GM General Motors Company

By Mike Colias 

In the seven years since General Motors Co. last considered selling its European business, a major factor has changed: the world has soured on passenger cars.

GM is in talks to potentially sell its Opel AG division to Peugeot. The German unit, acquired by the Detroit auto giant 88 years ago, has served as a primary development hub for the sedans and compact cars needed to satisfy demand in most markets and meet emissions requirements.

Opel's role has diminished as low fuel prices turn consumer demand away from cars toward the sport utilities or crossover wagons American engineers are known for. Even in Europe, where cars like Volkswagen AG's Golf or Ford Motor Co.'s Mondeo have long been top sellers, auto makers are flooding the market with SUVs to accommodate shifting tastes.

Certain passenger-car models, including redesigned Opel Astra and Chevrolet Malibu, have been selling relatively well. But GM executives said last month that selling more sedans actually hurts overall margins in key regions, and the auto maker is cutting production of certain models.

The Opel deal discussions "could indicate GM is further stepping back" from passenger cars, a market "plagued by declining demand and overcapacity," RBC Capital Markets analyst Joseph Spak wrote in a research note shortly after talks were confirmed.

Opel has lost money since the late 1990s and having a large sales operation in Europe forces U.S. auto makers to meet a separate set of emissions rules than need to be met in their home market. GM came close to selling the unit in 2009 to Canadian auto supplier Magna International Inc., but backed off. It also attempted to launch Chevrolet in Europe, but that effort fizzled.

Keeping the car-engineering expertise and certain diesel-engine development in house was a top reason for pulling out of the Magna deal. About $8 billion in losses have been generated by GM Europe since then, showing how costly that decision was.

In 2009 -- fresh off its U.S. government bailout and bankruptcy -- GM had pressing need to improve a car portfolio that had long lagged behind Toyota Motor Corp., Honda Motor Co. and other import brands. It was the gas-price spike in 2008 that froze sales of the Detroit Three's gas-guzzling SUVs and pickup trucks, pushing the auto makers toward insolvency and highlighting the need for better, fuel-efficient cars offerings.

That equation has been turned on its head in recent years amid lower amid lower fuel prices, forcing GM and other auto makers to cut production and offer profit-sapping discounts. The shrinking importance of smaller cars and diesel engines in other parts of the world means GM's scale in Europe "has become really difficult to leverage" outside of the region, said one person familiar with GM's operations.

The result is that better car lines haven't provided the financial lift GM envisioned years ago.

For example, last year the auto maker rolled new versions of its Chevrolet Cruze compact car and Malibu midsize sedan to critical acclaim. Car & Driver magazine, for instance, rated the Malibu higher than Toyota's Camry and Honda Accord, two cars that dominate the segment.

Malibu and Cruze sales rose -- but that actually hurt GM's overall profit margins in North America last year compared with the prior year, when highly profitable trucks and SUVs made up a higher percentage of sales.

GM isn't giving up on small cars, but it can rely on its small-car development team at GM's South Korean engineering center, acquired from Daewoo Motor in the early 2000s. The Chevy Bolt electric vehicle -- released in December and touted by GM as a symbol of its engineering prowess -- was jointly developed in South Korea and suburban Detroit.

GM's growing China operations also are handling more car development. In 2015, the company began spending $5 billion to co-develop a global small-car platform with SAIC Motor Corp., its largest joint-venture partner in China. That project will underpin more than a dozen models to be sold in Brazil, Mexico, China and other emerging markets starting in 2019.

Analysts say GM would need an infusion of new SUVs, commercial vans and other new products to swing to a profit in Europe and boost its market share beyond 6%, which is about one-third of what GM has in the U.S. That would require an infusion of capital at a time when the company is investing more heavily in electric vehicles, self-driving cars and experiments in alternative forms of mobility.

GM also faces uncertainty around the future of the EU and the prospect of tightening environmental regulations in the wake of Volkswagen's diesel-emissions scandal, which experts say could ultimately force a costly shift toward EVs in Europe.

Write to Mike Colias at mike.colias@wsj.com

(END) Dow Jones Newswires

February 15, 2017 11:17 ET (16:17 GMT)

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