German Plans for GM's Opel Go Awry
On the afternoon of Friday, Aug. 21, Chancellery chief-of-staff Thomas de Maizière (CDU) rang up Economics Minister Karl-Theodor zu Guttenberg (CSU), passing on Merkel's orders for Guttenberg to call US Treasury Secretary Tim Geithner before the board at General Motors made a decision on the future of Opel.
Maizière emphasized that it was important to get two key points across. Firstly that the German government favors the offer being made by a consortium made up of Magna, a Canadian-Austrian car parts supplier, and Russia's Sberbank to purchase Opel from GM. And secondly that GM would only be able to reckon with German financial assistance if it opted for this particular deal.
Guttenberg's response to this was cool. He indicated he didn't think very much of running the risk of provoking further displeasure in Washington by making a renewed attempt to get the US government to pressure GM to accept a specific deal the German government had chosen to back. In a voicemail to the Chancellery, Guttenberg said he wasn't going to have time to make the call at around 2 p.m. and that Finance Minister Peer Steinbrück could make it for him, seeing as he was in contact with Geithner on a regular basis anyway, and then hung up.
'Why Me?'A few minutes later, Steinbrück's cell phone rang in the midst of election campaign activities somewhere in the western state of North Rhine-Westphalia. Maizière asked if he could call Geithner regarding Opel. "Why me?" Steinbrück asked back. Opel, he pointed out, was Guttenberg's responsibility. That's true, Maizière admitted, "but his relationship with Geithner isn't as good as yours."
Steinbrück did as he was told. Three times he tried to get through to Geithner. Three times Geithner called back. But somehow they didn't manage to conduct a conversation. Geithner was tied up in meetings and Steinbrück was in the hubbub of an election campaign tent.
That evening, Foreign Minister Frank-Walter Steinmeier managed to get through to his counterpart, US Secretary of State Hillary Clinton, telling her that Washington needed to exert influence on GM and that time was of the essence. Clinton listened patiently to what Steinmeier had to say before pointing out that she was not the right person for him to be addressing in this matter. But she promised to speak with Geithner about it once again.
Quicksand for the GovernmentThis whole scenario shows that something's not working like it's supposed to with the German government's bid to rescue Opel. At the end of May, the leaders of Germany's grand coalition government—which comprises Angela Merkel's conservative Christian Democrats and the center-left Social Democrats—were slapping each other on the back in an atmosphere of optimism after a memorable late-night meeting at which they agreed to provide billions in government support to save Opel and to support Magna in its role as the investor.
At the time, Merkel rejoiced that the government had saved the Rüsselsheim-based auto giant from sliding into a maelstrom of bankruptcy proceedings. Steinmeier, the leading candidate for the SPD in the upcoming general election, gushed about "a good future for a new European automotive group". Three months and over €1 billion ($1.4 billion) in taxpayer money later, this future has become less certain than ever. Opel has turned into a quicksand for the German government.
Part 2: Political Fallout Originally the government had been looking for a way to avoid the loss of a large number of jobs that would inevitably follow in the wake of the American parent company going into bankruptcy.
But then it somehow lost sight of this objective. At some point it was no longer about jobs. It was about a new European automotive group, a new Opel. It was about industrial policy. It was about Russia versus America. Merkel and Steinmeier wanted very badly for Magna to be the new owner, but they didn't have any real pressure they could apply to make it happen.
The more the level of hysteria rose in the demands coming from Berlin, the more backs began to stiffen in Detroit and Washington. Fred Irwin, chairman of the German-American trust created last spring to facilitate a sale of Opel, noted critically that the German government had made a decision much too early as to which investor it was going to back.
The political fallout for the German government is considerable. If Merkel insists on backing Magna, she runs the risk of angering Washington. On the other hand, if she is seen as giving in to US wishes, she risks irritating the Russians.
Spokesmen for the Spanish automotive workers union fear that the German government's Opel offensive will have negative repercussions for their members and complained about the "brazen pressuring" from Berlin. The government of the Flemish-speaking part of Belgium has threatened to bring German state aid before European competition authorities. London openly opposes the Magna plan. There has been talk of "a disaster" at the European Commission in Brussels.
Considerable damage has been done on the domestic front as well. Merkel had originally undertaken this initiative with a view to neutralizing Opel's situation as an effective campaign issue for the SPD. Now the affair is beginning to affect Merkel's reputation as a capable crisis manager and is revealing deep splits in the conservative camp just four weeks before the general election.
