Deep Dive: General Motors considers selling Opel to Chinese

General Motors is said to have Washington’s approval to divest from Opel, it’s loss making European satellite, and has been in high-level talks with the Chinese government since early May. The timing and conditions of such a deal remain unclear, but it is far enough along to alarm the German government, which has asked Volkswagen Group to take over Opel and stave off Chinese involvement.

In 2009, GM very nearly sold Opel to a consortium led by Magna and Russia’s Sberbank. But at the eleventh hour, the company changed its mind and backed out of the deal. When this decision was announced, the German chancellor Angela Merkel was in mid-air on her return flight from Washington, where she had celebrated the twentieth anniversary of the fall of the Berlin wall — and lobbied on Opel matters. The decision by the Obama administration meant a political defeat for the snubbed German leader, who was on the brink of signing off various life-saving measures for the ailing German brand.

With Chapter Eleven looming, GM dethroned Opel head Carl-Peter Forster and installed Nick Reilly as new integrator maximus. Despite a wave of fresh products and massive incentives, the brand is still bleeding cash. In the third quarter of 2011, Ruesselsheim lost almost $400 million. In the very same quarter, the mother from Michigan earned $3.2 billion. Even though the US administration has step by step reduced its interest in GM to one third, red ink is the last thing Dan Akerson and his team need to steer the car maker toward full independence and greater profitability. In an interview with Germany’s Cicero magazine (May issue), the former “car czar” Steven Rattner said: “Last year, Opel lost 1.8 billion Euro. Dan Akerson is not going to tolerate this much longer….Opel needs to watch out.”

Since he failed to engineer the turnaround in time, Nick Reilly was sidelined, and Opel veteran Karl-Friedrich Stracke was appointed as new chairman of the board. Although this move was supported by various restructuring and streamlining initiatives, insiders are convinced that the powers in Detroit still want to sever their ties with Opel as badly as theydid back in 2009. We contacted the Opel press department and tried to get a hold of Nick Reilly, but the only official response was a lukewarm “No Comment.”

Fact is, the role of Ruesselsheim within GM was scaled down two years ago when major responsibilities were transferred back to North America. Although the Germans did develop the underpinnings of key cars like the Chevrolet Cruze, the Opel Insignia/Buick Regal, and the Chevrolet Malibu, the small car emphasis has since shifted to Korea while Detroit is now calling the shots in terms of alternative drivetrains (Chevrolet Volt/Opel Ampera), and new crossover vehicles. At the same time, GM has pumped up its efforts to globalize the Chevrolet brand. By 2012, Chevrolet could effectively replace Opel/Vauxhall in Europe with products engineered by Opel (Sonic/Cruze/Malibu), yet built in low labor-cost Asia. This approach should yield a 15 to 20 percent cost advantage, which could be decisive in a market punished by overcapacities and cut-throat rebates. Even proposed new products like the Opel Mini (conceived and made in Korea) and the still tentative flagship model (to be based on a U.S. crossover model) would weaken rather than strengthen Opel’s mission as an engineering hub in GM’s global organization.

Assuming GM is really serious about selling Opel, the next question does of course revolve around potential buyers. The likelihood that Magna wants to get burned again is slim. Mercedes-Benz, which was briefly flirtatious with Opel, has since gone to bed with Renault-Nissan. All suitors must of course consider such obstacles as the uneconomical German production sites (Ruesselsheimn, Bochum, Eisenach), the strong German trade union influence, and the tough German insolvency laws (you cannot simply close a plant and walk away).

Although most parties would for these reasons think twice before investing in Opel, the one party that could be interested is the Communist party — that is, the Chinese. Having just signed off the next five-year plan, leading Chinese politicians are now putting together a long-term scheme destined to provide its domestic auto industry with much more know-how and market power by 2020 and beyond. The Asians are aware that brands like Geely, BYD and Great Wall will take almost forever to be world-class competitors. Buying Opel, however, would provide the Central Committee with instant access to leading technologies and facilities. Unlike other candidates, the Chinese Council of State would probably even pay money for a loss-making Opel, and the cash might in fact continue to flow for quite a bit longer if GM was prepared to throw in intellectual properties and parts. In this way, the Chinese domestic car industry could instantly be virtually on eye level with those foreign investors it needed to get its automakers going in the first place.

While this scenario would be profitable for GM in the short and mid-term, it would come as a shock to Germany and its role as the home of the world’s best cars. When the Chinese aspirations leaked about three weeks ago, Angela Merkel reportedly contacted Volkswagen Group chairman Martin Winterkorn — whom she has learned to like and trust in the course of several future mobility summits. Perceiving the Opel issue as a key matter of national interest, she is believed to be investigating the conditions under which VW might be willing to step in and assist. It should be interesting to see where they all stand when a Chinese delegation tours Germany in late June.

Predictably, VW was not exactly fire and flames when the first rumors filtered through to Wolfsburg. After all, the last thing Europe’s leading player needs is one more brand, let alone an additional competitor in the volume segment. Even more to the point, VW no longer wants to be seen as an aggressive predator with a habit of polishing off ailing automakers. True, Ferdinand Piech would still like to buy the odd complementary asset such as Alfa-Romeo – but surely not Opel, which has for decades been Volkswagen’s arch-rival. But now management is considering the option. Comments a senior manager who must remain nameless:

“Our initial response was ‘no way.’ We thought we cannot handle this. But then we thought again, along the lines of making the best of it. We could for instance position Skoda against Hyundai, Seat to fight Kia, and Opel to challenge Toyota. This would take the VW brand out of the line of fire and open up new opportunities. Of course, we still want to be number one by 2018. Wouldn’t it be ironic if GM helped us to get there a little earlier by relinquishing Opel and watching us turn it from a liability to an asset?”

For the time being, however, VW is not keen to get involved – despite having a 20 billion Euro cash reserve and a brand new modular components set Opel would probably die for. VW does have plenty of experience in multi-brand handling, and with a little help from the corporate production wizards, those slow-moving Opel assembly lines could be sped up quite easily. The only real worry is the Ruesselsheim Tech Centre, where several thousand layoffs would likely be inevitable.

Would, could, should. Too many assumptions, not enough hard facts? Maybe. From GM and VW, one cannot expect anything but soft denials. The Chinese play their cards even closer to their chest, and Berlin is of course equally unwilling to put its underlying concerns into words. But even by reading between the lines it soon becomes clear that something major is about to happen in the German-American auto landscape. No, we don’t know yet exactly where lightning will strike and when. But it seems obvious that after a short consolidation phase, Opel is again facing a period of uncertainty and a possible change of ownership.

And who is to blame for this development but GM? You see, the string-pullers in Detroit lack patience, loyalty, and vision. They forbade Opel for much too long to sell cars in booming markets like China and South-America — VW has in China alone cracked the 500,000 barrier, but Opel’s combined exports to non-European Union countries hover at 50,000 units. Think Saturn, Pontiac, Hummer, Saab. Think 23,000 layoffs in 2009 alone. Think of that $50 billion in government aid and of the creditors left in its wake. It is hard to believe that the New Detroit will be any more thoughtful and conscientious when it comes to protecting its ten European plants and their 40,000 employees.