Prior to filing for legal bankruptcy protection on June 1, 2009, General Motors transferred 65 percent ownership of its money-losing operation in Europe, Adam Opel GmbH, into a German Trust. The five parties to the Trust include one non-voting Chairman, with two members representing GM’s now 35 percent minority interest and the remaining two representing several German governments, including the national government headed by Chancellor Angela Merkel.
This Trust is supported with bridge financing of approximately $2.2 billion from Germany’s national government to continue operations until a new buyer takes over the controlling interest. Plans endorsed by the GM Board of Directors to sell the Opel division required ultimate approval from the Trust.
On May 30 Chancellor Merkel announced that her government preferred suitors represented by Canadian automobile parts manufacturer Magna International Inc., with financing supplied by Russia’s Sberbank, and participation in operations by GAZ, a Russian auto manufacturer. Merkel indicated that approximately $6.5 billion in government guarantees would support that deal, and no other.
A significant aspect of the deal is that some effort to minimize job losses in restructuring was a commitment. This was important politically for Merkel who faces a re-election bid on September 27, 2009 in a country heavily impacted by worker unions. On September 10 a delighted Chancellor Merkel expressed her satisfaction at the successful purchase by Magna.
GM emerged from one of history’s biggest bankruptcy cases on July 10, establishing a procedural speed record of almost biblical proportions: only 39 days and 39 nights had elapsed since filing on June 1. (I have worked in insolvency practice and can attest to the rarity of such “efficiency”.)
From May 30, when Merkel indicated her favored deal for Opel, to September 10, when that deal was approved and announced at a major press conference from Frankfurt was a span of some 103 days. GM, in trying to dispose of a money-losing operation, would seem to be served well by an opportunity to get rid of it. Magna International is a successful automobile parts manufacturer, which is managed well. Contrary to the condition of most manufacturers associated with the North American automobile industry, Magna is enduring the current economic recession with large cash surpluses on hand.
Instead of jumping at the chance to shed a loser, GM stalled the sale process, indicating throughout a preference for a deal proposed by Belgian investment firm RHJ International, which it was said would be simpler to implement. Why?
Ostensibly, it was also offered that GM was concerned about Magna emerging as a North American competitor and Russian car manufacturer GAZ competing in Europe as well as in Russia by taking and copying the small car design and manufacturing technology largely developed by Opel, (i.e. money-losing Opel.) As Frank Stronach, principal of Magna was said to have observed effectively, “It is not rocket science, it is car manufacturing.”
There were supposedly other reasons offered by GM as to why it preferred the RHJ deal. RHJ was expected to work quickly to downsize and sell component parts of Opel European operations, firing many workers in the process. GM officials were said to be projecting the possibility of being able to buy back a stripped-down version of Opel in the future, after RHJ had completed the “dirty” work of restructuring and turnaround.
Now it bears mentioning that still more options may have existed, as long as we can play along with the GM Board and engage in fantasy. One common-sense option would simply be to shut down Opel. That’s what independent, profit-seeking ventures typically would consider doing with a money-losing division: cut the losses.
Early in this process the Italian automobile manufacturer Fiat, as well as some Chinese investors, were interested in the Opel operations. Fiat has had economic and operations problems of its own, but a return to profitability enabled it to be a successful suitor in the acquisition of that other loser, Chrysler. As a bona fide car manufacturer, Fiat presented an opportunity for a quick out on a $1 sale of the debt-ridden Chrysler. German political and union pressure most likely led to the speedy rejection of Fiat as a contender for Opel, though its offer remained on the table to the end. Fiat and Opel would have probably merged on common platforms and had potential to emerge as a giant European operation with economies of scale allowing it to challenge Volkswagen if successful. Unproductive factories would have been shuttered for sure and this meant the unionized auto workers would not support the Fiat offer.
Then there was the ultimate distraction, which undoubtedly cost GM some considerable expense in consulting fees at least. Reportedly, the GM Board was considering keeping the Opel division, (i.e. money-losing Opel), and in the last month has been projecting the costs of doing just that. Consultants from KPMG were said to have reviewed the GM projections and found them optimistic by about 30 percent, according to information reported in The Globe and Mail’s Globe Investor article, sourcing Reuters, GM board shakes up management. This is what you expect from a government institution: always underestimating the costs of its destructive schemes.
It appears as though the Magna deal was in the cards all along. It was the only deal supported by Merkel and the German government, including the government guarantees of $6.5 billion. It was expressly stated that GM’s preferred buyer, RHJ would not be afforded the same consideration. The GM objections and stalling tactics were weak in their justification. Fears about technology losses or competitive challenges are hardly sound reasons in the circumstances.
