General Motors Writes Down Venezuela: What It Means

By John Rosevear Markets Fool.com

General Motors (NYSE: GM) said that it would deconsolidate its operations in Venezuela, after the government seized GM's factory in the country last month.

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GM expects the move to result in a one-time charge of about $100 million.

What happened with GM in Venezuela?

GM for years has had a factory near the city of Valencia, about 100 miles east of Venezuela's capital city, Caracas. A judge seized the factory and other GM assets in the country on April 18, one of many moves the government has made to nationalize private assets. The move forced GM to shut down the plant and to terminate all of the factory's employees.

GM sold a small lineup of Chevrolets in Venezuela, including the Orlando. Image source: General Motors.

New-car production in Venezuela has ground to a near halt because of parts shortages. The country is in the midst of a dire economic crisis, and runaway inflation has made its currency nearly worthless. The government has imposed currency controls to try to stem the inflation, but those controls have made it very difficult to do business in the country.

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GM has been the market leader in Venezuela for over 30 years. But its plant in Venezuela, which employed about 2,700 workers, hadn't made a single vehicle since the beginning of 2016. Very few new vehicles are being sold in the country now.

What GM said about the move

GM said in a statement that it had filed an appeal of the seizure order with the Venezuelan Supreme Court. If successful, GM said, the appeal would dismiss the lawsuit that led to the seizure and reverse all related legal actions. GM said that it expects a "prompt decision and favorable outcome" to the appeal, while also noting that it remains willing to negotiate with government and union leaders about reopening the factory.

GM also said that all of the plant's former employees have been paid separation benefits as required under Venezuelan law.

What does GM mean by "deconsolidate"?

It means that, at least for now, GM will no longer include earnings or losses from its Venezuelan operations in its consolidated results for its South America business unit. Ford Motor Companydeconsolidated its Venezuelan business about two years ago, taking a one-time charge of $800 million.

But as with Ford, this move doesn't necessarily mean that GM is pulling out of the country permanently.

What about that $100 million charge?

GM said that it will take a charge of "up to approximately $100 million" against its second-quarter earnings as a result of the move.

That charge shouldn't make a big dent in GM's second-quarter result. GM reported net income of $2.9 billion in the second quarter of 2016, and has guided to a similar result this year.

But the move takes Venezuela out of calculations for GM South America as a whole, which could improve that unit's results somewhat as the year goes on. GM South America has been losing money ($115 million in the first quarter), but sales in the region have been rising recently amid signs that a severe recession in Brazil may be easing.

What's next for GM in Venezuela?

For now, we wait to hear how GM's appeal to the country's Supreme Court is decided. We'll have a better understanding of GM's prospects in the region after that.

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John Rosevear owns shares of Ford and General Motors. The Motley Fool owns shares of and recommends Ford. The Motley Fool has a disclosure policy.