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GM's high-stakes standoff over Opel

Posted by: David Welch on August 25, 2009


At a media event on Aug. 11, I asked General Motors CEO Fritz Henderson if there was a chance that GM would keep Opel. “Not likely,” he said. “The company needs financing support. If nothing happens, (insolvency) could very well happen.” Those comments are more interesting today in the rearview mirror than they were at the time when a deal to sell a majority stake in Opel to parts maker Magna International appeared to have momentum. Just a couple of weeks ago, Henderson wasn’t really entertaining the idea of keeping Opel.

That changed on Aug. 21, when Henderson’s board took the advice of GM’s own consultants and told him to look at all options, including keeping it or liquidating it. Read the latest here. This is interesting for two reasons. First, GM’s new board—which includes some forceful personalities and heavy hitters like Chairman Ed Whitacre, Texas Pacific Group co-founder David Bonderman and retired Coke CEO Neville Isdell—didn’t like where Henderson was going. He recommended the Magna deal, pending a few changes. But the board wanted to cast a wider net look at all possibilities. This wasn’t necessarily a repudiation of Henderson. The majority of this board hasn’t been atop GM for the past nine months while the drama of the German political scene has played out. But clearly they didn’t think Henderson had turned over every rock looking for a solution. They want him to play hardball and push for more than GM would have gotten by selling a majority stake to Magna, a deal with committed financing from the German government. At a minimum, GM’s board is watching Henderson closely and scrutinizing his decisions. That’s good news for GM and the taxpayers. There is finally an aggressive board that is minding the store.

The other interesting development is that GM would look to either keep Opel or let it fall into liquidation. If GM can’t get a favorable deal with Magna or get the German government to finance another bid from RHJ Investments, then GM would either find other financing options to get money to restructure Opel or just let it slide into insolvency. In Germany, that usually means liquidation. Opel could effectively go away. Then GM would use its Chevy brand in Europe. That is tantamount to a reboot. GM would get small, cheap cars from its Korean operations, reduce costs but also cut its market presence in Europe by a three-fourths. But at least GM would be done with Opel, which has lost billions over the past decade. “Does GM need Opel? Not really,” says Maryann Keller, a longtime industry watcher. She thinks GM could be better off using Asian-made Chevy cars and, if sales grow further, building new plants in lower-cost countries in Eastern Europe.

That will be a big decision for this board. They may decide that selling GM to Magna—which has ties to Russian carmaker GAZ—will just create a new competitor. Or if they’re worried that RHJI could finance Opel’s restructuring and sell it to a rival, then they need to find the money elsewhere to fix it themselves. Credit markets are starting to loosen up, but Keller points out that after the Treasury Department stuck it to GM’s bondholders in bankruptcy this year, few will line up to loan GM more money. So if no one else steps up to finance Opel, GM lets it go insolvent and Germany loses far more than 10,000 of its 25,000 jobs. That’s what Magna or RHJI would have cut. Of course, GM can’t keep Opel in its current state with its intransigent union, high costs and fat losses. “What’s good for GM is not good for the German government,” Keller says.

The Germans want to save jobs and get GM to go away. GM wants to stay in Europe, but without Opel’s bloated workforce and high costs. This will be a nervy standoff between Henderson and his board and the German government. And it will be a defining moment for Henderson’s relationship with his new board.

Reader Comments

Mark Mulligan

August 25, 2009 7:03 PM

Excellent article. I've been following the topic closely in the German media. The Germans, and in particular their leaders, are in a nearly hysterical state over this with national elections looming next month. A social-democratic country with a chaotic history, Germans crave stabilility above almost everything else. Your last two paragraphs summed up the situation perfectly.


August 26, 2009 4:06 AM

The net result: GM's decision making ability is stalling again, just like in old times, which contributed heavily to last year's large scale debacle.
GM is in no position to play hard ball. It should bite the bulet and move on.


August 26, 2009 10:21 PM

The last two paragraphs do indeed sum up the situation very well. However I would specify that BY FAR the highest costs come from the factories in Germany. THe factories in Spain and Poland cost GM a HALF or even a THIRD of what the German factories cost. Even the factories in the UK and Belgium cost less to run.
Therefore, I think the wisest move for GM would be to close all the German factories down and bring the other factories to full capacity. The result would achieve what GM desperatley needs: a profitable Opel!
I find it ridiculous how Germany keeps on piling conditions on conditions for their loans considering their factories should be the first to go. Consider that all European car makers have received car loans fron the EU of late, and with NONE of the above conditions. What is more than ridiculuos is how the EU is standing silent over the issue and allowing Germany to organise the scaling-down or closure of other European factories in favor of German factories. Then again, how can you get more pro-EU than Gunther Verheugen?

Danny K.

August 27, 2009 12:07 AM

Ron, if not for the fact that GM's most marketable and high-volume midsize cars are largely on platforms designed by Opel, I would tend to agree. But having farmed out design of its bread and butter vehicles to Opel, I just don't see how they can give up that operation. Furthermore, I think you are underestimating the risk of turning over Opel to GM. Just look at what Russia has done to the oligarchs, is it that far out of the question that once Russia, Inc. has control of Opel, it won't try to seize GM's operations there? Ask Shell and BP if that isn't a very real risk.


August 27, 2009 1:13 AM

Opel is in the same position as GM: old legacy costs competing with subsidized Asian competitors without those costs.
--> It is no different than the airline industry where new start ups have huge advantages over legacy carriers. Opel is in the same position as GM: old legacy costs competing with subsidized Asian competitors without those costs.
--> It is no different than the airline industry where new start ups have huge advantages over legacy carriers. So Opel will sooner or later have to be cut, chopped, and hollowed out—that is globalization—a race to the bottom.
GM, along with Ford & Chrysler, should have learned its lesson when they financed the Japanese auto company expansion in the 70s. GM should be on a mission to kill Opel—they are a (potential) competitor.


August 29, 2009 1:42 PM

Globalization is assuredly not a race to the bottom, populist myths aside, the entire global economic pie has grown exponentially during every age of globalization, and the German automakers have not been hollowed out.

That said, the Sale of Opel never did make sense, just as the sale of Saturn does not either. The industry has over capacity. And the removal of these factories and their outputs is important to the health of the entire auto industry.

As has been pointed out above, the notion that absorbing years of billion dollars losses has not earned GM the right to German government loans in it's own restructuring attempt is a sad testament to the state of economic capitalism centuries into it's proven success.

GM should wait out the elections, and then take on the short term heat of dealing with this problem child now, before it grows into an competitor in the future, whilst keeping it's brand, dealerships and as pointed out above, the East European and English factories.

It maybe painful, but GM owns it's Opel business, since the thirties if my memory serves, not the German government, and it must not react to political pressure but "handle it's business" in what is healthiest for GM. That's GM's fiduciary duty to the US taxpayer. If German taxpayers where to chip in that would be another issue. Then they can make demands as we did here.

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Want the straight scoop on the auto industry? Our man in Detroit David Welch, brings keen observations and provocative perspective on the auto business.

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