GM needs to focus on its own recovery in North American operations as the new leaner, “greener” operation. The only possible explanation for the stonewalling is politics as usual. Certainly Merkel was playing political hardball, but the sorry Europeans have a long history of mercantilism and corporatism with the accompanying poor economic performance, compared to what was once a relatively free enterprise US economy. Her game of hardball is no surprise either since President Obama left her miffed in diplomatic terms with his first official visit earlier this year, when she was virtually ignored by Obama.
US-German relations are strained amid US concerns over the growing alliance between Germany and a resurgent Russia. This may explain the GM sensitivity to the involvement of the Russian car maker being involved in the Magna deal. Such sensitivity would be unlikely to stem from strictly economic considerations.
Now it’s possible to speculate about the political aims of GM’s stalling tactics. It would be naïve to suggest that GM, 65 percent owned by the US central government, is operating without political influence, despite Obama’s representations to the contrary (as I’ve discussed previously here regarding the Chrysler insolvency). In the style of US political manipulation of the mainstream media during political campaigns, it is conceivable that the Obama administration was actually trying to help Merkel. By causing the timing of the announcement of the Magna deal to be closer to her election challenges, Merkel may benefit from recent favorable publicity. The ebullient Merkel on September 10 was certainly basking in the glow of a pre-election win as she is credited with saving the jobs of 25,000 auto workers. She is viewed as a fighter for Germany and probably the most powerful politician in the European Union.
But this kind of “help,” if true may have been too little, too late with respect to US-German relations. Current news regarding the conflict in Afghanistan has the US criticizing a German officer for calling in an air strike by American fighter planes, resulting in civilian casualties. Merkel faces political flak at home for Germany’s participation in this US “contingency operation”.
Another politically-motivated possibility is that the GM Board (U.S. Plans Key Role In Naming GM Board) really was trying to both eat and have its cake. Eschewing all reasonable business considerations about demand for its product, operating costs, and paying attention to domestic competition, GM spent over three months trying to keep or control a money-losing operation in Europe. And, it did this while ignoring the reality on the ground with respect to the sale preferred so publicly by Merkel, which included bridge financing to continue operations while GM dawdled, and loan guarantees to Magna going forward.
I digress now to ask just how well things are going at “Government Motors” (GM) in Detroit. Friends in Washington have been creative in “stimulating” its recovery efforts. The speedy bankruptcy case was just the beginning. There was the “hugely successful” Car Allowance Rebate System (CARS) program, also known as “Cash for Clunkers”. The objectives of that program were to remove “gas guzzlers” from the roads and replace them with modern, more fuel-efficient vehicles.
Undoubtedly it was to be expected that a shot in the arm in automobile sales would also help the ailing auto manufacturers as well. Also described as “wildly successful,” the CARS program was credited with accomplishing a stimulus to the manufacturers. So, how well did that work out for the industry?
The CARS program ended in late August, and although dealers continue to struggle with collecting payments from government for the trade-in credits of $3,500 to $4,500 per vehicle, and try to comply with the scrapping of trade-ins stored at their expense, the auto makers did get a sales boost in August versus the same month in 2008. Ford sales were up 17 percent while Honda followed with a 9.9 percent increase. Toyota ranked third with 6.4 percent. Not surprisingly, the struggling Chrysler and GM fared not as well. Each experienced August sales that were lower than a year earlier. Chrysler was down 15 percent and GM was dead last among the big five with sales down 20 percent for that month.
Of course, the economic recession accounts for much of this, but it is clear that the CARS program temporarily helped GM competitors more perhaps than it did GM. Other statistics will bear out the fact that Ford, Honda and Toyota models were most favored by those taking advantage of the “Cash for Clunkers” wealth transfer.
Americans have yet to experience all of the unintended consequences of the “hugely successful” program in which about 700,000 vehicles, most perfectly serviceable, were pulled from the market for used cars. Just one consequence may be that those who could only afford to buy a used vehicle now have 700,000 fewer to choose from. When they find one, they will undoubtedly pay more for the now more scarce economic good as a result.
Only politics can elude logic on a scale such as that represented by the many interventions in the auto industry. With respect to the GM sale of the Opel division, a business decision unencumbered by political considerations might have had a similar outcome, but we’ll never know. The neo-fascist corporatist state of Germany and the US, which is now adopting such a model with vigor, have so clouded economic decisions with political considerations that not one person in a million can successfully focus on the basic business considerations of demand, costs and competition. GM had $2 in debt for every $1 in assets when it filed for legal bankruptcy protection. Emerging from bankruptcy proceedings with its much touted “new Balance Sheet,” it still has an estimated debt to equity ratio of 1.6:1. That is still high and the company has difficult work ahead to return to profitability and reduce the debt load to a more reasonable debt to equity ratio of less than 1:1. In order to accomplish that for the long term, GM will need to focus on profits, not politics.
©Copyright 2009 Edward Podritske