GM Saving $10.7 Billion Means Cash for Truck Upgrades

Bloomberg

General Motors Co. said it has slashed $10.7 billion from annual costs, freeing up money for marketing and vehicle upgrades while boosting Chief Executive Officer Ed Whitacre’s push for a 2010 profit.

The expense cuts include reduced interest payments from the elimination of debt, the offloading of union retiree bills and $6.7 billion from steps such as chopping jobs, getting rid of plants and dropping half of GM’s U.S. brands, according to company documents and Randy Arickx, a spokesman.

The estimate is the first public tally of GM’s savings from a new labor accord and its 2009 bankruptcy compared with the previous year. Uses for the proceeds include spending more on a redesign of the Chevrolet Silverado and GMC Sierra pickups that may cost as much as $1 billion, an executive directly involved with the plan said.

“GM has come to the realization that customers are more perceptive than the old GM used to think,” said Eric Noble, president of CarLab, an Orange, California-based automotive consultant that specializes in product planning. “The only way to win is to gain an advantage in product quality.”

New models still may not be enough to meet Whitacre’s goal of keeping U.S. market share at about 20 percent. Detroit-based GM will have to make up lost sales from shedding 4 of 8 domestic brands, overcome a history of 20 declines in U.S. market share in 23 years and erase any stigma in buyers’ minds from last year’s federal bailout.

Opel Cash

The biggest U.S. automaker also faces cash needs such as its Feb. 9 pledge to invest 11 billion euros ($15 billion) at Germany’s Opel by 2014. GM provided 650 million euros in fresh Opel funding in January through accelerated payments for engineering work.

Losses at GM totaled about $88 billion through last year’s first quarter from the end of 2004, spurring the effort in the automaker’s U.S.-backed restructuring to shrink operations to help return to profit.

“A new and better balance sheet” is driving the increases in spending on products and marketing, Vice Chairman Bob Lutz said in an interview, without giving figures. “You couldn’t exist in this business cutting marketing budgets to near zero.”

In addition to the $6.7 billion in savings from chopping so-called structural costs, GM reaped $1 billion more by shedding debt, with annual interest costs this year of about $1.5 billion compared with $2.5 billion in 2008, Arickx said.

A United Auto Workers contract provision that took effect Dec. 31 saved about $3 billion more by shifting retirees’ health costs to a UAW-run trust.

Whitacre Strategy

Diverting some of the $10.7 billion in savings to refresh GM’s vehicle lineup and lure new buyers is intended to support the strategy set by Whitacre, 68, who added the CEO’s title to his chairman’s duties on Dec. 1.

Investors and U.S. officials are watching because Whitacre has said he wants to repay $5.7 billion in outstanding federal loans by June and that GM may sell stock this year. On Jan. 6, he said he expects “positive net income” in 2010, accelerating predecessor Fritz Henderson’s timeline for a 2011 profit.

“I’m pretty bullish on GM,” said John Wolkonowicz, an analyst at Lexington, Massachusetts-based IHS Global Insight. “They have taken a lot of cost out and they are improving their products.”

GM’s 8.375 percent notes due in July 2033 rose 0.31 cent to 28.25 cents on the dollar at 3:50 p.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

GM more than doubled its budget for the large-truck program, in part because of the automaker’s savings, said the executive involved with the project, who asked not to be identified because the details aren’t public.

Truck Upgrades

The Sierra and Silverado, along with the Chevrolet Tahoe, GMC Yukon and Cadillac Escalade sport-utility vehicles, will receive new styling, more-efficient engines and lighter- materials to improve fuel economy, two executives said. Last updated for the 2007 model year, the trucks and SUVs originally were supposed to get only cosmetic improvements, one of them said.

A spokesman, Pat Morrissey, declined to comment about GM’s plans for truck changes.

GM’s additional resources also will help pay for developing new products such as the Cadillac XTS Platinum concept car, a large luxury sedan that may reach showrooms in 2013 and is intended to compete with models such as Bayerische Motoren Werke AG’s 7-Series.

The XTS probably will include a plug-in hybrid version, said one of the executives.

