05 March 2009

GM Makes Sales Pitch To Europe

As Originally Posted in The Wall Street Journal

General Motors Corp. sketched out a proposal Monday for selling a stake in its Opel unit, the core of its European operations, in a bid to win aid from Germany and other countries in the region.

Under the plan, which was presented to German Economics Minister Karl-Theodor zu Guttenberg in Berlin on Monday, GM would sell 25% or more of Opel, and cut $1.2 billion in costs, company officials said.

People familiar with the auto maker's plans said GM may try to close or sell as many as four plants in Europe, including two in Germany. One plant being targeted is part of Saab, the Swedish brand that GM is trying to spin off completely with the help of Swedish government aid, these people said.

In Berlin, Mr. zu Guttenberg confirmed the government has received some details of Opel's restructuring plan on Monday and would hold further meetings in coming weeks. "No initial decision at all has been made," Mr. zu Guttenberg said.

In proposing to separate its sprawling Opel unit in order to win German support, GM is staging a distinct reversal from the strategy Chief Executive Rick Wagoner had pursued in recent years and demonstrates how the company's deepening liquidity problems are forcing the company into once-unthinkable changes. Such a step would be a framework for Opel's independence, potentially encouraging governments to lend money to GM.

In an interview in Detroit Friday, GM Chief Operating Officer Frederick "Fritz" Henderson said the company has been "working furiously" on its plan for European operations, and said he isn't "foreclosing any options" when it comes to fixing the business.

"We need support. We need to be open to options," he said.

GM has asked for as much as $44 billion in support from the U.S. and other governments in order to stay afloat, and is committed to making major changes to Mr. Wagoner's strategy to get the financing.

The German government has raised concerns that aid from Germany could be used to cut rather than save jobs in the country, and that GM could use German aid to restructure its operations in the U.S.

At the same time, German politicians are under pressure from labor unions to bail out Opel, GM's largest European brand by far, to help save the company's 25,000 jobs—a number that more than doubles when including parts suppliers.

Bailing out Opel could give the German government more say in how its funds are used.

GM Europe has been losing money or breaking even for a decade and lost $2.88 billion in 2008. GM's past attempts to recover were based on raising per-vehicle revenue and stabilizing market share.

Opel, which GM acquired in 1929, accounts for about three-quarters of GM Europe's sales and operates under the Vauxhall brand name in Britain. It has emerged as a key developer of passenger cars for GM's far-flung global operations as Mr. Wagoner and his management team have tried to consolidate the company's previously separate European, Asian, North American and Latin American units.

In addition to developing vehicles like the Opel Insignia, the unit has developed technology for high-volume Buick products for China, Saturn products for the U.S., and had been engineering much of the next-generation Chevrolet Malibu.

GM may struggle to find investors for Opel given the state of the credit markets and persistent weakness in the automotive industry. A glut of production capacity and a collapse in revenue in Western Europe and North America have scared investors and banks away from the sector, and led to a severe decline in interest for alliances and other ventures.

Cerberus Capital Management, for instance, was only able to lure Fiat SpA into taking a stake in Chrysler LLC by essentially giving it to the Italian auto maker for free. GM has had a tough time selling Hummer despite some interest among private investors because of a lack of financing.

GM this week plans to show off a new variant of the Saab 9-3 and an entirely new subcompact car called the Chevrolet Spark. Both were meant to further GM's push to become more fuel efficient and were to be sold in most of the markets GM participates in, including North America.

In discussing options with European officials, Mr. Henderson said the auto maker plans to reiterate the importance of keeping Opel tied in to GM's global vehicle portfolio so the unit can benefit from economies of scale. "They need to evaluate whether or not that is acceptable."

Meetings with German officials are expected to continue for several weeks. In its viability plan submitted to U.S. Treasury officials in February, GM said that it expects to resolve solvency issues in Europe by March 31. GM executives expect to meet strong opposition from labor representatives as it attempts to close or sell some of these plants.

In addition, there could be a concerted push by Klaus Franz, head of Opel's labor council, and government officials to desire far less decision making by Detroit-based executives. Germany's economics minister, Mr. zu Guttenberg, said Monday that he expected to discuss GM in meetings with U.S. officials later this month. He added that any decision "must be sensible" and the government wouldn't be pressured.

Earlier, Mr. zu Guttenberg said a key issue to resolve is how independent Opel would be from its parent company in the U.S. His comments followed consultations with governors of the German states of North Rhine-Westphalia, Rhineland Pfalz and Hesse, where Opel factories are located.

GM Europe President Carl-Peter Forster told reporters Friday that investors could take between 25% and almost 50% in Opel. Under this scenario, GM Europe would be treated much like GM's Daewoo operation in Korea. GM controls the unit and uses the operation to feed its Chevrolet brand with fuel-efficient cars and crossover vehicles around the world, but technically owns 50%.

GM has said it needs about $4.2 billion in loans from various government entities to prop up its sagging operation there. About two-thirds of that money would need to come from the German government. GM also plans to submit a plan to state officials in Hesse, where Opel has headquarters.

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