GM Angers Europeans, But Opel Decision Gains Plaudits

“The GM board doesn’t understand Europe, and Opel-Vauxhall will continue to a loss maker”

GM’s last minute decision to hang on to its European Opel marque left Russian Premier Vladimir Putin and German Chancellor Angel Merkel spluttering with anger and induced German unions to take to the streets chanting abuse, but despite all this negativity, retaining control of its European operation makes lots of sense.

It’s not often that a decision has angered such a wide range of powerful opinion but GM managed it. A Wall Street Journal editorial put it this way.

“Auto executives are almost as bad at politics as politicians are at making cars – at least if the international flap over General Motors’ decision to keep Opel is any indication,” the Journal said.

There were four main reasons why GM felt able to face down the inevitable firestorm of rage from such important quarters. Firstly, Opel and its sister company Vauxhall of Britain benefitted hugely from Germany’s 5 billion euro ($7.5 billion) and to a lesser extent the U.K., France, Italy and Spain’s cash-for-clunkers scheme. This meant that as the protracted talks with the Magna of Canada/Sberbank of Russia consortium dragged on through the German election on September 27 and beyond, Opel Vauxhall’s financial situation was being dragged back from the abyss.

Secondly, the decision by the European Union to investigate Germany’s 4.5 billion euro ($6.7 billion) offer of aid to Magna made GM sit up and think – “Hey. If we hang on to Opel, why can’t we have that money?”

Ruesselsheim the key 
Thirdly, GM’s turnaround in the U.S. meant that the financial pressure was off for the time being and it could look again at retaining Opel-Vauxhall. Lastly, as GM’s gaze shifted from the U.S. back to its global possibilities, it became obvious that Opel’s role, through its Ruesselsheim design and research centre, was central to a huge part of GM’s still profitable small car empire from Russia to China and Latin America. Many money-making products in these far flung outposts were really Opels under the skin, even though they were badged as Chevrolets, Daewoos and Buicks.

“The most important thing about Opel is Ruesselsheim,” said Peter Schmidt, editor of pan-European fortnightly newsletter Automotive Industry Data.

GM needs Opel more than Opel needs GM
“GM needs Opel desperately, but Opel doesn’t need GM. The Ruesselsheim R&D center is behind all those small cars GM sold in Korea, South America, China which are essentially all vehicles conceived and designed by Opel. These are all areas where GM has been making money in these worst of times and all this would have been cut off at a stroke if Magna had taken over,” said Schmidt.

“GM would have had to buy all future products from Magna. Without Opel, GM would have shot itself in both feet,” Schmidt said.

The Financial Times Lex column agrees.

“Retaining Opel is the best solution, even if it angers Berlin and Moscow. It will be cheaper too. GM is seeking less aid than Magna. But it must now grab the opportunity provided by the financial crisis to restructure its European operations in a sweeping and non-politicized way. That means sticking to earlier plans to cut up to 10,000 jobs in the commercially most appropriate locations, and reduce overcapacity by closing two or three of its European assembly plants,” Lex said.

There were some rumblings of unease this week when the debt rating agency Moody’s said Opel-Vauxhall would need about $8.5 billion (not the mooted $6.6 billion on offer from Germany to Magna) to effectively restructure and operate Opel. But this was refuted by GM CEO Fritz Henderson.

No idea
“I have absolutely no idea where those numbers came from. That’s not what we think is required – we think what’s required is about three billion euros ($4.5 billion),” Henderson told a news briefing in Ruesselsheim.

Moody’s Senior Vice President Bruce Clark gave no indication where he found the $8.5 billion number from in the agency’s weekly publication. But he agreed with AID’s Schmidt that Opel was crucial to GM’s long-term success.

“The Opel-Vauxhall operations are important because they have the potential to play a critical role in the long-term rehabilitation of GM in lots of ways: providing product to meet the U.S. market’s growing demand for small cars; spreading development costs over a larger sales base; supporting the development of global vehicle platforms; and maintaining purchasing power with an increasingly global supplier base,” Clark said.

