GM sees Europe pricing weakness causing broad capacity cuts

General Motors Co. sees “clearly deteriorating” sales and pricing in Europe’s car market leading to restructuring across the industry, according to analysts who met with the automaker’s management yesterday.

Analysts met with Dan Ammann, GM’s chief financial officer, and James Davlin, treasurer of the Detroit-based automaker, according to Citigroup Inc. Europe’s vehicle pricing has “worsened significantly” during the past three to four months, Rod Lache, a New York-based analyst at Deutsche Bank, wrote today in a research note on the meeting.

“GM appears to expect a more substantial industry volume decline during this cycle,” Lache wrote. The automaker “thus expects more substantial capacity reductions and by a broader” group of automakers.

GM, which lost $747 million in Europe last year before interest and taxes, will take two to three months to announce a restructuring plan for the region, Karl-Friedrich Stracke, head of GM Europe, told reporters March 6 at the Geneva motor show. GM will have to spend at least $1 billion to revive its Europe operations, according to estimates from three analysts last month. The company has lost $15.6 billion in Europe since 1999.

GM told analysts yesterday that Europe is a “clearly deteriorating environment” and “very tough,” Peter Nesvold, a New York-based analyst for Jefferies & Co., wrote in a report.

“Pricing appears likely to trend lower until either volumes rebound or capacity exits the industry,” Nesvold wrote. “Neither seems to be likely in the near term.”

GM-Peugeot Alliance

GM fell 1.8 percent to $25.57 at the close in New York. The shares have gained 26 percent this year.

Jim Cain, a GM spokesman, didn’t reply to telephone and e-mail messages seeking comment. European auto executives have predicted a drop in deliveries of about 5 percent this year in the region, the fifth straight annual decline.

GM is paying about 320 million euros ($420 million) to acquire 7 percent of PSA Peugeot Citroen, Europe’s second- largest carmaker, according to a March 5 regulatory filing. The two companies are forming an alliance for purchasing and vehicle development to reduce costs by about $2 billion annually within five years.

“Investors have met the alliance with some skepticism and it is our view that the alliance does get to the crux of the issue, which is addressing overcapacity,” Joseph Spak, a New York-based analyst for RBC Capital Markets, wrote in a report. “In GM’s view, they supplied a modest amount of capital for a reasonable amount of upside but the payoff is years away.”

Spak rates GM shares outperform, and Citigroup’s Itay Michaeli and Deutsche Bank’s Lache have buy ratings. Nesvold of Jefferies rates GM hold.

Volkswagen AG fell 0.9 percent to 129.80 at the close in Frankfurt. Renault SA slid 0.9 percent to 41.99 euros while Peugeot gained 0.7 percent to 13.12 euros in Paris. Fiat SpA, which is also controls Chrysler Group LLC, declined 1.3 percent to 4.78 euros in Milan. 

(Bloomberg)