A refreshed vehicle roster may allow GM to take advantage of the recalls that have spurred a U.S. sales freeze for eight models from Toyota Motor Corp., which seized the global sales crown in 2008. Adding production to meet any market-share gains or stronger industry demand would increase labor costs, said Renee Rashid-Merem, a GM spokeswoman.

Trimming Debt

GM had $46 billion in debt in 2008. Borrowings ballooned to $94.7 billion when the company was in bankruptcy last year, GM said on Nov. 14. The debt has been cut to $17 billion, half what Ford Motor Co. owed on Dec. 31.

As part of its restructuring, GM pushed through a plan to cut manufacturing plants to 34 at the end of this year from 47 in 2008. Dealerships were targeted to fall to 3,600 from 6,000 with the dumping of the Saab, Pontiac, Hummer and Saturn brands to focus on Chevrolet, Cadillac, Buick and GMC.

The savings in structural costs more than doubled the $5.1 billion reduction by Ford, the only major U.S. automaker to avoid bankruptcy last year.

Most of the savings for GM came in North America, the company’s Arickx said. Based on projected production in the region of 2.8 million vehicles, the benefit would equal about $3,800 for each car and light truck.

“A lot of the structural cost improvements were things that they left behind, like plants and brands that they didn’t need,” said Maryann Keller, president of Maryann Keller & Associates in Stamford, Connecticut. “That’s what bankruptcy is supposed to do.”

GM's New Opel Boss Gets Chance To Shine

Bloomberg

 

Longtime GM insider Nick Reilly, the new acting head of its German unit, faces an almost unimaginably tough job. But he has experience with turnarounds

Nick Reilly took over at Adam Opel GmbH in Germany five days after 10,000 people demonstrated against General Motors Co.'s ownership of the unit. It wasn't the first time GM had asked him to win over protesters.

Reilly, 59, became acting head of Opel on Nov. 10 after GM scrapped a sale of the Ruesselsheim, Germany-based unit to Magna International Inc. Unions had backed the deal as workers would get a 10 percent stake. GM's acting Chief Executive Officer Ed Whitacre made the appointment permanent on Dec. 4.

To turn Opel around, Reilly, a 34-year GM veteran, has to persuade workers to give up 265 million euros ($394 million) in annual pay and get seven European Union countries to provide 2.7 billion euros of support. He also has to stem a 9.6 percent slump in sales of Astra and Corsa cars as the automaker is set to run out of cash by March.

Fixing the carmaker is "all about regenerating team spirit and a determination to win," Reilly said in an e-mail response to questions. Opel has "a very robust product portfolio."

Reilly, who previously managed all of GM's international operations from Shanghai, oversaw the carmaker's 2002 purchase of South Korean plants in a deal also opposed by unions. As head of GM Daewoo Auto & Technology Co., he more than tripled annual sales to 1.5 million vehicles by the end of 2006. The unit, built from a formally bankrupt carmaker, now accounts for about 20 percent of GM's global production.
Opel Job Cuts

"GM counts on Reilly to be one of the leaders to turn around the whole company," said Michael Dunne, president of consultant Dunne & Co. and ex-head of J.D. Power & Associates in China. "His appointment to make sure the Opel deal works is an indication of how much confidence GM has in him."

At Opel, Reilly expects to cut about 8,300 jobs under an almost-completed turnaround plan, he said in a Dec. 5 conference call. Success will require developing a new "mini" car, as well as hybrid and gas-powered vehicles, he said.

The unit has been losing market share since the mid-1990s, "due to cheap manufacturing and cheap parts, hurting its reputation" said Christoph Stuermer, an analyst with research firm IHS Global Insight in Frankfurt. If Reilly thinks "it's a problem of scale—selling more cars and saving a bit more—then he doesn't understand the structural problems."

This year, Opel's sales have contracted at almost double the pace of the 5 percent decline in the overall market this year, according to the European Automobile Manufacturers' Association. The carmaker has lost market share to Volkswagen AG, Ford Motor Co. and Fiat SpA even as government incentives in Germany, the U.K., France and Italy boosted demand for its bread-and-butter small cars.
'Refreshingly Pragmatic'

U.K.-born Reilly will have to win backing for a 3.3 billion euro turnaround from countries including Germany, the U.K. and Spain, which house plants making Opel or Vauxhall cars. Detroit- based GM is putting in 600 million euros.

