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Could GM retain Opel-Vauxhall after all?

October 29, 2009

Could GM retain Opel-Vauxhall after all?


General Motors’ deal to offload its European subsidiaries has been about a week away from completion for about six months now, and it is still not possible to give a definitive answer to the question: "Who will own Opel and Vauxhall this time next year?"

For the last two or three months, the Magna-Russia consortium has seemed certain to win the dubious honor of acquiring Opel and Vauxhall. Don’t forget that GM Europe in the form of Opel, and its British offshoot Vauxhall, with a little help from the Swedish subsidiary Saab, lost about $1.6 billion in 2008, which could rise to $3 billion this year. It hasn’t made real money for about 10 years. Opel-Vauxhall has been called one of the most deflationary forces on European pricing in the last decade.

In other words, Opel-Vauxhall has often found it so difficult to unload its cars on the market it has been forced to slash prices, and this has forced its competitors to join in and devastated bottom lines all round.

The deal was complicated by the German election, with the suspicion that Chancellor Angela Merkel was stringing everyone along to make sure nothing nasty happened to sour the voters. But after the victory of Merkel’s Christian Democrats and her Free Democrat partners on Sept. 27, the deal with the Magna of Canada consortium has still stumbled, refusing to be consummated.

Now the European Union’s regulatory bureaucrats have intervened, further complicating the issue and threatening to derail it.

Logic is questioned

But the longer the saga has lasted, the more voices are being raised to question the logic of the Magna deal, which would have left GM with 35 percent, Magna and Sberbank of Russia splitting 55 percent and the remainder staying with Opel-Vauxhall’s unions. Sberbank was expected to hive its stake off to Russia’s second-largest carmaker Gaz, owned by the oligarch Oleg Deripaska.

Merkel seemed to favor the Magna deal over Belgian investor RHJ International (which eventually dropped out) because it presented a less harsh restructuring plan and was supported by the German unions. This played well during the election campaign, but was also thought to be part of Merkel’s attempt to build up trade with Russia and good relations with President Dmitry Medvedev.

Since the election, questions have been raised about the industrial logic of Magna’s still sketchy plans for Opel, which seemed to rely on building up car sales and production in a Russian market devastated by the recession. Some of the questions raised are:


  • Why would GM want to be part of a plan to move output and resources to Russia, which it had already targeted in a big way with its Daewoo/South Korea/Chevrolet business?



  • The Magna plan promised less pain in the form of firings and plant closures in Germany in the short term, but long term, much of Opel’s production looked set to move east.



  • Why would GM give up control over an Opel-Vauxhall organization which produces small fuel-efficient cars, after the Obama administration had brought forward CAFE rules in the U.S. demanding an average 35.5 mpg from 2020 to 2016?


    The short answer is, of course, that GM wouldn’t be letting any of this happen if it wasn’t severely financially compromised. Indeed, when these talks started, GM was on the brink of collapse.

    The Financial Times of London’s Lex column doesn’t think it is possible for GM to step back in.

    "The option of GM keeping control of the business is too complex and difficult to finance," Lex said.

    But others are not so sure.

    Automotive News Publisher and Editorial Director Keith Crain, in an article headed "Is it too late to let the Opel deal die?" says selling to the Magna consortium doesn’t make sense for GM.

    "OK, let’s accept that the U.S. government bailout money to GM can’t flow across the Atlantic to Opel, although the government logic behind the notion of segregated continents is completely flawed. GM needs Opel. That is where much of the engineering and design work for North America originates. The idea that GM is willing to give it away for a few pieces of German government gold doesn’t make any sense," Crain said.

    German gold

    The German gold on offer is not small potatoes.

    Opel-Vauxhall is being kept alive by a $2.2 billion loan from Germany. On the table is a $6.6 billion loan mainly from Germany to finance restructuring. Britain, Belgium and Spain, which also have Opel-Vauxhall plants, would also contribute to the latter loan.

    According to IHS Global Insight analyst Tim Urquhart, the best deal would have been for Fiat of Italy to take on Opel-Vauxhall, which died early in the summer. This had more industrial logic. The companies had worked together before when GM owned a minority stake in Fiat, and shared engines and components. The deal collapsed, not least because of Fiat’s tie-up with Chrysler.

    Best if GM kept Opel

    "We are now left with the very unsatisfactory solution offered by Magna. It would be best if GM could retain Opel," London-based Urquhart said.

    "We need to see some serious structural changes at Opel-Vauxhall. Every time Magna talks to the representatives at a plant it comes back with a huge compromise on job losses. At the start of the year there was a general consensus that four out of the 10 plants should go. Now that’s down to probably none, although the Antwerp, Belgium, plant is still under pressure," Urquhart said.

    Original plans called for about 10,000 — including 4,000 in Germany — of the 50,000 Opel Vauxhall jobs across Europe to go. That number has been slashed back after negotiations with various unions. About half the jobs are in Germany in four plants.

    Urquhart said if GM did manage to retain full control of Opel-Vauxhall, it would likely implement a more stringent cost-cutting plan than Magna.

    "That is what is required; it might be harsh, but it can’t just take it on again as it was. Don’t forget those losses. It would have to be aggressive to lower headcount," Urquhart said.

    The Magna solution is not without supporters, including professor Ferdinand Dudenhoeffer of the Center for Automotive Research at Germany’ s University of Duisberg-Essen.

    Magna most viable

    "I think Magna offers the most viable solution. In principle it’s a Magna-Gaz-GM solution. Opel-Vauxhall wasn’t successful for 20 years because GM didn’t provide room to develop. Together with Magna, Opel-Vauxhall can build up its strengths, focus on Russia and develop modules and platforms. I’m convinced that Magna will turn Opel to profits and will further improve quality and technology," Dudenhoeffer said.

    GM doesn’t have the capacity to step back in.

    "I think at the moment GM has to focus on the U.S. and China. It makes no sense for GM to invest money in Opel-Vauxhall, given its weak performance," Dudenhoeffer said.

    EU might nix it

    Dudenhoeffer does think there is a chance the EU might derail the deal, when it decides on Nov. 27. If EU Commissioner Neeli Kroes says the Magna deal contravened its rules, Dudenhoeffer said Opel-Vauxhall will file for bankruptcy, close at least three plants and instigate big layoffs.

    Global Insight’s Urquhart, looking beyond the GM board meeting on Nov. 3, which will discuss the deal, expects it will go on for some time yet.

    "I think this could drag on to December, and we won’t see a definitive conclusion much before Christmas. It’s so complicated and there are so many agencies and stakeholders involved and legal ramifications, the status quo is going to carry on a bit longer yet," he said.

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