GM to drop Chevy brand in Europe to focus on Opel

By Edward Taylor and Ben Klayman

FRANKFURT/DETROIT (Reuters) - 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 marques in a drive to return to profit on the continent.

The world's second-biggest carmaker behind Japan's Toyota Motor Corp said on Thursday the decision would result in one-time charges of up to $1 billion, but it should lead to production, marketing and distribution savings.

Relaunched in Europe in 2005, Chevrolets were supposed to compete at the budget end of the market with the likes of South Korea's Hyundai, Volkswagen's Skoda and Renault's Dacia.

 

But the Chevy brand, by far GM's biggest in its home U.S. market, failed to make much headway as its largely South Korean-made Daewoo 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 up-market models. But that put it on collision course with Opel and Vauxhall, and Chevy's sales showed little progress at around 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."

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. But will they instead go off and buy other value brands like Dacia and the Koreans?" he said, referring to particularly strong European demand for Hyundai cars.

GM's decision to drop Chevy in Europe, where the brand has about 1,900 dealers, will also be felt in South Korea, where GM produces most of the Chevrolet vehicles sold in Europe. In 2012, GM exported 186,000 Chevy-branded vehicles to Europe from Korea.

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

GM said it would honor its contracts with its 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 is investing billions more despite calls from Morgan Stanley to sell Opel and its British sister Vauxhall at virtually any cost.

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

GM's investment will result in a new generation of fuel efficient engines, renewing 80 percent of the brand's engine portfolio by 2016.

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

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

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 GM's target to break even financially in Europe by mid-decade has not changed with the announcement.

He called the decision to drop Chevy in Europe "just another tool in the tool kit" to end financial losses in the region. He also cited GM's plans to close its plant in Bochum, Germany, the alliance with French carmaker Peugeot , the decision to shift some vehicle production from South Korea to Spain, and bringing in new executives to lead Opel.

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

Stifel, Nicolaus analyst James Albertine said the streamlined approach in Europe would eliminate cannibalization across the company's brands, help it fine-tune its advertising spending in the region and save money in its supply chain, but GM still had a ways 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 between $700 million and $1 billion, primarily to be taken in the fourth quarter of 2013 but continuing in the first half of 2014.

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

In addition, GM said it expects to incur restructuring costs that will not be treated as special charges, but will have an impact on GM's international operations earnings in 2014.

Dropping the Chevy brand in Europe was not influenced by a partnership GM has with PSA Peugeot, Girsky said. "This is done independent of the PSA relationship."

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

GM's shares were 13 cents higher at $38.82 in late morning New York Stock Exchange Trading.

(Additional reporting by Arno Schuetze in Franfurt and Hyunjoo Jin in Korea; Editing by David Holmes, Mark Potter and Maureen Bavdek)