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GM ISN'T DONE PRUNING

After pulling the trigger on a sale of its European operations, General Motors signaled that it's willing to cut off more vestigial corners of its business in a decidedly unsentimental drive to improve its profit margins and stock price.

13 Marzo 2017

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After pulling the trigger on a sale of its European operations, General Motors signaled that it's willing to cut off more vestigial corners of its business in a decidedly unsentimental drive to improve its profit margins and stock price.

CEO Mary Barra made clear last week that the Opel deal is not the end of the automaker's effort to pare its portfolio, though other moves under consideration are unlikely to have the sweeping impact of effectively abandoning one of the world's largest and most mature markets.

"There's a little bit more work that we're doing in the international markets," Barra told reporters on a conference call from Paris, after announcing Opel's sale to PSA Group of France in a deal that shrinks GM's global volume by 12 percent. "Our overall philosophy is that every country, every market segment has to earn its cost of capital."

That level of accountability -- after previous regimes tolerated more than $20 billion in losses in Europe since 1999 -- encapsulates how dramatically Barra and her leadership team are shaking up a company that for decades coveted its status as the world's largest automaker.

It also has sparked concern among employees at GM's other far-flung and lower-margin units that they could be next, according to people within the company.

"In Mary Barra's GM, everything is on the table," said Rebecca Lindland, a senior analyst with Kelley Blue Book, "which is a really interesting and appropriate way to look at a business, especially one that's 100-and-some years old -- and something that companies don't do enough of."

GM is targeting two other pieces of its operations for reduced investment: North American cars and "select" international markets, according to a chart accompanying a GM conference call to discuss the Opel sale with analysts last week. Low profit potential and weak franchise strength have earned them a spot on the chopping block, the chart said.

Barra and GM President Dan Ammann declined to elaborate on what those plans might involve or a time frame. By diverting resources from those businesses, GM would free up more capital for more lucrative areas, including pickups and SUVs, autonomous vehicles, Cadillac, China and GM Financial, they said.

GM's money-losing South America business, which is battling severe economic turmoil, also is earmarked for increased investment, because management has categorized its franchise value in that market as high.

GM already has shown investment discipline by ending or limiting operations in Russia, Australia, Indonesia and Thailand, and scaling back its plans for India. Last week's comments suggest that the company might cut further in those countries and others.

"There's a little bit more work that we're doing in the international markets. Our overall philosophy is that every country, every market segment has to earn its cost of capital."

Mary Barra

GM CEO

The North American car business has deteriorated rapidly as consumers gravitate more toward crossovers and SUVs every month. Cars accounted for 38.3 percent of GM's U.S. sales in 2013 but just 25.3 percent in the first two months of this year.

The fallout is evident on dealership lots. GM had four months' worth of cars in inventory as of March 1, roughly double the target most automakers aim for. It had an 81-day supply of light trucks, including fewer than 60 days' worth of its full-size SUVs.

GM could choose to walk away from some troubled segments, such as small cars or full-size sedans. It already has stopped building the compact Buick Verano in North America and announced that it will kill the Australian-built Chevrolet SS, a four-door sports sedan.

Or it could merely spend less on some nameplates, allowing more time to lapse between updates and new generations. GM recently overhauled many of the cars in its lineup -- some of which are based on Opel models that are now leaving the company -- and could easily justify delaying more investments in them.

"We expect those architectures to carry us far into the future," Ammann said.

Chevy has two U.S. cars classified as subcompact or smaller, whereas other brands have just one. Sales of the Spark, the smaller of the two, are surging, but the Sonic has plunged 47 percent so far this year, with many would-be buyers likely opting instead for the Trax, a crossover on the same platform.

On the other end of the car spectrum, the Chevy Impala and Buick LaCrosse are fading fast. Sales are down 31 percent this year for the Impala, despite rave reviews from Consumer Reports and others, and 60 percent for the LaCrosse. On March 1, GM had a 340-day supply of the LaCrosse, which was redesigned just last year.

In addition to funneling resources into higher-margin plays, GM is heavily focused on returning capital to shareholders. The Opel sale, by reducing the company's target cash balance to $18 billion from $20 billion, frees up $2 billion that executives plan to use to accelerate share buybacks.

"That's an immediate opportunity for us to reward shareholders without changing the risk profile of the company or our ability to manage through a downturn," CFO Chuck Stevens said.

John Murphy, an analyst with Bank of America Merrill Lynch, questioned that strategy. He said GM should use the $2 billion to build a larger cash cushion to ensure it can maintain its dividend and product investments during the next downturn, as well as absorb any negative effects of new Trump administration policies.

Murphy also argued that the sale of Opel itself was misguided.

"It appears that GM's recent decision-making has become much more short-term-focused and, in our opinion, could create challenges for the company in the coming years," he wrote in a report to clients last week.

But Lindland, the Kelley Blue Book analyst, praised GM's willingness to cut ties with Opel as well as its newfound emphasis on the bottom line rather than on maximizing global market share at all costs.

"It takes a lot of discipline to shift away from a volume-is-king kind of mentality," she said. "In the end, that's going to make a better GM -- a longer-standing company that's not only more profitable but more relevant."

Fuente: Automotive News

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