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Barra's move to sell Opel signals a deeper change at GM

By Joseph White

(Reuters) - General Motors Co <GM.N> Chief Executive Mary Barra’s decision to put the company’s European operations on the block marks a turning point for the automaker that once prided itself on being the No. 1 vehicle maker in the world.

If Barra succeeds in concluding a deal with French automaker Peugeot SA <PEUP.PA> – and people familiar with the discussions cautioned on Tuesday that many details are yet to be settled – she will have delivered in an unexpected way on her promise to have GM “disrupt ourselves” rather than wait to be jolted by outside forces.

Selling Opel will mean GM no longer seeks to be a key player in all the major auto markets, but rather is focusing on cash flow and profitability instead of sales volume.

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There are risks to abandoning markets, especially one as large as Western Europe. GM faces a continuing fight to stop losing share in its core markets. At the same time, Barra faces pressure to do even more, with GM's share price - even after Tuesday’s nearly 5 percent gain - below the $41 level it had just before she took over the company.

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

Shedding GM Europe isn’t the technology-driven disruption Barra usually refers to in presentations to investors. But it is a major course change for the company.

GM executives long argued that owning Germany's Opel provided the company with the engineering know-how to develop small and medium sized cars it needed for U.S. and Asian markets. That's one reason why GM in 2009 pulled the plug on a plan to sell its European business to supplier Magna.

But small cars are now losing ground in the United States, China and elsewhere to sport utility vehicles. At the same time, tougher emissions and safety regulations are making European vehicles more expensive, and harder to sell in other markets, analysts said.

What's also changed since 2009 is GM's relations with its Chinese partners, which give it an alternative to developing small cars in Europe. GM is engineering a new low-cost vehicle lineup for Asia and Latin America with its Chinese partner Shanghai Automotive Industry Corp, a sign of how far Chinese automakers have progressed.

Bob Lutz, former GM Vice Chairman and head of product development, said on Tuesday GM could structure a deal with PSA that would still allow for joint product development, and could leave open the possibility of exporting certain Cadillac or Chevrolet models 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,” Lutz emailed, adding he had not been in contact with anyone at GM.

Analysts cautioned on Tuesday the price of the deal could be low. The final price will depend on how GM and PSA would share – or not share – intellectual property, pension liabilities, debts and restructuring costs, analysts said.

GM'S CULTURAL SHIFT

Even after its traumatic 2009 bankruptcy, GM fought to remain a significant player in all the major world auto markets, and to be competitive with rivals Toyota Motor Corp and Volkswagen AG for the title of world’s largest automaker by vehicle sales.

Selling Opel would mean GM is setting aside those traditional measures of success to be a smaller company focused on the United States truck market, China and some - but not all - the large, growth markets in Latin America and Asia. Under Barra’s leadership, GM has exited Russia and Indonesia after concluding it couldn’t earn acceptable returns on investment.

Barra has made return on invested capital, cash flow available for share buybacks and profitability the key measures of GM’s success, not sales volume.

GM Europe fails those tests, despite more than $1 billion spent on restructuring efforts since 2012.

“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 Barclays analyst Brian Johnson in a note Tuesday.

GM declined to make Barra or other top executives available for comment Tuesday

(Reporting by Joe White; Editing by Phil Berlowitz)

 
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