Commentaries

German Opel aid tests EU rules

The credibility of the European Union’s single market and state aid rules is at stake over Germany’s selective offer of taxpayers’ money to preserve Opel factories and jobs on its soil.

On the face of things, it looks like an open-and-shut breach of state aid rules. General Motors agreed last week to sell 55 percent of its European arm to a consortium of Magna and Russia’s Sberbank under massive pressure from Berlin.

German leaders have said publicly that they promised 4.5 billion euros in loan guarantees for the Magna-led bid — but not for rival bidder RHJ International — because it would preserve all four production sites and as many jobs as possible in Germany. The European Commission says:

state aid cannot be subject to additional non-commercial conditions concerning the location of investments and/or the geographic distribution of restructuring measures.

QED? Well, not quite.

The German authorities are unlikely to have been naive enough to put any such linkage in writing. And without such formal evidence, the EU competition regulator may find it hard to deny approval for the rescue. After all, didn’t French President Nicolas Sarkozy get away with a 6-billion-euro rescue loan to French car makers Renault and Peugeot in March on the unwritten (but loudly proclaimed) understanding that they preserve production sites in France?

European Competition Commissioner Neelie Kroes says she will scrutinise closely whether Germany set “de jure or de facto” conditions for helping Opel, whether aid was offered to only one bidder, and why its business plan was considered preferable. Kroes has a second possible line of attack, since Brussels must be convinced that a rescued Opel will be viable in the long run. She should talk to the German government’s own trustee, who voted against the Magna sale, questioning its chance of survival due to its small size and chronic overcapacity in the sector.

How Swedish is Saab now?

Less by the hour if there is any truth to the story in Reuters that China’s SAIC is considering funding the iconic Swedish car brand’s buy-out from GM.

The deal, announced in August, was originally supposed to be a patriotic flag-waving exercise, in which a tiny Swedish supercar maker, Koenigsegg, would “repatriate” Saab from American control. The Opelisation of the Saab range would be stopped. A new generation of quirky cars designed by Nordic designers in square specs would be manufactured at the company’s historic (and splendidly named) Trollhattan factory. Saabs would again be as Swedish as a meatball or an Ikea “Billy” bookcase.

A moving vision? Certainly. But how practical given Koenigsegg’s small size? Well, about as practical as owning an insanely fast Koenigsegg car in Sweden, where the speed limit is 60kph. Incidently Koenigsegg sells less than two dozen cars a year (although they are quite pricey), while Saab sells closer to 100,000.

Anyway, that as I say was the vision. What appears to be emerging seems more like a foreign-funded buy-out of Saab from GM. Assuming SAIC makes it, the Chinese group’s 3 billion kronor investment ($410 million) should help to unlock Swedish government support in the form of guarantees of some 400 million in European Investment Bank loans. That in turn will allow the company to fund a business plan that involves continuing to source components from GM.

And it will be interesting to see  what SAIC gets in return for any cash it puts up. The company has a fairly chequered history of investing overseas. It made a total pigs ear of its investment in Ssangyong of Korea – although its punt on MG Rover has turned out a bit better.

Saab to Koenigsegg – another go slow GM sale

General Motors doesn’t do deals in a hurry — at least when it is selling.

With the Opel sale grinding along, the U.S. automaker is also in the process of offloading its Saab brand to luxury sportscar maker Koenigsegg.

Financing is the major sticking point in the Saab sale process. Koenigsegg — backed by U.S. and Norwegian investors — reached a deal in June to buy Saab from GM but the process then stalled.

Now Koenigsegg — which boasts having developed the world’s fastest sportscar — has apparently sent the Swedish government a new plan for financing the Saab purchase. This we’re told no longer includes any extra loan from the government on top of funding guarantees from the European Investment Bank (EIB).  There were reports that Koenigsegg Chairman Augie Fabela thought he needed an additional 3 billion Swedish crowns of financing.

GM has always said it expects to close the deal by the end of the year. Given progress so far and the complications of agreeing autos deals with governments, it looks as though the automaker will have it right.

Germany wants GM answer on Opel

Germany’s Economy Minister Karl-Theodor zu Guttenberg is boldly telling the German public that he expects a “fundamental decision” from the board of General Motors on the future of Opel next week.

He goes further, saying in a television interview that with offers from Canadian car parts manufacturer Magna and Belgian-based investor RHJ International on the table, it is tme for GM to “give in”.

Given that GM has ignored or resisted all German pressure to dictate terms on the sale of its European arm so far, there’s no reason to think that it will change its stance.

But there are growing suggestions that the U.S. automaker has indeed made up its mind on which option it wants to recommend and that a meeting of the German government-backed trust set up to work through the sale of Opel will take place on September 10.

