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GM to drop Chevy brand in Europe to focus on Opel

The sign at a General Motors Chevrolet dealer is pictured in Golden, Colorado September 4, 2013. REUTERS/Rick Wilking
The sign at a General Motors Chevrolet dealer is pictured in Golden, Colorado September 4, 2013. REUTERS/Rick Wilking

By Edward Taylor and Ben Klayman

FRANKFURT/DETROIT (Reuters) - In a strategic about-face, General Motors will drop the Chevrolet brand in Europe by the end of 2015 after it failed to build significant market share, and the company will focus instead on its Opel and Vauxhall lines to try to return to profitability there.

The world's second-biggest carmaker behind Japan's Toyota Motor Corp <7203.T> said on Thursday that the decision would result in one-time charges of up to $1 billion, but it should lead to production, marketing and distribution savings.

GM shares were up 1.1 percent at $39.13 in afternoon New York Stock Exchange trading.

Reintroduced in Europe in 2005, Chevrolets were to compete at the budget end of the market with the likes of South Korea's Hyundai <005380.KS>, Volkswagen's Skoda and Renault's Dacia while turning GM's mainstream nameplate into a global brand.

But the Chevy brand, by far GM's biggest in its home U.S. market, failed to make much headway in Europe as its largely South Korean-made cars struggled against rivals, some of which are customized for European markets.

Hurt also by a brutal downturn in European demand, Chevrolet responded by slashing prices and introducing more high-end models. But that pitted it against Opel and Vauxhall, and Chevy's sales showed little progress at about 200,000 cars a year.

"Getting rid of Chevy seems to be a little about-face for them," said Scott Schermerhorn, managing principal and chief investment officer with Granite Investment Advisors, whose largest investment position is in GM stock.

"They talked about a global brand, which is led by Chevy," he added. "However, given the state of the market, focusing on the brands that sell well and no longer trying to swim upstream in growing the Chevy brand over there makes sense."

While RBC Capital Markets analyst Joseph Spak described the decision as "flip-flopping" that nonetheless made sense, one investment banker said it was about time GM threw its support completely behind Opel, given the brand's storied heritage.

"It's been a long time and a waste of a lot of money to eventually come to the right decision," said the banker, who requested anonymity because of the sensitivity of the topic.

GM almost sold Opel in 2009 before deciding the 151-year-old brand was too important to its business.

NordLB analyst Frank Schwope said the decision to drop the Chevy brand was great for Opel and likely to ease some of the pressure on a European market suffering from overcapacity.

"GM hopes Chevy customers will now migrate to Opel," he said. But he raised the possibility that they might instead buy other value brands like Dacia and Hyundai.

GM's decision will also be felt in South Korea, where the company produces most of the Chevrolet vehicles sold in Europe. Those exports reached 186,000 in 2012.

"We will phase out exports to Europe by the end of 2015," GM Korea spokesman Park Hae-ho said. "We will discuss with the union how to enhance the operating efficiency of our plants."

GM said it would honor its contracts with its 1,900 Chevy dealers in Europe, but declined to provide other details. More than half of its Chevy dealers in Western and Eastern Europe also sell Opel vehicles.

CONFIDENCE IN OPEL

GM has made a turnaround of its European business a top priority after racking up some $18 billion in losses over the past 12 years, and it is investing billions more despite calls from Morgan Stanley to sell Opel and Vauxhall at virtually any cost.

In April, GM pledged to invest 4 billion euros ($5.2 billion) in money-losing Opel by the end of 2016 to support new model launches, renewing a commitment to its struggling European brand.

By 2016, GM's investment will replace 80 percent of the brand's engine portfolio with new fuel-efficient versions.

"Chevrolet's business results in Europe were unacceptable," GM Vice Chairman Stephen Girsky said in a telephone interview. "It's a 1 percent share company. Meanwhile, we are gaining more and more confidence with Opel and Vauxhall."

Girsky declined to say how much GM would save, but said some of the savings would accrue in Europe and some in other parts of the world. He said the company's target to break even financially in Europe by mid-decade had not changed with the announcement.

Morgan Stanley analyst Adam Jonas said the time line to break-even could be accelerated to late next year.

"We get more bang for our buck spending the money in Opel and redirecting the resources to Chevrolet in other parts of the world," Girsky said, adding that Chevy remains a global brand even if it is a small player in Europe.

Abandoning Chevy in Europe shows that GM, unlike Volkswagen, is unable to manage several brands there, NordLB's Schwope said.

Stifel Nicolaus analyst James Albertine said the streamlined approach in Europe would eliminate cannibalization across the company's brands, help GM fine-tune advertising spending in the region and save money in its supply chain, but it still had a way to go to end losses there.

"Relative to peer Ford , we think GM has further to climb as it relates to EU profitability, but this is clearly a step in the right direction," he said.

As part of its efforts to push Chevy globally, GM signed a $559 million, seven-year sponsorship deal with English soccer champions Manchester United in July 2012, which is due to put the Chevy brand on the club's famous red shirts in 2014-2015.

Girsky said that deal remains unaffected. "We always looked at Man U as a global deal," he said. "They're exposed around the world, and Chevrolet will be exposed around the world."

GM said the decision to drop the Chevy line in Europe would result in net special charges of $700 million to $1 billion, primarily in this quarter but continuing in the first half of 2014.

Of that amount, $300 million will be noncash expenses. The charges also include asset impairments, dealer restructuring and severance-related costs.

GM said it also expected to incur restructuring costs that will not be treated as special charges, but would affect earnings at its international operations in 2014.

Dropping the Chevy brand in Europe was not influenced by a partnership GM has with French carmaker PSA Peugeot, Girsky said.

GM, the No. 1 U.S. carmaker, took a 7 percent stake in Peugeot after the companies announced what was billed as a broad-based alliance in February 2012, promising eventual savings of $1 billion each. But that was followed by unsuccessful talks on a deeper combination and a steady scaling back of plans.

GM also said it was completing expansion plans in Europe for its Cadillac luxury line, which has been more a niche brand in the region. The company said it would expand its distribution network for the brand over the next three years as it prepares to introduce more products.

(Additional reporting by Arno Schuetze in Franfurt and Hyunjoo Jin in Korea; Editing by Mark Potter and Maureen Bavdek and Lisa Von Ahn)

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