"Reilly seems refreshingly pragmatic," said Hendrik Hering, economy minister of the Germany state of Rhineland- Palatinate, where Opel employs 3,200 staff. "He has gathered experience in turning companies around and what also helps is that he's European."

Reilly was GM's European vice president for sales and marketing, based in Zurich, before moving to Korea. He also ran Vauxhall in the U.K. and worked in the U.S., Mexico and Belgium.

To win support from Opel's 50,000 workers, GM may give staff a stake and agree to profit-sharing, Reilly told reporters on Dec. 4. Reilly took over at Opel from Carl-Peter Forster after GM canceled a sale of the unit to Aurora, Ontario-based parts-maker Magna and Russia's OAO Sberbank.
GM CEO?

"GM realized that things need to be straightened out," said Klaus Franz, a union leader, who met Reilly on his first day at Opel over coffee at the unit's headquarters. "He seems like a person that can stand up for his own opinion, even within GM."

Reilly's move to Opel, after serving as Asia-Pacific chief from 2006, and head of all operations outside of North America from July, has led to speculation he could be a candidate to succeed Fritz Henderson and Whitacre as GM's CEO.

"He'd have to be among the people being looked at," said George Peterson, president of AutoPacific Inc., an industry consultant in Tustin, California. "He was groomed for the position with the role he had in Asia."

Still, Peterson said a "dark horse candidate" seemed likely. Several GM directors favor appointing an outsider, according to a person familiar with the situation.
Mountain Hike

In Korea, Reilly built relations with workers through moves including hiking up Mount Bongcheon, west of Seoul, with a union leader to perform good luck rituals, according to his Korean- language memoirs, "CEO Nick Reilly, Passion" (Hans Media, 2007). The University of Cambridge graduate also often sang in karaoke bars with colleagues and reporters.

"He certainly differentiated himself from former Korean managers and actively communicated with workers," said Kim Yun Bog, a spokesman for GM Daewoo's labor union.

Reilly helped revived sales at Daewoo by introducing new or revamped models, such as the Tosca sedan and Matiz compact, and the unit became GM's global hub for developing small vehicles and minicars.

"Reilly's proven himself after successfully reconstructing Daewoo," said Lee Jin Sik, a Seoul-based analyst at CSM Worldwide Inc. "He may be the perfect troubleshooter to deal with the chaotic situation at Opel."

GM's Opel Rescue Meeting With Resistance

Bloomberg

General Motors Co. must overcome resistance from German workers and politicians as it eliminates jobs to save the Adam Opel GmbH division from bankruptcy after calling off a planned sale to Magna International Inc.

The Detroit-based company’s board voted yesterday to keep Opel rather than sell a majority stake to Magna and Russian partner OAO Sberbank, reversing a September decision. Klaus Franz, Opel’s top labor leader, called it a “black day” and Roland Koch, the prime minister in Opel’s home state of Hesse, said he was “angry” and concerned about protecting jobs.

GM may need to trim about 10,000 jobs from Opel’s 50,000- strong workforce, persuade unions to agree to 265 million euros ($390 million) in concessions accepted under the failed Magna deal, and repay a 1.5 billion-euro loan from Germany. The automaker is still banking on European governments to fund a 3 billion-euro restructuring of Opel.

“Failure to reach the needed restructuring would result in the operation becoming insolvent, an unnecessary and undesirable outcome for all involved,” said Karin Kirchner, a spokeswoman for GM in Zurich. “The plan is to secure the bulk of financing from European loan guarantees,” she said, without giving details.

In canceling the sale to Aurora, Ontario-based Magna, GM’s board is seeking to rescue an unprofitable division that provides the company with critical small-car technology and a local presence in Europe.

‘Negative Experiences’

“In light of the negative experiences of past years with the corporate policy of GM, I have serious concerns about the future of the company and its jobs,” Hesse’s Koch, a senior member of Chancellor Angela Merkel’s CDU party, said today in a statement. About half of the Opel workforce is at four plants in Germany, while 5,000 people are employed by the manufacturer’s Vauxhall brand in the U.K.