Merkel embarrassment
AID’s Schmidt believes that although Chancellor Merkel was probably grinding her teeth over GM’s Opel decision – not only had she backed the Magna deal for months, but she was in Washington talking to President Obama when the shock news broke from Detroit with no courtesy tip-off from GM to limit embarrassment – Germany will come up with enough money to fund Opel’s plans.

“I’m convinced that the German government will cough up the same amount of money it would have given Magna, although it is likely to play a bit hard to get. GM will have to be as cautious about German job cuts as Magna was,” Schmidt said.

Professor Ferdinand Dudenhoeffer of the Center for Automotive Research at Germany’s University of Duisberg-Essen who supported the Magna plan, thinks GM and Opel-Vauxhall is in a mess, relying on a rose-tinted business plan which underestimates the cost of firing 10,000 or more people across Europe.

The Magna plan called for about 10,000 job losses across Europe from the 50,000 total workforce. Early Magna plans called for up to three of GM’s eight European plants to be closed, but by the end of the negotiation, only the factory in Belgium looked to be in jeopardy. Opel-Vauxhall has eight plants in Europe; Eisenach, Bochum and Ruesselsheim in Germany; Luton and Ellesmere Port, Liverpool in England; Zaragoza, Spain; Gliwice, Poland; and Antwerp, Belgium. There is also a plant in St Petersburg, Russia, which makes Chevrolet Cruzes.

Tin ear
“I think it will be difficult for GM to get money from European countries, at least it will take time because the European Commission will have to do its competition study. VW, BMW and Mercedes have already claimed that aid to GM will provide it with artificial advantages,” Dudenhoeffer said.

Dudenhoeffer also thinks that GM’s tin-ear political antics have lost it trust.

“In Germany, the public feels that GM is not very reliable. There is in principle no trust in the company. GM currently has no plan, it has lost more than 12 months and nobody knows how long it will take until it has a clear-cut plan. If it demands too much (from the workforce) it risks strikes in the midst of the Astra launch. It its plan is too weak, it will continue with losses. I think the brand has been damaged and leasing companies will be wary of buying Opels,” Dudenhoeffer said.

Continue to lose money
The Opel-Vauxhall Astra, a medium sized family sedan which competes with the market leading Volkswagen Golf, has just been redesigned from the ground up and is about to be launched across Europe. The car has received fulsome praise from the motoring media as a classy, good-looking well-priced rival to the Golf.

“The GM board doesn’t understand Europe, and Opel-Vauxhall will continue to a loss maker,” Dudenhoeffer said.

GM Europe in the form of Opel, Vauxhall, and the Swedish upmarket subsidiary Saab, lost about $1.6 billion in 2008, which some think could rise to $3 billion this year. Saab has since been offloaded, although even the deal hasn’t been completed yet.

“I’m not very optimistic for GM’s future in Europe. VW, Ford, Renault, Fiat, Peugeot, Toyota and the Koreans will put pressure on so that GM hasn’t a chance. GM simply underestimated the problems,” Dudenhoeffer said.

But AID’s Schmidt has no such qualms, although German market sales are expected to fall by about 30 per cent next year. He believes Opel has a secret weapon of sorts – product – in the form of the Insignia, a mid-size sedan about the same size as a VW Passat, and the Astra. The Insignia, European Car of the Year 2009, is built on GM’s global Epsilon II platform, and doubles as the Buick LaCrosse and the new Saab 9-5. Bits of the Astra will also be appearing in America, because it is based on GM’s global Delta platform which will see duty underneath the skin of the Chevrolet Cruze and the Chevrolet Volt.

Forster should have stayed
“The Insignia, although it was too expensive to be much affected by scrapping subsidies (cash-for-clunkers), has been tremendously successful. Opel is about to launch the Astra and that product will give the GM organisation just as much of a tailwind as VW got from (its new) Golf and Polo this year. It doesn’t have to try and push a dying donkey. These key products are brand new and the Astra is likely to do well,” Schmidt said.

Schmidt does have one criticism though. Opel Europe CEO Carl-Peter Forster quit after the news the Magna deal had fallen through, and has since decamped to Tata of India’s Land Rover Jaguar.

“It would have been perfect if Forster had been retained. In my view it was a mistake for GM let him go,” Schmidt said.