Is Russia the answer to General Motors' (NYS: GM) European crisis?
It's looking like it might be part of an answer, at least. GM's European subsidiary Adam Opel AG is bleeding cash, hobbled by structural problems that will take several years to fix. Opel's intractable problems have held back GM's global profit growth and put a damper on its share price.
But a big new investment by GM in St. Petersburg might turn out to be good medicine for Opel -- and for GM shareholders.
To Russia, with high hopes
GM CEO Dan Akerson announced late last week that the company will more than double the production capacity of an existing plant in St. Petersburg that will make the new Opel Astra sedan, along with several Chevrolet models. The investment in the plant, part of a $1 billion package GM plans to spend in Russia over the next five years, will increase the factory's annual production capacity from its current 98,000 vehicles to 230,000 vehicles by 2015.
GM's total Russian production capacity will be 350,000 vehicles per year once this expansion is completed, as production at a separate plant in Tolyatti will be boosted as well. GM's investment will also fund an expansion of local engineering resources as the company works to develop and fine-tune products for the local market.
Opel is just part of GM's Russian picture -- the brand's vehicles are sold alongside those of GM's two "global" brands, Chevy and Cadillac -- but it's a part that the General hopes to expand as it looks for ways to mitigate the German subsidiary's losses, which ran to $747 million in 2011 and have totaled more than $16 billion since 1999. Of the roughly 244,000 vehicles GM sold in Russia last year, about 67,600 were Opels -- a number GM hopes to push up to around 100,000 over the next couple of years.
Making the most of a losing situation
GM announced earlier this month that it plans to close an Opel factory in Bochum, Germany, and that it would delay pay raises due to workers in the interim. But that plant closure won't happen until late 2016 at the earliest, and GM will likely need to close a second Opel plant to bring the unit back to breakeven -- particularly if difficult economic conditions in Europe persist.
These are hard, long-drawn-out moves, as plant closings are politically fraught ordeals in Europe and especially in Germany, where Bochum could be the first auto factory to close since the end of World War II. To help take the pressure off, GM has been looking to expand Opel's presence outside its core market in Western Europe -- in China as well as in Russia.
GM is the biggest automaker in China with annual sales over 2 million, but it sold just 5,000 Opels in the Middle Kingdom last year. Increasing that to 20,000 is a near-term goal -- but unlike in Russia, Chinese Opels face competition from their own stable-mate, Buick, which has a product line that overlaps Opel's.
A good start on a growing market in Russia
Russia's auto market is nowhere near the size of China's -- yet -- but as it did in Russia's southern neighbor, GM has done a good job of getting in on the ground floor. Chevrolet was Russia's best-selling foreign auto brand last year, and is running neck and neck with Renault (OTC: RNSDF) so far in 2012.
But even now, there's plenty of competition. Ford (NYS: F) has also built a strong presence in Russia -- its Focus compact, the same Focus that is sold here in the U.S., is one of Russia's best-selling cars, and Ford and Volkswagen (OTC: VLKAY) both made significant new investments in Russia last year.
Russia is already the second-largest auto market in Europe, behind Germany, and analysts expect moderate growth to continue over the next several years. While it won't reach the nearly 20 million-per-year market of China's, 3 million vehicles a year is likely in the near future, analysts say.
GM is hoping to have a sizable part of that. And if Opels catch on with Russian consumers, it could make things a bit easier on the General -- and on its shareholders.
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The article GM Looks to Russia for Help originally appeared on Fool.com.Fool contributor John Rosevear owns shares of Ford and General Motors. Follow him on Twitter at @jrosevear. The Motley Fool owns shares of Ford. Motley Fool newsletter services have recommended buying shares of Ford and General Motors, as well as creating a synthetic long position in Ford. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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