Ulrich Wilhelm, a spokesman for Merkel, said the government regrets that GM decided against “the convincing industrial logic” of the Magna proposal. Germany wants GM to repay the 1.5 billion-euro emergency loan by the end of the month.

Opel employees will seek to “close ranks” with European governments, labor chief Franz said in a statement. Workers plan to stage warning strikes tomorrow and demanded the immediate payout of deferred wages.

‘Fewer Chances’

Without worker support and Magna’s assistance in technology development and expansion, Opel will “have fewer chances to survive,” Ferdinand Dudenhoeffer, director of the Center for Automotive Research at the University of Duisburg-Essen, said in a Bloomberg Television interview. “It’ll be a mess for General Motors.”

Magna’s proposal called for 4.5 billion euros in aid, which Germany had agreed to provide. Following concerns from the European Union, Germany told GM that the financial support wasn’t reserved solely for Magna, opening the door for GM to reconsider an agreement that would have left the U.S. automaker a 35 percent stake in Opel.

The Canadian auto-parts manufacturer’s proposal was more expensive than GM’s planned restructuring because it foresaw expanding Opel to Russia and other markets. Opel workers supported the deal, which offered them a 10 percent stake and the opportunity to take part in decisions.

Franz said that the Kaiserslautern and Bochum plants in Germany, with a combined 8,600 employees, could be closed under a GM restructuring plan. Magna, which was considering cutting 4,000 jobs in Germany, had planned to keep all four German plants in operation.

‘Delighted’ Britons

The German resistance contrasts with reaction in Britain, where workers called the decision “fantastic” and predicted fewer job cuts at English plants.

“I’m absolutely delighted with this news,” Tony Woodley, general secretary of Unite, Britain’s biggest trade union, said today in a statement. “It’s fantastic news for the U.K. and right that GM does not break up its family and retains ownership of Vauxhall.”

Spanish trade union CCOO said in an e-mailed statement that agreements reached with Magna to cut production and eliminate jobs are no longer valid.

Opel needs to eliminate about 10,000 jobs in order to cut capacity and become viable, Carl-Peter Forster, GM’s top executive in Europe, said yesterday in Berlin. The restructuring could include the closure of as many as three factories, with the Antwerp plant the most vulnerable, he said at an auto industry conference prior to GM’s decision.

Belgian Reaction

“General Motors has lost its credibility,” Eddy De Decker, an official at the ACV Metal union, said by telephone from Antwerp today.

“First they told us we could build the new Astra, then they promised us an SUV model as a replacement,” De Decker said. “The SUV production would eventually move to China and it’s no secret that Antwerp would close down under GM’s original restructuring plan.”

GM wanted to keep Opel but was restricted in devoting U.S. bailout money to operations overseas, said Mike Tyndall, a London-based automotive specialist at Nomura.

“The real clue was that RHJ was the preferred bidder, and RHJ was the one most likely to keep it intact, allowing GM to buy it back in the future,” he said.

Brussels-based RHJ International, which holds some former assets of Ripplewood Holdings LLC, the New York-based private equity firm started by Timothy C. Collins, made an offer for Opel that GM executives called “simpler” than Magna’s. RHJ said in October it was no longer interested in purchasing Opel.

GM Directors

GM’s board, changed since a U.S. rescue of the bankrupt company, cited an improving economy and the Opel brand’s strategic importance in setting aside the Magna agreement.

Retaining ownership of Ruesselsheim-based Opel marks the second shift in GM’s post-bankruptcy plan for unloading unprofitable divisions. GM said Sept. 30 it would wind down the Saturn brand after a sales agreement with retailer Penske Automotive Group Inc. fell through.

Fred Irwin, chairman of the trust created by the German government in June to supervise Opel, said in a statement that he hoped GM’s decision would lead to new business “stability” at the unit.

Thomas Schaefer, who represents Germany’s Opel manufacturing states in federal government-led talks with GM, said Germany expects the automaker to present its restructuring plan “very quickly.”

Government Aid

“No one can make any commitment on aid until the restructuring plan is available,” Schaefer, deputy finance minister of Hesse, said today in a phone interview.

Opel’s cash position has exceeded targets for the past few months, GM’s Forster said, declining to comment on when the carmaker might run out of money.

