RUESSELSHEIM, Germany (Reuters) - General Motors(GM.N) pledged to invest 4 billion euros in loss-making Opel by the end of 2016 to support new model launches, renewing a commitment to its ailing European brand.
GM is aiming for a slight improvement in its European business this year, but not anywhere near enough to avoid a 14th straight annual loss as car sales on the continent plunge to their lowest in almost two decades.
The company’s adjusted operating loss in Europe widened to $1.8 billion last year from $700 million in 2011 and it only expects to achieve profitability in the middle of the decade.
“Overall, GM’s engine is sputtering in Europe. This new product overhaul that they’re doing at Opel is being financed from U.S. profits and would not be possible otherwise,” said Edward Jones analyst Christian Mayes.
GM Chief Executive Dan Akerson said the investment would help it increase market share by funding the development and launch of 23 new models and 13 new engines through 2016.
“We are more convinced than ever that GM must have a strong and successful presence throughout Europe and especially here in Germany.” Akerson told reporters at Opel’s Ruesselsheim headquarters after a meeting of GM’s board of directors.
Speculation has persisted that GM might shift Opel’s assets off its balance sheet into a joint venture with struggling French ally PSA Peugeot Citroen (PEUP.PA), or even sell Opel, which also includes British sister brand Vauxhall, entirely.
“Opel is key to our success and enjoys the full support of its parent company,” Akerson added.
When asked specifically whether the 4 billion euro investment pledge guaranteed that Opel would remain a fully-owned unit of GM through 2016, the GM CEO declined to comment.
But Opel Chairman Steve Girsky told Reuters that speculation of a disposal was unfounded: “That’s an old story.”
GM’s board met in Ruesselsheim to examine progress in the brand’s turnaround plan dubbed “DRIVE!2022” and the difficulties faced by Europe’s auto industry.
Akerson will stay in Germany tomorrow to meet Chancellor Angela Merkel, whose centre-right government is seeking a fresh mandate in general elections scheduled for September.
Part of the problem is Opel’s underutilised car plants. Carmakers have high fixed costs in the form of manufacturing machinery that depreciates over time, so profits largely depend on how efficient the plants are at churning out cars.
Opel’s factories are running at around 70 percent capacity on the basis of three shifts of workers assembling cars per day, Opel production chief Peter Thom told Reuters.
This is lower than the 80-85 percent generally seen in the industry as necessary to break even, but Edward Jones analyst Mayes said the news helped to boost GM’s stock on Wednesday since it was higher than many expected.
Shares in GM gained 2.3 percent as of 1652 GMT, outperforming more moderate gains in the broader S&P 500 index.
New product launches should further improve Opel’s bottom line. After the debut of the Adam city car and the Mokka subcompact sport utility vehicle (SUV), it is entering a third market segment with the roll-out of its all-new Cascada cabriolet on April 20.
Just as crucially, GM is also addressing criticism of Opel’s relatively low fuel efficiency by renewing 80 percent of the brand’s engine portfolio by 2016, including an all-new family of 1.6 litre diesels developed entirely in-house.
Although GM is struggling to reform its Opel business, its problems are anything but unique.
Fiat FIA.MI Chief Executive Sergio Marchionne said on Tuesday the company’s losses in Europe could be worse than expected this year. According to industry estimates, western Europe’s car market shrank by roughly 10 percent in the first quarter.
On Wednesday, German premium carmaker Daimler(DAIGn.DE) said it may cut its 2013 profit forecast this month given the alarming rate of decline of Europe’s car market.
In 2012, volumes hit lows not seen in 17 years.
Additional reporting by Ben Klayman in Detroit; Editing by Helen Massy-Beresford