General Motors Company (GM - Free Report) plans to hire 1,500 workers at its St. Petersburg plant in Russia, known as GM Auto, as a part of its expansion plan announced with the Russian government to more than double the plant’s annual production to 230,000 vehicles by 2015 from 98,000 vehicles presently.
With this, the factory’s headcount would increase to 4,000 people from 2,500 presently. The plant, which produces Chevrolet Cruze sedan and hatchback as well as Opel Astra hatchback, will begin producing the Astra sedan following the expansion.
The Government Plan
Last year, GM along with Renault SA and Ford Motor Co. (F - Free Report) has promised the Russian government to boost production capacity in exchange for exemption on customs duty for parts.
Under the plan, GM decided to spend $1 billion in the country over five years in order to raise annual production capacity in the country to 350,000 vehicles by 2015. The plan also included expanding the company’s Avtovaz joint venture in Togliatti, Russia.
How Expansion Helps Opel
With the expansion, GM will not only meet its commitment to the Russian government but would mitigate losses at its German subsidiary Opel. Since 1999, Opel’s loss amounted to more than $16 billion with $747 million in 2011. As a result, the luxury car-making unit is under pressure from its parent company to mitigate the continuous losses.
Opel’s management has already sought plant closures as a way out. Recently, it announced plans to close its factory in Bochum, Germany. However, Opel has met with several ordeals with regard to its plant-closing plans as they are frowned upon by the political framework of Europe, mainly Germany. Therefore, expanding overseas -- mainly in China and Russia -- seems the best way-out for Opel at this juncture.
Why China? The answer is simple. GM has already achieved the top spot in the country by selling more than 2 million vehicles a year. However, the automaker sold only 5,000 units Opel in the country, indicating significant growth potential. In fact, Opel aims to boost its annual sales in the country to 20,000 units.
Why Russia? The answer is that it is the second-largest auto market in Europe following Germany and GM has a strong presence with its Chevrolet lineup as the top-selling foreign brand in the country in 2011. However, Opel needs to deal with strong competition from big automakers such as Ford, Renault and Volkswagen AG (VLKAY - Free Report) in the region.
GM and the Debt Crisis
A few months back, Opel revealed that it expects to report an operating loss of €1 billion ($1.3 billion) in 2012 due to fewer car sales than anticipated based on weakening market conditions in Europe due to the Eurozone crisis and ailing condition of the unit.
In order to reverse the losses in Europe (totaling more than $12 billion), particularly from the Opel brand, GM has recently formed a global alliance with PSA Peugeot Citroen . The pact will help both the automakers reduce at least $2 billion in costs.
Last month, the European Automobile Manufacturers’ Association or ACEA reported an 8.7% fall in new car registrations to 1,107 million units in the European Union. In the first five months of the year, sales fell 7.7% to 5,442 million cars on the continent.
GM revealed an 8.4% slide in sales to 98,873 cars in May. This translated into an 11.3% fall to 453,696 cars in the five-month period.
Automakers are still concerned about car sales in Europe in the near term due to the continuous negative impact from the debt crisis. Some automakers have projected that the European auto market will shrink 5% in 2012.
GM, a Zacks #3 Rank (Hold) company, reported a $100 million fall in profits to $1.6 billion in the first quarter of 2012 from $1.7 billion in the same quarter of 2011, before special items, due to lower profits from its European operations.
On per share basis, adjusted profits were 93 cents during the quarter, down 2 cents from the first quarter of 2011. However, it exceeded the Zacks Consensus Estimate of 84 cents. Adjusted earnings before interest and taxes (EBIT) dipped to $2.2 billion in the quarter from $2.0 billion in the year-ago quarter.
Revenues in the quarter went up 4% to $37.8 billion on a 3% rise in unit sales to 2.3 million vehicles globally. It was higher than the Zacks Consensus Estimate of $36.4 billion. The automaker occupied a worldwide market share of 11.3% during the quarter, compared with 11.4% a year ago.