Why GM Is Breaking Up with Europe

SMITH BRAIN TRUST — It was never an easy marriage. Now General Motors and its European operations are officially calling it quits, laying bare their incompatibilities and the difficulties of bridging the cultural divide.

GM announced this week it would sell its Opel and Vauxhall brands to Peugeot maker PSA Group in a $2.33 billion deal that will make PSA Group the second-largest automaker in Europe, behind only Volkswagen. The France-based PSA Group will also buy Opel's financing arm as part of the deal.

The German Opel and British Vauxhall have generated losses for GM since 1999. Part of the problem was an incompatibility between the small, economical models of the European brands and the rest of GM, experts say. "Most other car companies, to some degree, will have synergies between their production lines," says Oliver Schlake, clinical professor of management and organization at the University of Maryland's Robert H. Smith School of Business.

For example, Volkswagen builds many of its models on the same chassis, essentially reusing the drivetrain and framework, and streamlining production costs across models and even across brands within VW. Peugeot, whose entry-level models are similar to Opel's, may find similar synergies, Schlake says. "Peugeot is really buying away its major competitor," he says.

GM found too few synergies with Opel or Vauxhall and the U.S. market, says Schlake, who formerly worked as a strategy consultant for GM, specializing in the European car market. Much of the problem, he says, was the difficulty in bridging the gulf between the European consumer's preferences in cars, and U.S. preferences.

Consider the entry-level Opel, he says. It's small, economical and has minimal creature comforts. It delivers relatively low horsepower, an attribute in countries where the ownership tax is assessed on a sliding scale, linked to horsepower. And that Opel car probably runs on diesel. Fuel is more expensive across the board in Europe than in the United States, but diesel is the less-expensive option. "All of the development that would go into that diesel model, it wouldn't bear any fruit in the U.S.," Schlake says.

Without Opel and Vauxhall, GM will be less global but more profitable, the Detroit-based automaker says. GM says it will take a mostly noncash special charge of between $4 billion and $4.5 billion on the deal, much of it to cover company pensions.

Executives blamed the "changing geopolitical landscape" as part of the motivation for exiting the European market. GM's European operations had narrowed its losses in recent years, and the auto maker says it would have made a profit in Europe last year, if not for political and economic uncertainty brought about by Brexit, the United Kingdom's decision to leave the European Union. Britain's exit from the EU will complicate the movement of people and goods from Britain, where Vauxhall is based, and the rest of Europe.

Opel and Vauxhall sold nearly 1.2 million vehicles in 2016, driving about $19 billion in revenue for GM. "Having profit margin is one thing, but giving up on a continent, that's a big thing," Schlake says.

Overall, the EU bought 14.6 million new cars last year, a 6.8 percent increase over the year prior, making it the third-biggest car market after China and the United States. Many analysts have been forecasting dimmer prospects for sales growth in Europe. It's easy to overstate the differences between Europeans and U.S. consumers. But where automobiles are concerned, those differences are vast and deeply entrenched.

"GM, in my opinion, they are smart people, but they were removed from what car ownership means in Europe," Schlake says. "Opel is a very traditional German car brand, founded by Adam Opel at the turn of the 20th century, and while Opel management is still local, it is the corporate parent in Detroit that ultimately dictates resources and direction."

The most successful GM brands and models — trucks, SUVs — were never going to be a good sell in Europe. Now outside the European car market, GM will have to find new areas for growth.

"If the money is not being made easily, you have to ask, strategically, 'Can we put this effort into something that will make us more money more easily?'" Schlake says. For GM, that likely means focusing on grabbing more share of the North and South American markets, and a keener focus on Asia, particularly China and South Korea.

In Asia, which also favors smaller vehicles, GM will be back to competing against Opel and Peugeot again, Schlake says.