Jobs are under threat. Investment is disappearing, the currency is hitting profits, and the world’s mightiest multi-nationals are turning their back on us. In the wake of the of the announcement that General Motors is selling its Vauxhall unit, manufacturer of the Astra, the Remoaner headlines almost write themselves.
True, the decision to get out of the British market after almost a century is hardly a vote of confidence in this country. But hold on. In fact, it is Europe that GM is quitting, not the UK. Plagued by high costs, mass unemployment, a hostile political class, and a deflationary currency, the auto manufacturer has decided that it simply is not worth the hassle of trying to do business over on this side of the Atlantic. The really worrying thing is this. It may not be the last. In truth, global multi-nationals are losing interest in the euro-zone.
GM has deep roots in Europe. Arguably the template for the global manufacturing conglomerate, under is visionary creator Alfred Sloan, the American company first entered the British market when it bought Vauxhall way back in 1925. Three years later, it acquired a majority stake in Germany’s Opel brand, and massively expanded it, becoming the first manufacturer to make 100,000 cars a year (it lost control, inevitably, during WWII, but took it back soon afterwards). For most of its history, owning a major slice of the European market was a core part of GM’s global strategy. It had to be here.
Over the years it has made some classic cars, and some of its vehicles remain formidable competitors in the market. In this country, the Vauxhall Astra has long remained one of the most popular on the roads – only this week, figures released by the Society for Motor Manufacturers and Traders ranked it as the third best-selling model in February (after the Ford Fiesta and the Volkswagen Golf, in case you were wondering). The Corsa came in at nine. In Germany, the Opel Asta – in effect, the same car – came in at fifth place. But in neither France nor Spain did it make the Top Ten. Opel and Vauxhall were very much German and British brands, which struggled to make any impact worldwide.
Even if it shifted a lot of units, GM couldn’t find a way to make money in Europe. It has lost money consistently on the continent since 1999, and has managed to blow the best part of $20 billion over those years (more than a third of its current market value of only $57 bn). It has gradually scaled back. The Opel brand has been steadily taken out of the Chinese and Russian markets, concentrating only on Europe. A few years ago, it closed its plant in the German city of Bochum, with the loss of more than 3,000 jobs, the first time an auto plant has been closed in that country since the end of WWII. It has re-organised, re-focussed, re-branded and re-launched its lines a dozen times, and none of it has managed to move it into the black. It was probably not great surprise then that it finally gave up, and this week sold the whole unit to France’s Peugeot-Citroen for £1.9 billion, a mere fraction of the billions it has lost over the last decade and a half.
The UK’s decision to leave the EU certainly didn’t help matters. The sharp devaluation of sterling threw GM’s recovery plans off course (although in time, it will make the cars made in Ellesmere Port and Luton a lot more profitable in Europe). The threat of tariffs if there is a ‘hard Brexit’, and Brussels decides to inflict maximum damage on everyone after we leave, presented another round of potential challenges, although if that does happen, none of it will impact Vauxhall’s healthy sales in the UK market.
But, aside from some short-term noise, the sale has nothing to do with Brexit. And it has everything to do with the daunting challenges facing any multinational trying to build a business in a continent that has high taxes, fearsome regulations, and a currency that has locked it into permanent depression.
The first and most important factor is the dire state of the European economy. Car sales across the continent collapsed after the crash of 2008/9. From 16 million vehicles in 2007, the total went all the way down to 12 million in 2013, a two-decade low. Helped by a tidal wave of cheap money from the ECB, sales have clawed their way back since then, but they are still well below their peak.
What else would you expect in a continent where 15.6 million people are unemployed? In the countries where economies have been destroyed by the euro, the outlook has been especially dire. There aren’t many Greeks who can afford a new Astra anymore – and it will hardly come a shock that new vehicle sales dropped from 33,000 vehicles in January 2008 to just 3,000 in February last year, a fall of a staggering 90pc. Italian sales hit a peak of 310,000 way back in January 1990. By August 2013, that had fallen to slightly over 50,000 – a fall of more than 80pc. These are catastrophic numbers for a mid-market manufacturer focussed on the European market.
Next, costs are out of control. GM had plants right across Europe, concentrated in Germany and Spain, but with units in Poland and Hungary and elsewhere. Only 4,000 of its 25,000-plus workers were in the UK. Trying to rationalise that has been a nightmare. It took a $866 million hit for closing that one plant in Bochum. When a package was finally worked out with the unions and the government, which included early retirement and re-training support for younger workers, it cost the company 125,000 euros for every person it got rid of . It is virtually impossible to slim-line a company when you face costs like that. The German Chancellor Angela Merkel, a politician who has abandoned every free market principle her Christian Democrats once championed, has already intervened to protect the 18,000 workers Opel has in her country. Peugeot won’t find it any easier to squeeze costs than GM did.
Against that backdrop, the real question is why GM stuck it out so long, not why it finally gave up. The hash fact is that global multi-nationals are turning their backs on Europe. With mass unemployment, a deflationary currency, crippling costs, and a political culture that is obsessed with protecting declining industries rather then encouraging new ones, the continent has become less and less attractive – and already it is slipping in the world rankings for investment.
In the 1920s, when Alfred Sloan, was building GM into the first global manufacturing colossus, expansion into Europe was the most crucial part of that strategy. It needed a presence in Germany, France, and Spain to be a world-class player. Nine decades later, that is no longer true. GM is one of the first multi-nationals to give up on the continent. It is unlikely to be the last.