How General Motors Will Finally Make Money in Europe

By Markets Fool.com

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The Opel Mokka SUV, a twin to the U.S.-market Buick Encore, has been a nice hit for GM in Europe. GM says that its money-losing European unit will return to profitability in 2016. Source: General Motors.

General Motors says that it expects its pre-tax earnings and operating profit margins to increase in 2015 -- even after taking last year's recall costs into account.

Speaking at a conference organized by Deutsche Bank in Detroit, GM CEO Mary Barra and other senior GM executives said that "modest" global industry growth and a series of new products should lead to improved results in each of GM's regional business units.

It's good to hear that GM expects improved profits in a global market that could be at or near a peak, or at least a plateau. But there was even better news for long-term GM investors: The company remains on track to a profit in recession-ravaged Europe.

Still on track to a long-held goal
GM made a lot of news at last week's North American International Auto Show in Detroit, so much so that its upbeat guidance didn't seem to have much effect on the stock.

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Perhaps it was lost in the shuffle. But while it's good to hear that Barra and team expect an improvement over last year's numbers (which were pretty good, aside from the huge costs of GM's record-setting recalls), the news about the company's 2016 targets was more reassuring.

Specifically, Barra said that GM was on track to deliver an operating margin of about 10% in North America in 2016, to "maintain strong margins in China," and -- this is the big one -- to return to profitability in Europe.

Why a recovery in Europe has been such a challenge for GM
GM has lost a fortune in Europe in recent years, roughly $20 billion-with-a-b since 1999. The problems have been familiar to anyone who recalls the challenges faced by the Detroit automakers in the U.S. until recently -- too many factories, employing too many workers, making not enough vehicles to generate good profits (or in many cases, any profits).

In the U.S., those challenges were met by painful restructuring efforts that saw Fordtake on a mountain of debt, GM land in bankruptcy court, and a broke (and briefly shuttered) Chrysler delivered into the hands of Italy's Fiat to form Fiat Chrysler. In the process, a lot of underused factories were closed and other facilities discarded.

GM has high expectations for the new-for-2015 Opel Corsa, a popular subcompact that competes directly with Ford's Fiesta. Source: General Motors.

That downsizing, combined with a recovering market and increased demand for their much-improved products, has kept the Detroit Three's remaining North American factories very busy (and very profitable) in recent years.

Something like that process needs to happen in Europe. But while a few auto factories have closed, there's still more production capacity than the recession-clobbered European markets can support. That meant that GM had to do more than wait out the economic storms.

How GM Europe will get back in the black
GM and Ford, both looking to reverse steep losses in Europe, attacked the problem in similar ways. Each moved to close some facilities (for GM, a factory in Germany) and worked on expanding and improving their product offerings to maximize the profitability of the sales they did get.

Ford's European effort was set back by a big economic slowdown in Russia, where it had made major investments. That led Ford to lower its guidance for Europe last fall, and it made some investors pessimistic about GM Europe's plan to return to profitability by "mid-decade."

But GM's announcement last week that it is still on track to turn a profit in Europe in 2016 shows that its plan is working (and that the impact of Russia on GM will be less dramatic than investors thought).

This slide from a presentation given by GM CFO Chuck Stevens last week neatly summarizes the company's current guidance for its money-losing European unit. Source: General Motors.

Strong new management, led by former VolkswagenChina chief Karl-Thomas Neumann, has helped GM integrate its European brands more completely with its global product-development operations, reducing costs and increasing quality.

And a string of hit products, including the Opel Mokka SUV (a twin to the U.S.-market Buick Encore) and the new-for-2015 Opel Corsa subcompact, have helped draw new customers to the brand. Opel's European market share has now increased for two years in a row.

The upshot: A profit in Europe will be a big deal for GM's bottom line
Through the first nine months of 2014, GM Europe lost $976 million. That's on top of an $844 million loss in 2013, a $1.9 billion loss in 2012, and billions more in losses in the decade-plus prior.

If GM Europe had simply broken even last year, it would have improved GM's pre-tax bottom line for the year by almost 10%. Getting Europe to profitability next year -- and keeping it profitable in the years to come -- will be a big step toward Barra's long-term goal of a GM that generates profits in line with those of its biggest rivals.

The article How General Motors Will Finally Make Money in Europe originally appeared on Fool.com.

John Rosevear owns shares of Ford and General Motors. The Motley Fool recommends Ford and General Motors. The Motley Fool owns shares of Deutsche Bank AG (USA) and Ford. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.