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For Magna’s Opel Plans, Wait Until After German Election

Why Would Anyone Want This Chronic Loss-Maker Anyway?
If Opel Is Saved, Pressure Will Switch To Next Weakest.

The German government seems to have negotiated a way to make sure no difficult decisions about the future of GM Europe’s Opel are taken before the federal election in September.

Job one was to make sure Opel was ring-fenced from any reaction to GM’s assumed bankruptcy. Mission accomplished. Job two was to keep Opel alive until the elections, after which unpalatable decisions on the future could be taken. Canada’s Magna International, with a little help from the Russians, plus 1.5 billion euros ($2.1 billion) in loan guarantees from the German government will keep Opel afloat for a while, hopefully past September 27, the date of the election. Fingers crossed. GM and Magna must now negotiate a final deal.

The surprising thing is that there were any investors seriously competing for GM Europe. Last year it lost $1.6 billion, and according to IHS Global Insight, quoting a Financial Times story, is expected to lose another $3 billion in 2009. It hasn’t made serious profits for 10 years. Everybody knows that overcapacity is chronic in Europe. Governments should be seeking the closure of factories producing cars that lose the most money, like Opels and Vauxhalls, the British subsidiary. If Opel/Vauxhall manages to stay alive, this just puts pressure on the next weakest company, and the process continues.

Magna hasn’t spelled out its plans for Opel-Vauxhall, although unions believe it sought cuts less savage than Fiat’s, the other main bidder which dropped out Friday.

Would it carry through Opel’s new model programme? Would it seek to drop chunks of this and produce cars for other manufacturers? After all, Magna has much experience of this. Magna has said all 4 German Opel plants would remain, but would only say it would try and keep other plants in Antwerp, Belgium, and Vauxhall sites in England. With other big manufacturers fleeing high-cost Western Europe to set up factories in central and eastern Europe, this tactic seems brave.

Max Warburton, analyst with Bernstein Research in London, in a report published before Magna’s triumph was announced, couldn’t see the logic behind Fiat’s drive to link with Chrysler and Opel. His thoughts would appear relevant to Magna’s plans too.

“(Fiat CEO Sergio) Marchionne’s strategy, if it comes off, will keep America’s weakest (and bankrupt) manufacturer Chrysler and Europe’s weakest (and near bankrupt Opel/Vauxhall) manufacturer alive – stalling or preventing capacity cuts. Surely that can’t be good for industry returns?”

Warburton said Europe suffers from excessive market share fragmentation, political support for national champions, two different powertrain options (gas and diesel), declining average vehicle lifecycles and volumes, poor labor productivity, poor capacity use, and dense and expensive distribution networks.

“Would it not be better overall for the industry’s returns to see Opel shrink, or fail?” he said.


Neil Winton – May 30, 2009

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