3 reasons why GM is getting out of the European car business

GM Opel PSAScreenshot via PSAThe leadership of GM, Opel/Vauxhall, and the PSA Group.

General Motors’ long-held stake in the European car business came to and end on Monday when the automaker announced that it would sell its Opel/Vauxhall division to France’s PSA Group for $US2.3 billion.

GM came close to selling Opel in the aftermath of the Detroit giant’s 2009 bankruptcy, but the deal never made it to the finish line. Since then, GM has struggled to make Opel profitable.

The deal was a bold move by GM CEO Mary Barra, who is determined to cut losses and cut them quickly. Already, GM had pulled out of the Russian market, ended car production in Australia, and taken Chevrolet out of Europe.

There were three key factors that drove what Barra called a “difficult” decision to end GM’s commitment to Opel/Vauxhall after nearly a century:

1. Return on capital

Excessive debt and an unwieldy corporate structure, with an excessive number of auto brands to support, were what dragged GM into bailouts and bankruptcy in 2009. After the automaker emerged from Chapter 11 and returned to the public markets via a 2010 IPO, it was several years before the company and its board settled in Mary Barra as a long-term CEO.

The first woman to lead a major car company, Barra is a GM veteran who had no intention of repeating the mistakes of the past. Once she navigated the company clear of is massive ignition-switch recall, her focus turned to the balance sheet. Rapidly, underperforming areas of the business came under scrutiny as Barra and her team — President Dan Ammann, VP and resident car guy Mark Reuss, and CFO Chuck Stevens — sought to make sure that every invested dollar was bringing back more than that in return.

Both the US and China performed. Latin America became mired in an extended recession, but GM anticipated growth there. In Europe, meanwhile, Opel struggled to compete in the mass-market. Barra and the GM board gave it several years, but stresses on other aspects of the business eventually led to the PSA deal. Now GM’s plan is to use the $US2.3 sale price to accelerate the carmaker’s share buyback plan.

Mary barraBill Pugliano/GettyGM CEO Mary Barra.

On a call with reporters following the announcement of the deal in Paris, GM CFO Chuck Stevens explained to Business Insider that the carmaker will effectively free up $US2 billion and be able to shift from keeping a cash balance of $US20 billion on hand to one of $US18 billion. With $US8 billion remaining to buy back, from a total of $US14 billion currently authorised, Stevens said that GM would be able to buy back $US5 billion in 2017, versus a previously expected $US3 billion.

The move could please Wall Street, as GM’s stock has only recently begun to rally, up 20% over the past six months after underperforming the S&P 500 since 2010.

2. Brexit

GM had planned to get Opel to break even by 2016, but the 2016 Brexit vote in Britain undermined that strategy.

According to Bloomberg, GM has lost $US300 million since the Brexit vote and was facing increased costs to import Vauxhall components to the UK from continental Europe. On a conference call with reporters after the deal was announced, Barra told Business Insider that Brexit wasn’t a determining factor in the decision to sell Opel/Vauxhall — she called it “speedbump” in the break-even plan. Nonetheless, the sale does eliminate much of GM’s future Brexit exposure and enables GM to avoid the future regulatory hurdles it would face in Europe.

3. Shifting consumer preferences in the US and China

In Paris on Monday, Ammann said that changes in the European market have meant that only 20% of vehicles sold there by Opel/Vauxhall share engineering platforms with the vehicles GM sells elsewhere in the world.

Europe is still a land of small vehicles, while in the US pickup trucks and SUVs are driving a continuing sales boom. That same pattern is beginning to emerge in China, a strong market for GM that is already larger in total than the US (20 million in annual sales versus 17 million in the US).

Additionally, GM wants to be able to invest in the future of mobility, through its partnership with Lyft and also through the development of self-driving vehicles and shared transportation with its Maven division.

Keeping up in Europe was going to demand a renewed commitment from GM and the need to increase its scale of operations. Ultimately, the company decided to invest in the US, China, and the future instead, leaving PSA to manage the challenges of mass-market competition in Europe.

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