GM Will Sell Opel to Magna After All

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More Chevys

Meanwhile, GM has been expanding its Chevrolet brand in Europe, chiefly in Russia and the Eastern markets, by selling cars engineered and assembled with lower costs in Asia. Both companies will covet growth in Russia and the East. "Over time they could be competitors," says King.

Magna will have some big issues to face as well. Opel has lost money for most of the past decade, with only brief respites. Last year, GM's European operations lost $2.8 billion, and they bled a further $2 billion in the first quarter of this year. Saab, another loser that GM is trying to sell, accounted for some of that, but Opel has not been successful since the 1990s. Smith says GM and Magna think Opel can become profitable in 2011.

The new company will get a total of €4.5 billion in financing from the German government, which will syndicate some of that debt to governments in Spain and Britain. Magna will put another €500 million into Opel. GM gets no cash in the deal but does get to unburden itself from a money loser at a time when management has its hands full turning the North American business around.

Now, Magna must start fixing Opel. The problem is that Opel has high-cost manufacturing in Germany, Britain, Belgium, and Spain, while some rivals have moved production to lower-cost countries in Eastern Europe. Opel does have a plant in Poland. But its cars don't command the high prices of, say, the BMW, Mercedes, or Audi brands. So profits are a challenge.

Managing the competitive positioning of both Opel and Chevrolet could be the answer to Opel's cost problems, says James N. Hall, principal of 2953 Analytics. If Magna lets Chevy sell smaller, cheaper cars and stay downmarket as GM had been doing, the two companies can keep moving Opel upscale and get the level of pricing that justifies the costs. Says Hall: "It's in Opel's best interest to leave the lower-market business to Chevy."

GM thinks that Opel's market position may be the best way to keep the company from competing with Chevy. Smith said that moving Opel downward in pricing and prestige to compete with Chevy would be risky for Opel and could turn away core buyers.

Saving Jobs

The new Opel Insignia midsize car is commanding better pricing, says Hall. That has led some executives inside GM to believe that Opel can recapture its premium-price position that made the company a winner before GM started cutting corners on its models in the '90s.

But with losses piling up, GM couldn't wait for an Opel turnaround. The German government sees GM management as a big part of the problem, so Chancellor Angela Merkel didn't want to finance a restructuring led out of Detroit. Opel has cash to last only into December or January. So GM had few options but to sell a stake.

Henderson was never keen on the Magna deal, say sources inside GM. But with Opel burning cash and the U.S. Treasury Dept. and German government unwilling to fund a GM-led restructuring, selling the company became the only clear option. GM talked to governments in Britain, Spain, and Poland (homes to other Opel plants) about financing, but no deal was reached that would get the necessary funding. The German government favored Magna as a buyer, believing that it would save more of Opel's 25,000 jobs than RHJ International (RHJI.BR), a Belgian private equity firm that placed a rival bid. GM favored RHJI, but the German government would not provide the needed $4.5 billion in financing to get the deal done.

Now the restructuring gets under way. GM said the two companies need to work with the German unions; with GM out of the driver's seat, German union IG Metall may have the cover it needs to grant more concessions and bring Opel back to profitability. If Magna can pull that off, it will have scored a major victory. And given Opel's history, an unlikely one.

Welch is BusinessWeek's Detroit bureau chief.

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