GM’s board is due to meet next week to discuss the Opel situation, with Magna and RHJ both apparently still in the race despite Berlin’s clear preference for Russian-backed Magna.

Keeping the spice alive, there have been suggestions that GM may now be backing off selling a stake in Opel altogether, with reports that it is trying to pull together state aid from the British, Polish and Spanish goverments.

So far at least there’s nothing on GM chief negotiator John Smith’s blog to suggest anything has changed since his last posting on August 14 when he told us with customary clarity where things stood.

Why the carmaker in front is cutting back

Good news: global car capacity is being cut by 700,000 vehicles. Bad news: the company doing the cutting is the world’s most efficient manufacturer, Toyota.

Across the world, governments are pledging money to keep local plants open, mostly plants which have no long-term future, and which are far less efficient than the production line in Japan that Toyota is closing.

Welcome to the crazy economics of carmaking. According to CSM Worldwide, a consultancy, the world is capable of making about 94 million cars and trucks a year. In 2008, calculates OICA, an international carmaking trade body, global sales of vehicles were just over 70 million. This year may not reach 60 million, after the end of borrow-and-spend in the economies of the west.

In essence, the world is capable of making three cars for every two buyers. No wonder so few manufacturers can make money. Sergio Marchionne, responsible for the “near miraculous” revival of Fiat, believes that 5.5 million cars is the minimum output needed to make money, since it costs 500 million euros to develop a new model.

On Marchionne’s maths, today’s 11 volume carmakers will have to shrink to about six to stay viable, but events are following the political reality rather than the economic textbooks.

Opel, the loss-making European arm of General Motors, ought to close, but it won’t. The German government will support its plants, and it seems that the UK government will pour money into Vauxhall too.

Peter Mandelson, the UK business secretary, has a reasonable record of resistance to subsidy, having rejected calls for help from Tata, the owner of Jaguar and Land Rover, but political reality in Luton and Ellesmere Port may force his hand over Vauxhall.

Germany should call GM’s bluff

Recently bankrupted companies seeking billions in taxpayer handouts do not generally have the strongest hand at the negotiating table. Yet General Motors seems determined to drive a hard bargain over the bailout of Opel, its European car arm.

After months of tortured negotiations with the German authorities, GM is now threatening to reverse away from the deal. However, it appears to have few alternatives.

Opel reckons it needs 3.3 billion euros in loan guarantees and other support to see it through to the end of 2011. Germany is ready to stump up the cash, but would like to see Opel sold to Magna,  the Canadian car parts maker, and its Russian backers.

GM is worried that Magna’s bid is too complex and would hand its precious intellectual property to the Russians. It favours a rival bid by RHJ International, the Belgian investment group, which requires less state support but would cost more jobs. With an election looming, however, the RHJ deal looks a non-starter in Berlin.

Now GM is suggesting it might keep Opel and raise the cash elsewhere. Quite where it hopes to find that kind of money is unclear. GM is barred from using U.S. government funds to support its international operations.

It has a presence in Britain through its Vauxhall division, but the British government is less prone to being blackmailed with the prospect of plant closures. Just ask Tata, the Indian group which spent months seeking government support to prop up Jaguar Land Rover before giving up.

GM could raise some cash by flogging or mortgaging its Chinese operations, the largest outside the United States. Even though credit markets have eased since the spring, however, the political complexities of such a sale would surely rival anything thrown up by the Magna proposal.

Driving an Opel round in circles

True to form, GM’s negotiator on the sale of Opel has poured cold water on expectations of a slam-dunk deal for Canadian car parts group Magna and its Russian backers.

John Smith (no relation, but I’m impressed by his negotiating) maintains in his blog that GM will compare the latest Magna offer with the proposal it has on the table from Belgium-based financial investor RHJ International.

Yesterday was a pretty busy day in the media, with many outlets  reporting that Magna/Sberbank and General Motors had reached an agreement regarding Opel.  At the risk of repeating myself, that’s just not the case. (emphasis added)

Smith is still waiting for more information from Germany’s automotive task force on the T&C of the financing package they are offering to sweeten a deal to buy Opel.

He’s promising to keep us posted. Shame nobody else involved in the negotiations in blogging on them. Or perhaps a chatroom is the way to go.

Driving a hard bargain on GM’s Opel

John Smith, General Motors’ chief negotiator on the sale of Opel, deserves a medal. But he certainly won’t be getting one from German Chancellor Angela Merkel.

Magna says it has reached an agreement in principle to buy a controlling stake in GM’s European unit. However, GM says it is going to think about the revised offer from the Canadian auto parts maker. It wants more details of the government financing package on offer before it can make up its mind.