Sour SentimentWhile Merkel was busy on Aug. 21 issuing urgent calls for the GM board to arrive at a decision on selling Opel as quickly as possible, Economics Minister Guttenberg said he understood that the American side would want to take the time it needed for appropriate due diligence before making a decision of this magnitude.
The suspense-filled drama that has continued to play out with regard to the fate of Opel for almost a year now is not just something that focuses attention on statements by campaigning politicians, wise investors, and prudent shareholders. It is also contains lessons to be learned on the dangers government leaders confront when they try to take on the task of saving companies from bankruptcy. If, after making grand gestures and exploiting taxpayers' money, they happen to succeed, they can expect to see a significant rise in their popularity ratings. On the other hand, if, in the end, the provision of government assistance fails to save the company in question, public sentiment can rapidly turn very sour indeed.
What is going to happen in the case of Opel has yet to be decided. It is possible that it could be sold to Magna. It is just as possible that it could be sold to a competing bidder, Belgian-based private equity investor RHJI. Then again, GM could decide to hang on to it. And Opel could file for bankruptcy after the general election.
'Sick of Hearing this Stuff'It is clear that the German government made serious blunders in its attempt to save Opel. It was too quick in deciding to back an investor whose business plan was questionable and whose partner was a hard sell. The government designed its assistance plan in such a way that it would hardly be able to exert any influence at all on the decision to sell. And it misjudged the climate of opinion in the United States, the key partner country.
There is growing frustration among Opel workers, who have been worried for months about losing their jobs. When 44-year-old Norbert Hinzmann sees camera teams waiting in front of the factory gate at the end of his shift in Bochum, he knows right away that something new was put on the table in the negotiations. "A new potential buyer is being named every day at the moment," he says. "We're getting sick of hearing this stuff."
Hinzmann has been an assembly line mechanic for 20 years now. He installs steering wheels, dashboards, and speedometers for eight hours a day. He currently has Mondays off as a result of the plant putting workers on reduced hours under Germany's short-time working program, which is designed to protect jobs during a downturn. When he first started working for Opel in 1989, his fellow workers told him he would be able to continue on all the way through to retirement. Those expectations are long gone now.
"At my age I don't think I'll be able to find another job that pays well," he says. During the last crisis he inquired about employment with a contract labor company just in case he might need it. "They offered me €7.50 an hour. I can't support my wife and my son on that kind of pay," he says. "We no longer have any financial security."
Political SupportThe German government's rescue plan has done little to change that, despite the fact that it was formulated for the most part by a union man, Opel works council chairman Klaus Franz. Free of party affiliations himself, Franz succeeded in gaining political support from both sides of the political spectrum for the solution he proposed, a takeover by Magna.
Franz began lobbying to this end in late January, after meeting with GM managers in Detroit. Faced with impending bankruptcy, the latter were willing to sell off anything that would bring in badly needed cash, including the group's European business. Franz saw this situation as a chance to free Opel from the stranglehold the US parent company had on it. He needed two things to achieve this: several billion euros in government financial assistance to help restructure the company—and a buyer.
Franz's first convert was Frank-Walter Steinmeier, the SPD candidate for the office of chancellor. For many years a close adviser to former chancellor Gerhard Schröder, Steinmeier saw the Magna plan as an opportunity to establish a reputation for himself as a leader with the ability to intervene and save companies from closure the same way his mentor did. Significantly, Franz also gained the support of Hesse's governor, Roland Koch (CDU). This meant he had the Social Democrats behind him as well as one of the most influential leaders in the conservative camp.
When it came to getting the chancellor herself on board, Franz was helped by Berthold Huber, who is the president of the powerful union IG Metall and well connected in government circles. At a meeting in the Chancellery, Huber told Merkel about the Magna plan. Since then, Franz has been present at almost every top-level meeting on Opel held in Berlin.
Part 3: Considerable Defects Despite wide-ranging support for the Magna plan among political and union leaders, there was no denying the fact that it had considerable defects, not least of which was the fact that Magna would risk getting into trouble itself if it invested in Opel.
Major customers in the automobile industry could stop ordering from Magna, since its status as an Opel shareholder would automatically make it a competitor. CEO Martin Winterkorn has already announced that VW, Europe's largest car manufacturer, would be forced to review its policy of ordering components from Magna.
No less controversial are Magna's Russian partners, first and foremost the Nizhny Novgorod-based car manufacturer Gaz, a company seen as being in dire need of restructuring. It appears doubtful that Opel would be able to expand its production in Russia with the help of this company.
