GM-Magna Deal Shows Signs of Progress

FRANKFURT – Despite some political uncertainty, executives at Adam Opel GmbH believe Magna International Inc. and General Motors Co. will sign their sales contract within the next several weeks.

“Everything is more positive now than it was two weeks ago,” says Alain Visser, vice president-sales, marketing and after-sales at Opel/Vauxhall. “At the maximum, we should have a contract in several weeks and one or two months later the final closing.”

Since GM decided Sept. 10 to approve the proposed Magna deal, talks have been progressing. Negotiations now are ongoing in Europe, between Magna and Opel’s unions.

The deal does face some resistance in Europe, as European Union member countries jockey for favorable position over future job cuts and debate over who should help fund the restructuring costs.

About half of GM’s 54,000-person European workforce is located in Germany, with important plants in Spain, Britain and Poland.

The original plan, published in July, indicated there would be 2,045 job losses at the Opel plant in Bochum, Germany; 830 at the Vauxhall factory in Ellesmere Port, U.K.; and 2,321 at the Opel plant in Antwerp, Belgium. Now it appears the figures will be substantially higher.

Britain, Belgium and Spain all have called on the European Commission to ensure EU rules for state aid are strictly observed and that the state aid provided by Germany is not used to safeguard jobs at inefficient plants. Britain's business secretary Lord Mandelson has urged a “commercially-based outcome rather than one determined by political intervention and subsidies.”

“The ball is now in the German authorities’ court,” Jonathan Todd, the EC’s competition spokesman, tells Ward’s. “It’s up to them to notify us of the details of what they’re going to do. You cannot impose conditions on the state aid, such as ordering that the restructuring be done in other states and not here.”

Opel engineers working on engine to go into new Chevrolet Cruze in U.S.

If the commission finds the state aid illegal, it can order it to be paid back to the donor government.

Although the EU, Magna’s finance partner Sberbank in Russia and GM all have a stake in the operation, Magna is the sole negotiator, Visser says.

In the agreed outline, GM will retain 35% of Opel, employees will control 10% and Magna and Sberbank will hold the rest equally.

Even though there will be a formal split between GM and Opel, there will not be a complicated physical separation, Visser says. When GM divested its Delphi Corp. parts subsidiary, buildings and people and computer systems were divided.

GM and Opel will use contracts to continue functions like the Global Technical Operations, rather than sending Michigan engineers assigned here back home.

Still, many changes must occur in the background. On Oct. 1, GM Powertrain Europe gave 1,000 workers in Germany to Opel. Another 350 GM Powertrain employees at the technical center in Italy already are in a subsidiary of Opel, says Daniel Nicholson, executive director-product engineering.

“We have engineers working on the 1.4L turbo engine that will first appear on the Astra,” Nicholson says. “The engine also will be used on the Chevy Cruze next June, but we don’t say, ‘Yesterday I worked on Opel and today I am working in Chevrolet.’”

Continued co-operation is essential.

“To have a good future, we have to have our links with GM,” Visser says. “Opel volume is 1.5 million, not enough on its own. We need the synergies, economies of scale, global purchasing and technology.”

To survive, Opel must restructure by shedding employees and closing some operations, Visser says, and that is the subject of Magna’s current negotiations in Europe.

Restructuring will cost money that can come only from the sale to Magna, which is why Opel couldn’t do it before. It needed a E1.5 billion ($2.2 billion) loan from the German government in May to continue operations until the end of this year while negotiating with Magna. But that was “survival” money and not enough to cover the cost of restructuring, he says.

Opel is strictly European now, with 95% of its sales in the region. Magna wants to make the brand global, although there will be some temporary restrictions on where it can compete with GM.

For the moment, exports from Europe are not profitable. The strong euro makes it difficult to sell cars in North America, for example. Even in the U.K., where Vauxhall is the No.1 retail brand and No.2 overall, Opel loses money on every sale, Visser says, because the British pound is so weak against the euro.

In Europe, the brand has held onto its market share despite all the speculation about the corporate future. The German bonus scheme for turning in old cars for new ones helped Opel sales of small cars in Germany. Since that scheme ended Sept. 3, demand has fallen about a third, Visser says.

The E2,500 ($3,648) bonus helped boost sales mainly of smaller cars, because the rebate represented a larger percentage of the sale price.

Visser says about a third of the people who used the program traditionally bought used cars and another third were people who had put off buying before because they were expecting a government incentive program aimed at reducing carbon-dioxide emissions. The final third were sales pulled ahead from later in the year.

Now that the bonus has expired, Visser says, the sales mix has moved back to normal, with larger cars making up a bigger percentage of the market.

The Opel Insignia, for example, has been selling well in the upper medium class, with 150,000 customers this year, but it was not helped much by the bonus.

– with Alan Osborn