“Where GM is going to get the money to fund the Opel restructuring is still something of a mystery,” said Aaron Bragman, an analyst at IHS Global Insight. “But from a strategic standpoint, keeping Opel was the right thing.”

GM’s Kirchner said GM will pay back the German loan if asked and needs to complete financing “as soon as possible.”

Opel’s market share declined to 7.6 percent in the first nine months of 2009, compared with 8.0 percent a year earlier, according to figures from the European Automobile Manufacturers’ Association.

Consumers probably will shrug off the latest twist in the Opel saga, Jaap Timmer, chairman of the European Opel dealers’ association, said in a telephone interview.

Some Opel dealers were “shocked” by GM’s reversal, Timmer said. “The main consequences will be for the workers and the plants.”

Nomura’s Tyndall said GM’s change of heart is a good sign for the industry.

“It’s broadly positive because it reflects the rapid recovery that GM is seeing,” he said. “In terms of broad-brush sentiment, it means the auto industry is through the worst.”

GM To Retain Opel

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.'"

Germany Considers Aiding GM's Opel, U.K. Weighs Vauxhall Options

As Originally Posted at The Wall Street Journal

Germany and the U.K. continued to weigh solutions for troubled European subsidiaries of General Motors Corp. on Monday, as Washington debated rescue plans for the auto giant in the U.S.

The U.K. government plans to sit down Wednesday with auto-industry representatives and others to discuss support for the country's auto sector, in which GM's Vauxhall subsidiary plays a major role.

In late January, the U.K. government announced a £2.3 billion ($3.24 billion) loan-guarantee package to support the sector, although industry officials at the time questioned how quickly funds would be made available.

Asked whether there would be any fresh support announced for the auto sector and Vauxhall in particular, a spokesman said "if there are any announcements to be made Wednesday, we'll announce them Wednesday."

Wednesday's meeting will be hosted by Business Secretary Peter Mandelson and will include officials from banks and regional development agencies, a spokeswoman for the department said.

"Vauxhall is in terrible trouble," Mr. Mandelson said on BBC television Sunday. "I've spoken three times in the last week to the president of General Motors in Europe; I've also spoken to the German economics minister because their plants are similarly affected and we will approach what we need to do together on this."

In Berlin, a government spokesman said Monday that securing jobs at GM's big Opel plants will be the government's main aim if it decides to give the company any aid. The spokesman, Thomas Steg, said it was clear that restructuring plans for Opel weren't sufficient for the government to make a final decision.

"This plan is still incomplete and requires a fleshing out," Mr. Steg told reporters. "The federal government's aim is clear: to secure jobs at the Opel plants permanently," he added. But any decision to help Opel could take weeks, he warned.

GM Europe Chief Executive Carl-Peter Forster last week presented the company's restructuring plan for Opel to the government and said GM needs €3.3 billion ($4.17 billion) in aid across its European operations. GM posted a total 2008 loss of $30.9 billion.

German politicians are under pressure from labor unions to bail out Opel, GM's largest European brand, to help save the company's 25,000 jobs -- a figure that more than doubles when including parts suppliers and other Opel-linked companies.

However, signs of a growing rift between the government's two ruling parties could complicate rescue plans.

The center-left Social Democratic Party worries that calls by Chancellor Angela Merkel's conservative Christian Democrats for detailed restructuring plans could cost jobs if the company goes under before it can be saved.

"We will help when the benefit for all people is more than the harm," Ms. Merkel said in her weekly video-streamed message Saturday.

The SPD's leader, Foreign Minister Frank-Walter Steinmeier -- who will challenge Ms. Merkel in general elections next fall -- is pressing for a quick solution.

"Politicians are responsible to protect Germany as an industry location," Mr. Steinmeier said over the weekend. "Politics must now come into play and fight for every job."

Interior Minister Wolfgang Schäuble, a member of Ms. Merkel's conservative party, said last week that Opel should seriously consider filing for insolvency because such a move could help the company protect its business assets.

The financial predicament of GM's European operations also could feature at an Anglo-German summit Friday, when Ms. Merkel visits the U.K. for meetings with Prime Minister Gordon Brown.

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.

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.