Even though this contest has been one-sided from the start, GM and Smith have stuck resolutely to their guns in talks with not only the potential bidders but also the German government — resisting its attempts to bully them into accepting the Magna bid to the last.

Berlin has unashamedly skewed the race towards Magna at every step of the way — supporting its Russian-backed consortium in the belief that fewer jobs will be lost than under the rival takeover proposal of Belgian private equity group RHJ International favoured by Smith and GM.

With a general election looming on Sept 27, Merkel is desperate to show voters that her government is protecting local jobs at a time when the economy is fragile.

The “auction” involving Magna, RHJI — and in the early stages Fiat and some Chinese buyers — has driven up the price GM is getting for Opel to a reported 500 million euros. However, a key ingredient of Magna’s offer are the loans being made to Opel — totalling 4.5 billion euros — guaranteed by European governments.

Magna, along with Russian backers Sberbank and carmaker GAZ will get a 55 percent stake in Opel.

Schaeffler/Conti feud puts Schroeder back on stage

Gerhard Schroeder is back at centre-stage, seven weeks before Germany’s general election. A corporate feud between industrial holding group Schaeffler and car parts maker Continental AG has given the former chancellor the chance for a comeback as the workers’ champion, although he no longer holds public office.

When Schaeffler, the biggest family-owned industrial company in Germany, bought control of Conti last August, the two sides appointed Schroeder as guarantor of the interests of Continental and its workforce, shareholders and other stakeholders under an investors’ agreement.

With the new owners now trying to oust Conti CEO Karl-Thomas Neumann, the former chancellor has used his powers to demand information from Schaeffler – and take legal action if necessary — to enforce compliance with the pact. Neumann’s sin is to have proposed a share issue that would dilute Schaeffler’s control.

A published summary of the shareholders’ agreement does not explicitly bar Schaeffler from seeking to remove Conti’s CEO, but it commits the owners “to support the ongoing strategy and business policies of the Executive Board”.

Latest reports on Monday suggested Schaeffler was seeking a compromise in which both Continental chairman Rolf Koerfer, a Schaeffler loyalist, and Neumann would go — as would the disputed share issue — to avert a showdown at a Conti supervisory board meeting on Wednesday.

Schroeder’s cameo role has political overtones. It looks like part of a strategy by the Social Democrats (SPD), junior partners in an uneasy coalition with the conservative Christian Democrats (CDU/CSU), to paint themselves as the true defenders of German jobs and companies against predatory Big Finance.

The SPD is trailing far behind the CDU/CSU in opinion polls, with about 23 percent compared to 36 percent for Chancellor Angela Merkel’s conservatives.

GM and Germany in Opel chicken run

   By Alexander Smith and Paul Taylor

General Motors and the German government are playing out the Chicken Run scene from the 1950s James Dean classic film “Rebel Without a Cause”.     Neither has leapt from their car yet, but there are growing signals from Germany that GM has its hand on the door handle and is preparing to drop its preference for financial investor RHJ in favour of handing control of Opel to Canadian auto parts maker Magna.     GM has so far been in no hurry — although the U.S. car group has been doing its best to keep up appearances with a statement following this week’s board meeting saying it hoped to make a recommendation to the Opel Trust Board “shortly”. But German pressure has been rising as a Sept. 27 general election approaches.     Germany’s eagerness to seal a deal with Magna — which has teamed up with Russian bidding partner Sberbank and automaker GAZ — is palpable.     Berlin is ready to get its cheque book out to provide state aid for a deal with Magna. But has made clear this would be reconsidered if GM opted for Belgian-based RHJ, which Chancellor Angela Merkel’s government fears would cut more jobs. RHJ would be an unpopular choice in Germany, where a leading politician famously branded private equity buyers “locusts”.     Berlin wants a deal closed in September and has set up an Opel Task Force to oil the wheels. Yet Opel workers are concerned that GM has been playing for time so that a decision is delayed until after the election.     They fear that stalling until after polling day would make it easier for GM to put Opel through insolvency proceedings and shed some of its factories and staff at a lower cost.     For Merkel, a deal on Opel’s future now would deprive her Social Democratic junior partners and rivals, who back Magna, of a potentially damaging campaign issue (“Merkel dithers while Opel burns”). But while it may yield short-term benefits, Berlin’s rush to hand Opel to Magna could yet backfire.     GM’s chief negotiator John Smith has been vocal in his criticism of Magna’s bid, specifically citing concerns about the use of GM patents and Russian expansion plans.     Magna’s Kremlin-backed partners operate in an opaque business environment where foreign players can suddenly lose control of a joint venture or face tax or regulatory obstacles.     It may well be GM that blinks in the run-in with Berlin over Opel, but Merkel shouldn’t forget that whoever bails out first, the Chicken Run inevitably ends in a car wreck.