Commentaries

Should Volkswagen demand a Magna Carta?

Magna International seems to be taking seriously threats from Volkswagen to pull its business following the Canadian car parts maker’s Opel victory.

Magna’s co-CEO Donald Walker is saying that after talking to them, most of his other customers are happy that the car parts group – which along with Russian backer Sberbank is buying a 55 percent shareholding in GM’s Opel — is able to protect their technologies.

Apparently VW is still unconvinced, so Magna will “finalising the internal procedures” and will have more talks with the German carmaker.

Walker is also stressing that Magna is not looking to compete with its clients but is simply aiming to get a good return on its investment in Opel, reiterating that Magna will remain a parts company.

There seems little doubt that Magna can manage potential conflicts, after all it already builds cars for BMW, Chrysler and Mercedes as well as making parts for Toyota, Ford and VW.

But to say Magna won’t be competing with other carmakers once it starts building Opel cars is stretching the point. Why else would you buy Opel if it wasn’t to take market share from VW and others?

Can Magna keep its model juggling act with Opel?

Cries from Volkswagen about pulling its business from Magna if the Canadian car parts maker ended up owning a stake in GM’s former European unit Opel ring somewhat hollow given the success Magna has had in juggling its customers’ different needs so far.

Even so, Magna is trying hard to keep its customers — which also include Toyota, Ford and BMW — happy by vowing to ringfence Opel from the rest of its business now it has won the long battle to buy GM’s former European unit.

Sure, these carmakers will want watertight assurances over the supplier’s tie-up with one of their competitors. But they can’t have it all ways if they want to continue to outsource their parts — and even the construction of whole cars — to keep their costs down.

Given the tortuous journey to agreeing a buyer for Opel, Magna’s customers have had plenty of time to work out what guarantees they will want, although it is only now that a deal has been done that they will get to hear the full details of the arrangements between GM, Opel, Magna and its co-investor, Russia’s Sberbank. Magna will have to show them it can treat its own car manufacturer like any other client.

Magna’s Steyr unit already produces the BMW X3, the Mercedes-Benz G-Class, the Chrysler 300C and both the Jeep Commander and Grand Cherokee for three different customers. So it is in a fairly strong position in any discussions — after all the major carmakers are heavily reliant on their parts manufacturers and switching supplier is not an easy option by any means.

But it remains to be seen for how long Magna retains a clear separation between its traditional parts business and its new car making operation Opel. It may find the move up the value chain to its liking.

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.