Is GM Abandoning Its Future for Short-Term Profits? – Motley Fool
In the past few years, General Motors (NYSE:GM) has rapidly retreated from a host of big and/or high-growth markets around the world. The company has made a clear choice to focus its efforts on countries and regions where it has the most market share and earns the biggest profits, especially the U.S. and China.
To some pundits, this is madness. By abandoning or sharply reducing its presence in places such as Europe, GM is giving up global scale. Meanwhile, by exiting high-potential markets such as India, it is sacrificing future growth.
However, General Motors didn’t have a realistic path to meaningful profits in any of the countries it has exited. Furthermore, there’s no factual basis for the conventional wisdom that automakers need to be big players in every market around the globe to be successful.
GM’s parade of retrenchment
Since the beginning of 2015, GM has been aggressively exiting markets and market segments where it doesn’t think it can earn a reasonable return on invested capital. During that year, the company virtually abandoned three major emerging markets: Russia, Indonesia, and Thailand. In all three markets, it now focuses on selling imported SUVs and other low-volume “prestige” vehicles.
This year, General Motors has accelerated its retreat from underperforming markets. In February, it agreed to sell its stake in GM East Africa to Isuzu. In March, it reached an agreement to sell Opel, its European operations, to Peugeot parent PSA Group. In April, it exited the moribund Venezuelan market after the government seized its factory there. Lastly, GM announced earlier this month that it will stop selling vehicles in India and sell its operations in South Africa by year’s end.
These downsizing moves have come one after another. However, management has signaled that General Motors is now in the right markets for the long haul.
What is GM losing?
Including the actions announced this year, GM has pulled out of countries representing more than a third of the world’s population since 2015. However, while these markets may have “potential” in an abstract sense, they have been stubbornly unprofitable despite GM’s patience and years of investments.
Europe is the most blatant example. General Motors has lost money there in every year since 2000. Europe also serves as a lesson: No matter how good a turnaround plan may seem to be on paper, it’s hard to reach profitability in regions where you’re far behind the leaders in terms of market share.
Indeed, GM had a market share of about 6% in Europe recently. GM’s share is even lower in many of the countries it’s exiting. Most notably, it has a dismal 1% share of the Indian market. Thus, GM would have been hard-pressed to capitalize on India’s growth even if it had stayed.
Another lesson from Europe is that having global reach brings limited benefits. Because of differing regulatory standards, there is relatively little overlap between GM’s European vehicle portfolio and its North American lineup.
The General’s remaining markets are its main ones
Last year, General Motors sold just shy of 10 million vehicles worldwide, of which 7.5 million were in its two largest regions: North America and China. These are also GM’s most profitable regions by far. Both sport operating margin roughly in line with the company’s long-term target range of 9%-10%.
General Motors also remains committed to South America, where it sold nearly 600,000 vehicles last year. It’s lost money there for the past several years because of economic weakness and geopolitical upheaval, but it continues to have a market share of more than 15% in the region. GM is in the midst of developing a new emerging-markets vehicle platform that will help reduce costs and improve profitability in South America.
Other key markets where GM will stay the course include South Korea and Australia, which together accounted for about 275,000 vehicle sales last year. Indeed, even after it completes all of its downsizings, GM will still have annual volume of more than 8.5 million units.
While GM will be somewhat smaller going forward, it will have much higher margin. Rather than investing in perennially unprofitable markets such as Europe, Africa, India, and Southeast Asia, it will be able to ramp up spending on electric vehicles, car-sharing, and autonomous-driving projects. (General Motors also plans to return plenty of cash to shareholders.)
GM’s willingness to exit major markets under CEO Mary Barra shows that the company is finally being realistic about where it has a competitive advantage — and where it is an also-ran. This courageous change of mindset is likely to pay off in the short term and the long term.