After years of losses, GM's European division is making a profit again-but it will need fresh, complementary designs to stay in the race.

General Motors racked up more than $4 billion in losses in Europe between 2000 and 2006, so when it eked out a small profit in this year's first quarter, no one was ready to pronounce the patient cured.

Now GM's $33 billion European unit finally looks to be picking up momentum. New models such as the Corsa subcompact, Antara sport-utility vehicle, and Astra compact are stoking sales growth, and second-quarter net profit of $217 million was the best in a decade. Even Chevrolet is making inroads in the Old World, with sales up 34% in the first half of 2007, to 215,315 cars.

Revamped Opel Needs New Models

Can GM Europe President Carl-Peter Forster make the rebound stick? The good news is that a painful 2004 restructuring at GM's Adam Opel unit in Germany, which accounts for 80% of European revenues, has helped whittle down excess capacity and costs. And a sporty redesign of Opel's two biggest selling models, the Corsa and the Astra, has given the brand new cachet. So most analysts don't expect GM Europe to swerve off-track again and post losses anytime soon.

The challenge now is boosting profits and churning out new models that can fuel future growth. To do that, Forster needs to fill Opel's pipeline with more high-volume models, analysts say, instead of niche offerings such as coupes and convertibles. As a revitalized Volkswagen prepares to launch a next-generation Golf compact in 2008, Opel will be disadvantaged by an older lineup. A new Astra is not due out until 2010, and as volumes taper down, margins will weaken. Yet developing more mainstream models will require hefty investments that headquarters in Detroit may not be willing to back.

"What's missing when you look forward is a model strategy," says Ferdinand Dudenhoeffer, director of the German Center of Automotive Research in Gelsenkirchen. "Forster made a big step forward, but he has to bring stronger products to compete with models such as the VW Golf and the Kia C'eed."

Eastern Europe Bolsters Sales

In the first half of 2007, the Opel Astra ranked No. 6 and the Corsa No. 8 in sales in Western and Eastern Europe combined (including Russia), according to market researcher Global Insight, with sales of 240,000 and 236,000 units, respectively. While that's not bad, the VW Golf was No. 1 with 365,900 units, followed by Ford's Focus with 329,120, and Renault's aging Megane family with 282,950.

What's more, a closer look at the first-half numbers shows a tale of two GMs. Overall unit sales were up 5.23%, but Western Europe actually saw a slight decline. Opel sales there fell 1.7% in the first half vs. the same period a year earlier, to 685,933 cars. That knocked Opel's market share down a hair, to 8.6%. And Saab sales plunged 11.2%, to 44,140 cars.

Eastern Europe, on the other hand, accounted for all of the gain. In the fast-growing Russian market GM's sales soared 106%, and the company expects to sell 250,000 units there this year.

"Without east Europe and Russia, GM Europe's numbers would not look as good," says Dudenhöffer, who forecasts tepid profits for GM Europe, compared with stronger earnings at rivals Volkswagen and PSA Peugeot Citroen.

Mashing Together Saturn and Opel

To improve productivity worldwide, GM has launched a global integration program designed to share models and modules across regions. The strategy is to consolidate brands such as Opel and Saturn and share development costs to reap greater efficiencies. Under a seven-year development program, all vehicles for the U.S.-based Saturn brand and Europe's Opel brand will merge by 2014.

Eventually, the European Opel Astra and the replacement for the Saturn Ion will be the same car. Likewise, the Opel Antara SUV will be the same as a Saturn Vue. "Saturn's tie-in with Opel should lower costs and increase scale" says Paul Eisenstein, chairman and publisher of The Car Connection.

GM also is seeking to leverage its Korean unit, GM-Daewoo, by relabeling Daewoo's Korean-built cars for Europe and the U.S. The idea is to position Chevrolet as a lower-cost brand in Europe, allowing Opel to move its brand image slightly up market to tackle Volkswagen-and thus earn a better premium per vehicle.

First Steps On Road to Recovery

Last year Opel increased its average profit per car by