GM Abandons Europe with Opel Sale

 

GM is getting ready to leave the European market with the announcement of the sale of its Opel brand to PSA Group, the automaker behind Peugeot. The deal is valued at $2.3 billion, and will turn PSA Group into the second biggest car brand in Europe. The restructuring is expected to turn around Opel’s 16 year string of losses, and will allow Peugeot access to new markets. Meanwhile, GM can turn from the hemorrhaging brand and redirect its efforts towards new markets.

GM sells European brand Opel to PSA Group.

GM Sells Opel after a Decades-Long Relationship

German-based Opel has been a part of the GM family since 1929, although the American carmaker did not take over full ownership until 1931. Opel, its sister company, the British brand Vauxhall, have consistently underperformed and were put up for sale in 2009 when GM went through bankruptcy. However, the prospective buyers backed out when an attempted savings plan was unable to meet its goals.

Opel Sale Puts PSA Group into Second Place in Europe

PSA Group, which also manufactures the Citroen brand as well as Peugeot, is banking on the added sales from Opel to move the company past its fellow French rival Renault. The joint brands will currently have 16 percent of the market, right behind Volkswagen’s 24 percent. PSA expects a savings of nearly $2 billion dollars per year thanks to streamlining. This allows Opel to achieve an annual profit of 6 percent within ten years.

Opel Technology Should Help PSA Gain Market Share

In addition to administrative benefits, PSA expects that the addition of a German brand will help win over potential customers. In a crowded European market, image is everything, and some drivers refuse to buy French cars, as they are often associated with style over power. PSA will also gain access to Opel’s cutting edge technology, including designs for electric cars which fit in with new environmental regulations recently passed in many of Europe’s largest cities. Opel’s compact cars are also attractive to the car sharing services which have helped reduce the need for car ownership.

Workers Worry over the Impact of the Opel Sale

Of course, the sale will bring negative consequences as well. PSA’s management plans to streamline duplicative services and will decide on which plants to keep open. This places nearly 6,000 jobs in jeopardy. The plants in Germany, France, and the U.K. will lobby to keep business as locally centered possible. The obvious loser here is likely to be Vauxhall, which has 4,500 workers based near London and Liverpool. The U.K. is making plans to leave the EU by the end of 2019. British cars will face different treatment under renegotiated treaties.

GM warned earlier that the value of their British holdings could fall by $400 million. This is due just to the fall in the pound expected to accompany the Brexit decision. PSA Group is promising to honor all current contracts, which will run through 2021. However, Vauxhall employees must be getting nervous about their future.

GM Seeks a New Direction After Opel Sale

GM’s decision to sell their European interests signals a change in direction from volume to profitability. The company had banked on importing the European types of cars over to the U.S. market. So far this has not worked, as customers have remained loyal to the bigger SUVs. This is especially true given the low gas prices which were in place since January of 2016. GM has also developed new partnerships in China, allowing the car maker to abandon the crowded European arena to try to capture the eyes of the growing Asian demographic.

How will the Opel Sale Affect Trading

GM is making a good business decision. They are moving away from a market where they have sustained consistent losses despite spending over $1 billion dollars on rebranding during the past five years. The stock price should increase, as investors wait for GM to complete share buybacks thanks to the newly available funds. The London FTSE should also benefit, as PSA Group will see a will get a boost, at least on paper. The possible loss of the U.K. manufacturing plants will turn investors bearish on the pound. On the other hand, the euro should rise due to the increased business for the French and German sides of the new entity.