A New Road for Magna

Now that GM has decided to keep its subsidiary Opel after all, what are the options for Germany, Russia - and Austria?

News | Mirjam Masa | December 2009 / January 2010

Germany was furious. Magna was not happy either. And the Russian Sberbank also lost a remarkable deal.

"We are very shocked and surprised at the sudden decision of General Motors", said Peter Hofer of Human Resources at  Magna International Austria. "We invested a lot of time and money in order for this deal to happen," Hofer continued.

After a six-hour board meeting in early November, the U.S. carmaker had canceled the deal to sell Opel to the Austro-Canadian automotive company and the Russian bank and said it would reconstruct its European unit on its own. "But we will continue doing our work", Hofer stated, "although some changes will have to be made."

The German government was especially irritated, since GM is threatening to shut down two out of four German plants, in Kaiserslautern and Bochum. "The demonstrations will begin in Germany and spread out across Europe," warned Klaus Franz, the head of the German workers’ council.

And things seem to be getting more difficult by the week. General Motors is asking European governments for €3 billion funding in order to restructure Opel.

On the other hand, Berlin is asking General Motors to pay back their loan of €1.5 billion, while Magna is requesting €4.5 billion in state aid. The automobile giant meanwhile maintains that it already gave back €600 million and they are willing to pay back the rest.

For the Russian Prime Minister Vladimir Putin the U.S. carmaker’s decision was a surprise. He indicated that Russia might not give up the battle, and suggested a legal analysis of the move to be conducted by Magna and Sberbank.

Magna can only support this consideration since Russia was seen as a new market ready for the first car model that the Austrian-based parts manufacturer would build.

"Gaz, Russia’s second-biggest carmaker, owned by Oleg Deripaska, was seen as our industrial partner for producing Opel cars in Russia," says Hofer. "Russia wanted to gain access to the more modern technology that Opel has to offer, in order to rescue its auto industry from bankruptcy. With General Motors close to failure as well it seemed an ideal plan for us to both help Opel and enter the Russian market."

At this point, Germany is fed up with the situation, as Jurgen Ruttgers, prime minister of the state of North Rhine-Westphalia put it. "The behavior of General Motors towards Germany is totally unacceptable." He added that "General Motors’ behavior shows the ugly face of turbo-capitalism."

Despite the overall dissatisfaction, however, some German state governments with Opel factories indicated that they could support GM’s move.

Employees and people close to the U.S. company admitted that there was a "certain kind of brinkmanship" involved in its decision to keep Opel. "If GM cannot finance it, then they will go for a controlled insolvency with a much more brutal restructuring and even more plant closures," a source told the Financial Times.

"GM’s overall financial health and stability have improved significantly over the past few months," said its CEO Fritz Henderson,  "giving us the confidence that the European business can be successfully restructured. We will soon present our restructuring plan to Germany and other governments and hope for its favorable consideration." Henderson stepped down on Dec. 1, shortly after making the comments. Ed Whitacre, GM Chairman of the Board, will serve as interim CEO until a replacement is named.

It is difficult to say what exactly is going to happen next, what with the many tactical moves spanning continents and involving economic, political and even military considerations.

"I don’t want to conclude anything for General Motors", said Hofer of Magna, "but already employees in Spain have been laid off, and in Germany there is a threat of cutting down jobs. Magna is still the main supplier for Opel parts, and we will continue to do our job, but I am very interested to see how this will evolve, especially with the pressure from the Germans."

He added, "We are going to have to make many changes, but for Opel the changes and decisions will be much harder."

Russia’s politicians believe that GM’s u-turn was politically motivated. As Oleg Mozorova, a senior member of United Russia, the Kremlin’s ruling party, claimed, "It seems the motivation was very simple: to keep Opel within the political and economic sphere of influence of American business and American politics." General Motors announced, however, that it will continue its co-operation with Russia’s carmaker Gaz. The company seems intent on proving that the Russian accusations are just rumors.

Even if Magna will not co-own Opel, its future is closely linked to the fate of the German car. ""They still are our biggest client", confirmed Mr. Hofer and added, "It’s understandable that employees of these companies (in Spain and Germany) are worried, now that they are threatened with close-downs. The operating income (EBIT) for Europe decreased around €71 million to a loss of approximately €36 million for the third quarter of 2009.

The decrease in EBIT was substantially due to decreased margins earned on reduced sales as a result of significantly lower vehicle production volumes, or the shortage of cars being sold."

In any case, Magna seems to have made peace with the decision. "We understand", said Siegfried Wolf, Magna co-chief executive, "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. We will continue to support Opel and GM in the challenges ahead".

Eventually Opel’s German board, which administers the 65 per cent stake that was destined for a new investor and the workforce, said it also approved General Motor’s choice. And the European Commission is considering the GM board decision, and expresses its hope that any restructuring plan will be based on "solid economic grounds". With the caveat that few things in today’s automotive business can really be viewed as totally solid.

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