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Magna Seals a Deal for GM's Opel

[Ed. note: This is an updated version of a story that originally ran May 29.]

Auto parts giant Magna International (MGA) forged a deal in the wee hours of May 30 to buy General Motors' (GM) European units, pleasing German unions and politicians who believe that Canadian-Austrian Magna will cut fewer jobs than rival bidders might have at Germany-based Opel and its sister British brand, Vauxhall.

Yet the tentative agreement, worked out with representatives of the German and U.S. governments and GM meeting in Berlin late on May 29 and early May 30, is full of risks for the 54,500 employees of GM Europe, which has factories in Germany, Britain, Poland, and other countries. While rival bidder Fiat (FIA.MI) would likely have cut more jobs in the immediate future, the Italian automaker offered a more plausible long-term rescue plan for Opel.

Fiat CEO Sergio Marchionne proposed joining Opel and Chrysler to create a company large enough to duplicate the model used by Volkswagen (VOWG.DE), Europe's largest carmaker. By sharing a limited number of engines, chassis, and other parts—so-called platforms—among nine brands, Wolfsburg (Germany)-based VW has weathered the current auto industry crisis better than most rivals. Volkswagen's VW, Audi, Skoda, and other models look different on the outside and address different market segments, but underneath the sheet metal, the brands have much in common.

By using a similar strategy, Marchionne hoped to become cost-efficient enough to compete with VW as well as Toyota (TM) and other global mass-market automakers. Fiat, which had revenues last year of more than $78 billion, continues to pursue its takeover of Chrysler, but the addition of Opel would have brought total production close to 6 million vehicles a year and put the combined company on more equal footing with its largest rivals. Of course, welding Fiat, Opel, and Chrysler into a sleek global carmaker would be a huge task. But it was probably the best chance to save the three carmakers in a business that suffered from overcapacity even before the global economic crisis hit.

What Benefit to Opel?

Magna's plan is less clear, and representatives of the company could not be reached immediately. According to news reports, Magna, whose annual revenues are around $20.5 billion, will take over Opel in league with Russian carmaker GAZ (GAZA.RTS) and with financial backing from Russia's Sberbank (SBER.RTS), aiming to build share in the Russian market where Opel is already strong. Magna would also likely use Opel as a kind of automaking outsourcer, producing cars on contract for other brands. That's a business Magna is already in, and it's a model used in other industries such as semiconductors and mobile phones.

But given that most automakers already have way more factory capacity than they need, it's questionable whether any would want to hire a third party to build more cars. Opel and Vauxhall, with production of 1.5 million cars a year not counting other GM brands, do not seem to have anywhere near the volume by themselves needed to make money with mid-priced and low-priced cars, even in a healthy economy.

In addition, the partnership with GAZ suggests that Opel might shift its focus east from its current core markets in Europe. Currently, about 25,000 Opel employees work in Germany, with fewer than 1,000 in Russia, according to information on GM Europe's Web site. Opel employees should probably be more worried than they are that Magna will move production to Russia, where labor costs are much lower than in Germany, Britain, or even Poland.

Magna was left as effectively the sole bidder for Opel after Fiat said May 29 it would not attend the Berlin talks on May 29 because it hadn't been given enough time to examine Opel's books and was unhappy with the way the sale had been handled. It was also shocked when GM asked on May 27 for $415 million more in bridge financing to keep Opel running.

Magna's victory is a welcome outcome for German politicians, who want to protect jobs now and get the Opel issue off the table before national elections in September. But it may not be good news in the long run for Opel's hard-pressed workers.

Return to the General Motors' New Landscape Special Report Table of Contents.

Ewing is BusinessWeek's European regional editor.

Ewing is BusinessWeek's European regional editor.

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