GM’s Two Billion Dollar Bargain
The Detroit News had a feature story about GM that illustrates part of why this behemoth company lost more than 2.6 billion since 2000. It has to do with not noticing that in Europe, diesel engines are the way of the future, even though back in 1999, they were just beginning to come into their own. It is clear when you travel in Europe and go to a gas station, the diesel is always cheaper than the regular gas. So more and more people drive diesels, now 46% of all cars have these engines. But Bob Eaton, the head of GM in 1999, thought people didn’t like diesels, so he rejected putting any big GM funds into developing it. Instead they bought a 20% chunk of Fiat for a couple of billion.
Fast forward to 2005: The only growth in the European car market IS DIESELS! The author compares this to what would have happened if Toyota and Nissan had not developed light trucks, since these too are the biggest growth area in the US market.
Last week GM paid out two billion to buy their way out of the Fiat deal, effectively giving up on the area where the growth is.
GM Europe is still losing money. Without Fiat’s help, though, Opel would be as good as out of business.
The original $2.4-billion investment in Fiat, the $2-billion getaway payment GM will make and GM Europe’s losses add up to $7 billion.