Cash flow rather than volume could be GM’s next mantra

General Motor’s decision to sell its Opel brand signifies its CEO’s vision to focus on the company’s Return on Investment rather than sales volume as a measure of GM’s success.

For General Motors, putting its European operations up for sale marks a significant milestone for the company which once prided itself to be the world’s biggest automobile manufacturer.

If GM’s CEO, Mary Barra has her way in sealing a deal with Peugeot, a French auto manufacturer, she would have delivered on her promise to change GM from within, as in “disrupt ourselves”, rather than wait to be jolted by outside market forces.

With GM deciding to put the Opel brand on the blocks, the move could mean that GM no longer seeks to be a player in all major auto segments. Instead it prefers on focusing on steadying its cash flow and profitability rather than spread itself thin across the auto segment and generate sales through volume.

Surely Barra is aware of the risks of abandoning markets, especially one as large as Western Europe. Faced on the one hand of depleting loss of share value in its core markets and pressure to do more with GM’s share price, the company has chosen this strategic option which has many ramifications.

“We believe (GM) investors are willing to accept more radical measures to optimize capital allocation,” wrote Adam Jonas, an analyst with Morgan Stanley wrote in a note to clients.

One of the reasons GM pulled the plug on its plan to sell its European business to Magna, an auto parts supplier is because owning Germany’s Opel brand allowed GM the technological and engineering know-how of developing small to medium sized cars needed for the U.S. and Asian markets.

As per analysts, for Barra the view may have changed since small cars have steadily lost market share in China, U.S. and elsewhere with Sport Utility vehicles taking their place. Further, higher emission standards and safety regulations have made the business of producing vehicles in Europe more expensive.

Secondly, GM’s relationship with China has undergone a paradigm shift. Instead of China just being a market for selling its offerings, GM has managed to capitalize on its relationship and has partnered with Shanghai Automotive Industry Corp to engineer a new low-cost vehicle lineup Latin America and Asia.

Bob Lutz, former GM Vice Chairman and head of product development, shed further light on this partnership when he stated that the structure of the deal with PSA allows for joint product development and leaves the option open for possible exports to Europe.

“The proceeds from the sale (which would do wonders for the stock price) would permit acceleration of the business in North America and China; a far better use of resources,” said Lutz in an email while clarifying that he has not been in contact with anyone at GM.

Analysts have flagged the deal saying Opel’s final price will depend on how GM and PSA would share debts, intellectual property, restructuring costs and pension liabilities.

“The decision to exit is Business Strategy 101 – move resources away from unattractive markets with weak competitive positions, toward attractive markets with strong positions – especially areas that are likely more crucial for GM’s long term success,” wrote Brian Johnson, an analyst at Barclays in a note.

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Categories: Creativity, Entrepreneurship, HR & Organization, Strategy

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