Business Week
With new prospects for government aid, General Motors' board of directors nixes the proposed sale of the automaker's troubled German unit
Well, the new board of directors at General Motors got its way. The automaker will keep its long-struggling, German-based Adam Opel unit rather than sell it to Canadian parts maker Magna International (MGA) and Russian partner OAO Sberbank.
GM's board made the decision at its monthly meeting Nov. 3, reversing an agreement made in September. GM's board agreed to sell Opel to Magna but had initially balked at the deal, fearing the sale would cede control of a huge presence in the European market and give technology to Russian automakers.
Now, GM will get to keep a key strategic piece of its global empire. But it will have to fix a company that will require €3 billion to restructure. "GM gets to keep control of the engineering for its passenger cars," says Michael Robinet, vice-president of CSM Worldwide. "The bad news is, they have to restructure their European operations."
GM had little choice at the time. The German government refused to give GM enough cash to restructure Opel, after giving GM a €1.5 billion bridge loan to keep the company afloat. Chancellor Angela Merkel's government also wouldn't provide financing for a rival bid from Belgian investment firm RHJ International (RHJI.BR). As a result, GM was all but forced to go to Magna, which had a financing deal with the German government.
A Valued Engineering Hub
GM's board had two problems with the deal. The first was losing up to 1.5 million vehicles' worth of sales and the scale of parts purchasing that comes with it. Opel also is the engineering headquarters for GM's compact cars and midsize sedans. The new directors didn't want to cede those engineering resources even though GM would have kept a 35% stake in Opel. The German company has engineered the platforms for the Chevrolet Malibu and Buick LaCrosse as well as the Chevy Cruze compact that comes out next year.
For the board, the strategic value of keeping Opel's sales and engineering capabilities outweighs the costs of keeping and fixing Opel, said a source briefed on the meeting.
In one sense, the reversal could be viewed as a slap to GM CEO Frederick A. "Fritz" Henderson, since he recommended the sale to his board. But it's more complicated than that. Henderson saw no other option when he pushed for the Magna deal back in August, since the German government wouldn't offer financing for GM's restructuring plan or another buyer, say sources close to the board. Plus, the events of last month cleared the way for GM to keep the company. In mid-October, the European Commission questioned whether the German government had fostered a noncompetitive bidding process by offering financing only to Magna. When the German government countered that it was willing to consider offering financing for other alternatives, GM saw an opening to keep Opel and ask for financing help to restructure the company.
A Better Cash Position
There is something else at play. On Nov. 15, Henderson will reveal GM's financial progress. While the company will not be in the black, sources inside the company say GM's cash position will be improved. So the company will be better able to fix Opel and deal with its losses. GM's European operations, which included Saab until it was sold recently, lost $2.8 billion in 2008 and another $2 billion in the first quarter of this year.
It will be a tough slog for Opel, though. Germany has run a generous version of "cash for clunkers," pushing sales up more than 30% in some months. There will be big payback next year for that spurt, adding to an already difficult environment.
Now GM has to negotiate with Germany and other European governments for financing. Henderson will also have to go to IG Metall, the union representing Opel workers, for concessions that could cut about 10,000 of Opel's 25,000 workers. It won't be easy. Both the German government and IG Metall have publicly criticized GM's management and blamed the American executives for Opel's problems.
However, GM may have some sway with the union. Management could threaten to move assembly of future models to lower-cost countries in Eastern Europe, or import cars from India or China. With the dollar cheap, GM could even export cars from the U.S., says Robinet, the industry analyst. "GM has substantial leverage with IG Metall," he says. "GM could go to IG Metall and say, 'We'll keep building vehicles here for now, but the next one may go somewhere else.'"
There is something else at play. On Nov. 15, Henderson will reveal GM's financial progress. While the company will not be in the black, sources inside the company say GM's cash position will be improved. So the company will be better able to fix Opel and deal with its losses. GM's European operations, which included Saab until it was sold recently, lost $2.8 billion in 2008 and another $2 billion in the first quarter of this year.
It will be a tough slog for Opel, though. Germany has run a generous version of "cash for clunkers," pushing sales up more than 30% in some months. There will be big payback next year for that spurt, adding to an already difficult environment.
Now GM has to negotiate with Germany and other European governments for financing. Henderson will also have to go to IG Metall, the union representing Opel workers, for concessions that could cut about 10,000 of Opel's 25,000 workers. It won't be easy. Both the German government and IG Metall have publicly criticized GM's management and blamed the American executives for Opel's problems.
However, GM may have some sway with the union. Management could threaten to move assembly of future models to lower-cost countries in Eastern Europe, or import cars from India or China. With the dollar cheap, GM could even export cars from the U.S., says Robinet, the industry analyst. "GM has substantial leverage with IG Metall," he says. "GM could go to IG Metall and say, 'We'll keep building vehicles here for now, but the next one may go somewhere else.'"
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