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GM aids Opel by booking Russian profits at loss-making unit

By Christiaan Hetzner

FRANKFURT (Reuters) - General Motors has decided to put its Russian operations back under the control of its European wing - a victory for GM Europe's new president and a signal of support for a workforce that has endured massive job cuts in the hunt for profitability.

GM made a turnaround of its European business a top priority after racking up around $18 billion in losses over the past 12 years, and is investing billions more despite calls from Morgan Stanley to sell Opel and its UK sister Vauxhall at virtually any cost.

Russia is Opel's only major growth region - a lucrative geography where margin-eroding discounts are far less common than in a western European market set to plumb lows not seen since 1993.

From January, General Motors International Operations (GMIO), based in Shanghai, China, will hand the business back to GM Europe (GME) after three years.

Not only will Opel's own sales in Russia be consolidated at GME, so will those of Chevrolet, which sells more than twice as many cars in Russia, and GM's premium brand, Cadillac.

"This will allow GM Europe to emerge more quickly from the red," said Ferdinand Dudenhoeffer, head of the CAR automotive research institute at the University of Duisburg-Essen.

He said this suggested that new Opel chief executive and GME president Karl-Thomas Neumann, who came in March from Volkswagen , had won out in a battle for influence within GM.

The move could also help Neumann to shore up support among his European workforce, which has endured tens of thousands of job cuts since 2000 - more than half of all staff - and will suffer the third closure of a car plant come 2014.

"Profits that so far were booked in Asia-Pacific are now ending up in Europe. They are creating the appearance of progress with the restructuring of Opel," said Dudenhoeffer.

FROM BOOM TO BUST

Five years ago, Opel was an up and coming brand in Russia, selling almost 100,000 cars - twice as many as Volkswagen's VW brand.

But the bankruptcy of the GM group in 2009 and the aborted sale of Opel to a consortium that included Russia's state-owned Sberbank sent sales that year crashing by two-thirds.

GME then surrendered responsibility for the Russian market to GMIO in 2010. The loss was heavily criticized at the time by Opel's labor leaders, who felt GME management had given up a key profit center in exchange for personal advancement.

In the meantime, VW has overtaken Opel in Russia, moving nearly 165,000 cars last year and outselling it two to one. However, GM's Chevrolet sold over 205,000 cars while Cadillac managed around 2,000.

"This is the right decision at the right time," Neumann said, noting that Russia was still the third-largest market for Opel/Vauxhall after the UK and Germany.

"All forecasts indicate that Russia will become the biggest European car market. Opel has a strong image in Russia and we want to significantly expand our share of the market."

Opel has hampered its chances of growth by largely staying out of major markets such as China and instead confining its operations to Europe, home to all of its factories, so as not to compete with other GM brands.

For example, GM's Buick builds the Opel Insignia in China, badges it as a Buick Regal, and books the profits, leaving Opel with only niche products to sell, such as its Astra GTC coupe. As a result, Opel sold just 4,500 vehicles last year in the world's largest car market.

A main reason why other mass-market rivals such as Volkswagen are profitable is their ability to compensate for weak European business with rising sales in emerging markets such as China, Brazil and India.

By comparison, Opel pulled out of Australia in August, leaving it with only a few, small non-European export markets such as Chile, Singapore and the United Arab Emirates.

(Editing by Kevin Liffey)

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