No Opel, No Hope?

General Motors needs Opel, but is powerless to help it
As Originally Posted at The Economist

IT WAS exactly 80 years ago, just seven months before Wall Street’s Great Crash, that General Motors (GM) bought Adam Opel AG, Germany’s biggest and most efficient carmaker at the time. By the late 1930s Opel was the largest carmaker in Europe and GM was established as a global automotive giant. This week, against the background of another world financial crisis, a humbled GM offered to surrender up to 50% of its stake in Opel in a bid to persuade the German government to rescue its subsidiary from insolvency.

Opel is not a basket case. But nor is it strong enough to ride out the hurricane wrecking the world’s car industry without help that GM, its own survival hanging in the balance, can no longer provide. GM says it needs another $16.6 billion in federal loan guarantees, on top of the $13.4 billion it has already received from America’s Treasury, to stave off bankruptcy.

After a painful restructuring in 2004 following several years of losses, GM Europe (which includes Opel, Vauxhall in Britain and Sweden’s Saab) looked as though it had turned a corner. Competitive new Opel/Vauxhall models helped make it profitable in 2006, but as the market slowed, GM Europe’s recovery stalled and then reversed. Production fell from 1.83m vehicles in 2007 to 1.55m last year, and losses increased from $524m to $2.8 billion. GM believes its European arm could run out of money as soon as next month.

On March 2nd GM Europe’s boss, Carl-Peter Forster, presented a 180-page rescue plan for Opel to Germany’s economics minister, Karl-Theodor zu Guttenberg. It calls for emergency loans of $4.2 billion from European governments, but most of the money would have to come from Germany, where the majority of GM Europe’s 55,000 employees work.

To reassure political leaders that the funding will stay in Europe, GM proposes to place Opel into a legally separate holding company into which it will transfer about $3.8 billion-worth of non-cash items. Another $1.2 billion will be found from capacity reductions. Two of Opel’s nine factories are thought to be especially vulnerable: Bochum in Germany and Antwerp in Belgium.

GM also hopes the new entity might attract outside investors. Mr Forster says GM is prepared to sell an equity stake in Opel of 25-50%. Fritz Henderson, GM’s chief operating officer, went further on March 3rd, saying that GM might even be willing to cede control to save Opel.

But it is hard to see who might want to take up Mr Henderson’s offer just now. Other carmakers are hoarding their cash, and financial investors will note that GM has ploughed $7.5 billion into Opel since 2001 for little return. Were the German government even to consider taking a stake in Opel, other German carmakers would cry foul. Daimler, BMW and Volkswagen said this week that they would tolerate only short-term bridging loans for Opel.

One possibility that would go down well with Opel’s unions might be for a stake to go to Hesse, the state in which Opel has its Rüsselsheim headquarters. The precedent is the 20% shareholding that Lower Saxony still holds in Volkswagen. However, the “VW law” that gives the state a veto over important decisions is a controversial anachronism which both the European Commission and Porsche, VW’s new owner, are determined to get rid of.

A measure of GM’s desperation is that these options defy industrial logic. Opel is of critical importance to GM’s future. Its products and engineering are tightly interwoven with all the company’s other operations. Both the Epsilon 2 platform, used by the new Opel Insignia, and the Delta 2 platform, intended for the next Astra, were developed at Rüsselsheim and will be used by almost every GM brand in future.

GM can do without Saab, which looks doomed (despite claims that there are several interested bidders). But without Opel, GM’s strong position in the big emerging markets with the highest growth potential would be undermined. Without Opel, GM’s promises to build a fleet of smaller and more fuel-efficient cars in North America would lack conviction. As for Opel, deprived of GM’s scale, it would quickly wither and die.

Ford, which sees the highly rated products developed by its European arm as central to its recovery plans, is puzzled by GM’s willingness to reduce its stake in Opel. One senior executive observed this week that it was “hard to imagine” how GM could both welcome other shareholders into Opel and also tie it tightly into the firm’s operations and strategy.

But Ford is in a very different position from GM. Because it has not had to resort to government aid in America, which comes with many strings attached, Ford still has some freedom of manoeuvre. Ford of Europe is also much healthier than GM Europe, notching up a profit last year of $1.06 billion. Lewis Booth, who ran Ford of Europe before becoming Ford’s finance chief last year, says that because the business was successfully “sized to demand” in 2000, the European operation was profitable from the end of 2003 until a few months ago. By contrast, GM Europe reckons it has 30% more capacity than it needs.

The German government will be very reluctant to allow Opel to fail before the general election in September. But beyond that its future is bleak. GM is powerless to help it. Even if Barack Obama decides to keep GM out of the bankruptcy courts for the time being, he will not stump up money for Opel. Nor does quasi-independence from GM seem a feasible option. If Opel closes, GM’s own prospects, already uncertain, would be dealt a further blow. What began in 1929 could well end in 2009.