A spot of car trouble

Sian Hickson on the risk General Motors has taken by pulling out of the deal to sell Vauxhall and Opel
Commercial awareness
Business analysis

The world of car manufacturing suffered an unexpected bout of engine trouble this week, as General Motors (GM) announced it would be pulling out of the deal to sell its European subsidiaries, Opel and Vauxhall, to the Canadian car-part manufacturer, Magna.

The manoeuvre has angered the German government, who had looked to safeguard jobs at Opel's four national plants by underwriting the deal to the tune of €4.5 billion. Having reneged on the settlement, General Motors is now appealing to the governments of Europe for a substantial financial support package while it undertakes what it has termed a "restructuring" of its continental operations.

Opel is the largest GM brand in Europe, making it a major player in an industry that has long been running at overcapacity (with manufacturing outstripping demand). But the company has seen poor economic results both prior to and throughout the global downturn. In late May of this year it was announced that a deal had been struck that would give GM's European assets - including Opel and the British Vauxhall plants - over to a separate company.

German chancellor Angela Merkel was the prime broker in the deal, in which GM was to retain a 35 per cent stake in this new company, with the rest of the business moving into the hands of a coalition of Magna and Opel dealers and employee stakeholders backed by Russian financiers Sberbank.

However, following Magna's refusal to bend over the issue of intellectual property rights, the bidding was opened up, attracting interest from both Fiat and Beijing Automotive Industries. Eventually, the US government pledged a majority share support, and the agreement to sell to Magna-Sberbank was finalised on 10th September. The deal included a proposed €4.5 billion underwriting by the German government, who were determined to salvage the beleaguered manufacturer's national concerns (a move that earned them a rap on the knuckles from the European Commission on charges of protectionism.)

However on Tuesday November 3, General Motors announced an audacious U-turn, declaring that the retention of Opel was key to maintaining their position on the global stage. This has been seen by some analysts as indicative of a new-found confidence in the market, with sales boosted by European car-scrappage schemes and an emerging trend in the US towards the purchase of smaller, more design-focused European cars.

Nevertheless, the abandonment of the planned sale has left several parties dissatisfied - not least Chancellor Merkel. The decision effectively means that German tax euros have been poured into a US majority-stakehold company that now guarantees no protection against homeland redundancies. The 25,000-strong German workforce is threatening industrial action, and "warning strikes" took place on November 5. The government has also made its displeasure at GM's sharp practice abundantly clear, calling it "totally unacceptable" and demanding immediately the repayment of €1.5 billion on the loan it laid out to keep the company ticking over throughout the drawn-out negotiations. The President of GM in Europe, Carl-Peter Forster, resigned, calling the move "incomprehensible". By contrast in the UK, spokespeople for trade union Unite, representing Vauxhall's 5,500 UK employees, welcomed the development as one which could potentially safeguard the future of the country's manufacturing industry.

It remains to be seen whether associated European governments (including, naturally, that of Germany) will respond to GM's new appeal for financial assistance as they prepare to take on the task of reshaping their overseas market. Part of the motivation behind Chancellor Merkel's strenuous efforts to safeguard the deal was the need to retain support for her CDU coalition government in the run-up to September's election. Now that they have secured another four years in the driving seat, it is debatable whether they will be willing to make another expensive and potentially damaging wager on a partner that has proved to be more than a little unreliable. Failure to secure a financial package could have grave consequences for GM. A substantial lay-off of workers seems inevitable, with 10,000 job cuts across Europe already announced. For now, the manufacturing world will have to wait for GM to show its hand.

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