Perhaps the biggest drawback to the Magna plan is the fact that it will only be able to guarantee Opel's future for a transitional period, if that. Opel only sells around 1.5 million cars in Europe each year, a quantity that is too small to be able to finance long-term investments in new technology.
Lack of TactBut Magna wanted to attempt the takeover anyway. After all, the parts supplier had managed to get the government to cover most of the risk. Magna would only have to contribute €0.5 billion towards the restructuring of Opel, and only €350 million in actual equity. German federal and state government guarantees, on the other hand, would amount to €4.5 billion.
The plan offered by private equity investor RHJI would have been less expensive. It only requires government assistance to the tune of €3.8 billion.
However the fact that Magna was chosen in the end was a consequence of more than just political lobbying. It was also a result of a lack of tact on the part of RHJI representatives at a meeting in the Chancellery.
When Merkel asked Magna CEO Siegfried Wolf why he wanted to take over Opel, he said he believed in the company, in the future of the automobile market, and the value of the Opel brand. Merkel liked that.
Then she asked RHJI CEO Leonard Fischer why he was interested in Opel. The former investment banker answered very matter-of-factly that it was because the German government was assuming the risk. Merkel liked that less.
Half-HeartedIn the end the decision in favor of Magna turned out to be a typical Merkel-style decision. On the surface of things there seemed to be a clear result. In actual fact, however, it was watered down by compromises and half-hearted statements.
The German government generously offered the new investor assistance to the value of €4.5 billion. But in contrast to the American government, it chose not to invest in the company. Merkel feared having to face a public debate on too much government influence in the business sector.
The German government contented itself with two seats on the five-seat board of the newly created trust. That meant if it wanted to get an agreement on something, it would first have to convince the three representatives from the US side.
But that turned out not to be necessary. The Economics Ministry sent delegates who did not support the government's position anyway, former Continental CEO Manfred Wennemer and Dirk Pfeil, a politician with the business-friendly Free Democratic party. Wennemer would have preferred to send Opel into bankruptcy, while Pfeil took an interest in the offer put forward by RHJI. Neither of them showed any inclination towards supporting the Magna plan.
Part 4: Change of Course No wonder, then, that the Chancellery failed to notice when the wind started to blow in a different direction in the United States. Early this year, when GM was still headed for bankruptcy, its strategy was more or less dictated by desperation. A rapid selloff of certain parts of the group, such as Opel, had been envisaged in an effort to generate urgently needed cash revenues. But GM has since emerged from bankruptcy proceedings. It has gotten rid of around $40 billion worth of debt and self-confidently refers to itself as "the new GM." Given the growth in car sales brought about by the American cash-for-clunkers program, the selloff of parts of the group, although still an option, is no longer a necessity.
And the personnel changes in Detroit have attracted little attention in Berlin. The Obama administration has done more than just appoint a new CEO. In July the board was "purged". Eight out of 13 members were newly appointed. At the meeting held on Aug. 21, one of them asked: "Why should we sell our European business at all?"
A power struggle is currently raging in the GM management over this question. GM CEO Fritz Henderson is no longer the voice being listened to. That role has been assumed by board members such as Tom Stevens and veteran Bob Lutz. Referred to internally as "hawks", they take the view that GM should not sell off any more of its assets.
Merkel's Dangerous GameThe German government failed to pick up on the change of course at GM. After a telephone conversation with Obama, Merkel remarked that the trans-Atlantic relationship was being "put to the test".
Things like this are not received well in a country that sees itself in the role of a superpower. In addition, Obama has no intention of being America's "car czar". The fact that he could be perceived by the US public as cultivating trans-Atlantic relations at the expense of GM workers is something the White House finds irritating—even if the US government has invested $50 billion in GM.
"Why is Merkel playing a game whose result she cannot control?" asked one observer who was a member of Obama's transition team and who preferred not to be named. There was no way Merkel could win, the observer said, adding that the chancellor's attempts to apply pressure are regarded as naïve.
A Humiliating ExperienceWhat was probably the biggest miscalculation on the part of the German government was its underestimation of the importance of the Russian factor in American thinking. April 28, the date on which Russian carmaker Gaz announced its interest in Opel together with Magna, was for many in Washington and Detroit the day on which that consortium lost its appeal. Russian involvement is no small matter for Americans. GM is one of the biggest suppliers of foreign cars on the Russian market and wants to continue to maintain that position. At the same time, being forced to sell off part of GM "to the Russians" is something that would be seen by many Americans as a humiliating experience, even 20 years after the end of the Cold War.
