General Motors Company (GM)’s Opportunity: An Update

This is exactly the medicine that GM has needed for a long time. GM has long been at a disadvantage to its principal global rivals when it comes to product quality, making up the difference with good marketing and its vast scale and reach. Improving GM’s products and further reducing its costs, while preserving its traditional strengths, should make GM a formidable global contender over the long term.

That is the basis of the opportunity: The chance to buy a solidly profitable GM at a discount now, knowing that significant further improvements to its business — in the U.S. and overseas — are likely in coming years.

One area you must watch: Europe
Like most automakers doing business in the region, GM has been posting significant losses on its European operations — over $17 billion since 1999, $1.8 billion in 2012 alone. The industry’s problem is structural: Too many auto factories, not enough auto sales. This mismatch has been exacerbated by difficult economic conditions in many European nations, which have put significant downward pressure on new car sales. That in turn has led many automakers to discount heavily, eroding margins.

GM’s European subsidiary, Opel, has been seriously ill for a long time. In many ways, Opel’s problems have resembled those of pre-bankruptcy GM: too much production capacity, too-rich deals with labor unions, and eroding market share.

Reducing fixed costs by closing factories would do much to improve Opel’s prospects, just as capacity reductions were key in turning around GM’s North American operation. But labor-friendly rules in Western European countries such as Germany and France limit GM’s ability to close plants. A solution that involves closing one or more factories could take several years to implement, with GM accruing significant losses in the interim.

While one factory closing has been announced, GM’s management has begun work on a multi-pronged approach to restoring its European operation to health. In the last year, Opel’s senior management has been overhauled (with new Opel CEO Karl-Thomas Neumann set to take charge in March), a cost-saving strategic alliance with French automaker PSA Peugeot Citroen has been created, and a slew of new (and new-to-Europe) models are on the way.

GM’s current guidance, reiterated by Akerson in February 2013, is that GM Europe is now on course to break even on a pre-tax basis by “mid-decade”. That said, the company won’t rule out further (and more drastic) moves, and this is a situation that shareholders should watch very closely.

The article General Motors’ Opportunity: An Update originally appeared on Fool.com.

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