GM hangs on to Opel, Germans and Russians Furious

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GM’s decision to hang on to their European Opel brand caught the industry by surprise this week and spurred dramatically different reactions from the parties involved. Magna, the Canadian parts maker that was spearheading the partnership in negotiations to take over GM’s Opel brands, gave the most reserved response as Siegried Wolf, Magna’s co-chief executive said, “We understand that the board concluded that it was in GM’s best interests to retain Opel, which plays an important role within GM’s global organization. Succinctly put, Mr. Wolf. GM’s new board has realized Opel is key to GM’s position as a global player but more on that shortly.

Magna’s partner Sberbank and their Russian backers all the way up to Vladimir Putin were outraged threatening a legal review of GM’s right to retain the brand. Their ire is understandable. The survival of the Russian car industry has been hanging in the balance for most of this year as the economic crisis ripped through demand and cut sales by half. Avtovaz, the country’s biggest car-maker, has already eaten up Rbs25bn ($800m) in government assistance and says it needs more to stave off bankruptcy and pay off Rbs47bn in short-term debts according to a report in the Telegraph newspaper. Gaz, Russia’s second-biggest car-maker, owned by Oleg Deripaska (you remember him of Rusal and Norilsk fame), which had originally been seen as Magna’s industrial partner for producing Opel cars in Russia, has been in talks on restructuring about $1bn in debts for most of this year. Both companies desperately need western technology to survive and GM’s Opel R&D operations are world class, the loss of which to a lower cost Russian rival has always been a major concern of the old GM board.

The German government and workers are equally furious. The workers were due to take a 10% stake in the new enterprise and the government thought it had successfully negotiated a deal that would avoid any plant closures within Germany. British workers at Opel’s Vauxhall plants, on the other hand, were said to be delighted with the deal having always maintained their greater productivity justified the UK plants being favored over continental plants in closure decisions, something that looked as if it would be undermined by political pressure under the Magna-Sberbank deal.

For GM, however, the decision to retain full ownership had more to do with the strategic development of their global business. Opel Europe has been a consistently profitable part of the GM group, 2009 not withstanding, but more important, it holds much of the intellectual property necessary for the development of GM cars in the next decade. As the article points out, Opel plays a key role in the development of new compact cars for GM, a crucial segment in its drive to retain market share from rivals, such as Toyota, in North America. The soon-to-be-launched Buick Regal will share many features with Opel’s Insignia, for example. Vehicles such as the Regal are critical to GM’s hopes of retaining the loyalty of owners of Saturn and Pontiac, two of its discontinued brands. Americans are gradually gravitating away from large SUV’s towards the smaller, (not small we hasten to add, just smaller) more luxuriously appointed cars that have long appealed to Europeans. Furthermore, GM’s diesel engine research and development is centered in Europe. While diesel has so far played a relatively small role in GM vehicles outside Europe, the car-maker is keen to retain this technological edge. The proposal to sell a majority stake in Opel was always an act of desperation for GM. If they can now retain the brand and intellectual property that goes with it they will be better placed to rebuild their business in the years ahead.

So back to Magna’s reaction. They fully understand why GM having put their own Chapter 11 behind them and emerged more bullish and confident would want to hang on to Opel. As a major supplier to the car maker they are also the most pragmatic. “We will continue to support Opel and GM in the challenges ahead said Mr Wolf. Whatever way it falls, Magna will make sure they are in there for the long term and bury their disappointment in failing to secure Opel – pragmatic capitalism at its best.

–Stuart Burns

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