A number of times in the course of the past few weeks, GM managers asked German government representatives to take Russian investors out of the Magna consortium and to focus on restructuring core business areas in western Europe, saying that this would increase acceptance of the project in the United States.
German negotiators said they were unable to comply with this request. By way of explanation, they referred to agreements that had been made with Russian President Dmitry Medvedev.
At their recent meeting in Schleissheim, Bavaria, Merkel promised Medvedev that she would definitely support the Magna plan. Medvedev, for his part, held out the prospect of major Russian orders for eastern German shipyards, something Merkel has a strong interest in. The shipyards in question are in the immediate vicinity of her voting district.
A Cat-and-Mouse GameBut the Americans are not greatly moved by Merkel's electoral needs. Opel still belongs to GM. The US negotiators are convinced that they have a clear advantage in the talks.
GM's chief negotiator, John Smith, has been playing cat and mouse with the German side for months now. He skillfully keeps the talks going, but without really letting them go anywhere. Whenever a solution appears to be on the horizon, the wily manager puts forward what are alleged to be new problems but which in actual fact are issues that have already been dealt with.
Almost everything seemed ready for an agreement shortly before the GM board meeting in Detroit on Aug. 21. But then Jochen Homann, a senior official at the Economics Ministry and the chief negotiator on the German side, received an e-mail from Detroit on the evening of Aug. 18 in which Smith wrote that there were two points that would very probably cause problems at the board meeting. By then, at the latest, it should have been clear to the German side that a decision was not going to be made at that meeting.
Smith continued to play his cat-and-mouse game in Berlin on Aug. 25. In a meeting with senior officials at the Economics Ministry, Homann asked Smith if the GM board was in fact considering the possibility of keeping Opel. Smith's answer was evasive. He said there were eight new members on the board and it was clear that they were going to be asking questions.
Part 5: Dragging on Indefinitely Smith allegedly had an urgent question of his own for the German side. Would the German government back away from the Magna takeover plan if the competitors in the RHJI group were to include an industrial partner? Homann answered that lots of things would be possible but that the German government could only assess proposals that had been put forward in concrete form. At the present time there were only two plans on the table, he said, adding that as long as that situation remained the same, the German government would continue to back the Magna plan.
Once again Smith presented his reservations with regard to the Magna plan, mentioning licensing fees, the eastern European market, and the threat posed by technology transfers to Russia.
Homann called Magna CEO Wolf and asked what the status of these points was. Wolf immediately faxed him the status of negotiations agreed with GM. As it turned out, the allegedly controversial points had long since been ironed out. There were supposedly no more questions left open after the latest round of negotiations with Magna representatives and chancellor adviser Jens Weidmann in Zurich. But those who attended that meeting felt it was a safe bet that Smith would come up with a few more supposedly unresolved problems, at the latest by the time he returned to Detroit.
Trans-Atlantic Tug-of-WarThus it would seem that the talks are doomed to drag on indefinitely. The government bridging loan provided to Opel is large enough to last until January. The German government would have no trouble waiting until after the Sept. 27 general election for a decision.
GM and Magna are not under any time pressure either. It is only the objects of this trans-Atlantic tug-of-war, Opel and its more than 25,000 German employees, who are suffering as a result of being left up in the air as to their fate.
No progress can be made with regard to restructuring the company as long as the question of ownership remains unclear. And it is not exactly conducive to cars sales if Opel is perceived less as a brand name and more as a synonym for a company that is about to go under.
New OpportunitiesOne thing is certain. The final decision in this matter is going to be made in Washington. The question is: What is more important to Obama? The global reputation of the US auto industry or the restructuring of a major corporation? Markets overseas or jobs at home? The promotion of industry or a balanced budget?
On the one hand, Obama says: "We cannot and must not, and we will not let our auto industry simply vanish. This industry is like no other—it's an emblem of the American spirit, a once and future symbol of America's success."
On the other hand he says: "We cannot make the survival of our auto industry dependent on an unending flow of taxpayer dollars. These companies—and this industry—must ultimately stand on their own, not as wards of the state."
Merkel is standing firm. She wants to use billions of taxpayer euros to keep an ailing industrial company alive. In her view this will provide "new and increased opportunities" for Opel.
SVEN BECKER, MARKUS DETTMER, DIETMAR HAWRANEK, CHRISTIAN REIERMANN, MICHAEL SAUGA, GABOR STEINGART, JANKO TIETZ