Dan Akerson has announced that GM will invest $5.2 million in Opel through 2016, part of which would come from the cost savings from ‘Drive 2022’.

As the European auto industry continues to slump, analysts expect 2013 auto sales to fall to around 11.4 million units, a far cry from the 15 million plus levels of 1999. It is time to take a look at the two automakers – Volkswagen (NASDAQOTH: VLKAY) and Ford – who lead the European auto market.

The rock solid Volkswagen is struggling

Europe’s largest automaker, Volkswagen, is also not spared from the brunt of the economic crisis. The flagship brand passenger cars saw first quarter deliveries in Europe come down 10.3% to 396,300. This was primarily due to weakness in Western Europe, where deliveries were down 10.2%. On its home turf of Germany, deliveries fell a whopping 15.1%. There was some marginal growth in Central and Eastern Europe.

The European losses are weighing so much on the company that it has said that it is not expecting any growth in its overall operating profits in 2013.

However, a strong positive for the company is that in 2012 it had made some market share gains. According to Acea industry association, Volkswagen has increased its market share by 2 percentage points to 25%. This would be a big boon for the company when market trends reverse.

Ford in deep dilemma

Ford is expecting to lose $2 billion in Europe this year. CEO Alan Mullaly, who is famous for turning around the company’s U.S. operations, is at work to devise a strategy for Europe. The company already has a plan through which, like General Motors, it is also trying to break-even by mid-decade. However, things so far have not quite turned out to be the way they were expected.

Last year ,Ford decided to close three plants, two in Britain and one in Belgium, and axed 6,200 jobs. The factory closures involved loss of 5,700 jobs and another 500 positions were eliminated across Europe. The idea was to remove around 18% of capacity which would bring it back to profitability by 2015.

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