Wednesday, 18 March 2009

Macro-Level Trends – Germany Autos GmbH – Opel's Need for a Miraculous Lightening Bolt from Above

As the G20 summit approaches there looks to be continued friction of ideology between the likes of the 'prime-pumping' Prime Minister Brown & President Sarkozy, and the altogether more 'spend-thrift' Chancellor Merkel. As stated in previous posts, Germany has had a hard 25 year journey to reach today's far more open market-orientated socio-political mentality, and weaning the public off of a German Nanny State has been worthwhile in terms of revolutionising its productive efficiency, commercial acumen and ultimately standing regards 'high-value' goods & services upon the world stage.

Though it is suffering, as all are today, with exports down and a deflated economy, Merkel recognises the dangers of returning her country to a less than globally competitive entity. So whilst the Chancellor and her cabinet have balked and succumbed to the desperation of state funding intervention, it is not on the proportionate scale of the likes of her European neighbours or the USA.

Instead, she has been a key proponent of expanding the role of the IMF to assist the global financial challenge, a call latterly supported by the French President.

Where the 2 differ significantly is with regard to Keynesian economic theory that surges national indebtedness to support industry and the consumer in the fight to re-inflate the business, consumer and financial marketplaces. Though Germany was ultimately forced to save its highly exposed large financial enterprises, to keep the financial system from collapsing, has been trying to draw a line in the sand against the calls of the broader private business sector for assistance. Merkel caught between the conscientious righteousness of economic responsibility and the houndings of business leaders, strong unions and consumers.

Unlike the populist seeking Sarkozy, who appears to be re-introducing a manner of 'de Gaullism' Merkel is willing to wear public wrath. France's massive directly injected state support for its national auto-industry stands at $8.8bn as of Feb 09 (primarily split between Renault & PSA), whilst Germany has stated that it will alot $1.9bn, done so indirectly as a scrap-incentive scheme for cars over 9 years old.

Caught between a rock and hard place (its GM parent and a to date staunch political stance) perhaps the most high profile 'casualty' of the recession is Adam Opel AG. Although the prime business of GM Europe (and in global terms a generally/historically positive revenue earner) the effects of slow-to-thaw wholesale credit and massively loss of confidence in the consumer-base, means that even this historical 'solid performer' has stalled heavily.

And moreover, Carl-Peter Forster - the company's inveterately professional CEO – recognises that the longer Opel is caught in the intricacies of the political realm, the longer and greater the suffering within marketplace against its national and international peers; which with greater cash reserves, brand consumer relevance and product cache would like to see Europe's 20% or so overcapacity be cut through the loss of Opel. Non more so than VW Group, BMW Group and Daimler Group who will be happy to see the 'market discounting effect' Opel could be said to use to hold market-share eradicated; and so enable improved margin, RoS and ultimately RoI. And as 'role-playing' national participants of that painful German economic progression (which Merkel does not want to slip) they will have strong voices in Berlin against any form of 'favoured' assistance.

Merkel knows that she can't be seen to promote the double-standards of such favouritism, and also recognises that the national accounts cannot support the equal assistance given to Opel for all Germany's volume producers. And that even if it could, that little would change for the relative strength sector inhabitants in the medium term. Opel simply gaining a stay of execution for a finite period until either finally pulled under by its parent, marginalised in the market by far more competitive peers or at best acquired by a (probably) Chinese Auto-Firm in years to come for a 'low-ball' price intent on using the brand and dealer-base as part of its own global expansion ambition. Thus, if that is truly the most likely outcome for Opel, why inject so much government cash in the firm – updating plant and products - only to have such valuable assets sold off under par value?

In the meantime, after his discussion with Karl-Theodor zu Guttenberg (the German Economics Minister), the ever up-beat Rick Wagoner appears to be playing Merkel off against her public via the press, with quoted reports saying he thinks German politicians are “really getting into this” (ie the idea of state aid). Guttenburg's response was unsurprisingly rather less enthusiastic, stating that Berlin was looking to see exactly what GM was putting on the table first, and what the Opel corporate plan could viability deliver, before it cited political promises.

GM's need to divest responsibility and consider radical global re-structuring has been conveyed by its pronouncements that it would be happy to “cede control of GM Europe” (inc Vauxhall & SAAB) for $4.3bn, and it appears that it may be exploiting the the implicit threat of Opel following SAAB into bankruptcy proceedings; a very unpopular thought across Russelsheim & nearby Frankfurt.

Opel's November '08 call for a credit guarantee against parental GM failure was mutedly responded to, without credible confirmation from Berlin. And SolarWorld's speedy proposition – in response to that guarantee call - as a potential 'white knight' purchaser looks about as incredulous now as it did then given the credit-heavy terms of the bid and the aforementioned frozen wholesale finance markets. Slightly more realistically, last week the Opel dealer-base stated it would create a semi-private/semi-public holding company with government backing that would acquire Opel using a % cut of future car sales as a payment schedule. Better, but still not wholly tenable from a political perspective.

So as things stand Wagoner and Merkel metaphorically stand face to face, neither blinking...with Carl-Peter Forster forced to strategically and operationally juggle balls as best he can to keep Opel trading under harsh conditions in the short-term. But at least he has the dealers on side, and that demonstrates his acute strategic acumen as a retained leader if any new Opel enterprise is born from which ever eventual quarter.

Of course many will point to Lower Saxony's 19.9% hold in Volkswagen and the social democratic reasoning it was embedded and has since been defended (to Porsche's chagrin). A similar set-up for Opel may be the last bastion of political compromise Merkel may be willing to cede if all else fails. And at times such as these, ironically, that pressure may come from her own party recognising the political consequences of the zeitgeist.

But if Germany wishes to stay the spiritual leader for a globally competitive, inter-regionally trade-friendly EU, even that may be too high a price to pay as the likes of China, India & Russia eye up European car markets as part of their resurgence plans. Politically, German industry may have to be seen to be 'internationalist' for ameniable 'quid pro quo' relations; especially so given VW, BMW and Daimler's interests in the BRIC economies.

The longer-term international success of the German car industry at large depends on a successful outcome of that G20 meeting. The formal agenda highlights the role of the IMF in setting a global regulatory financial framework; but implicitly the newer G8+/G20 members will be looking at Germany as perhaps the central proponent of cross-border industrial markets goodwill....and just perhaps the fate of Opel as the examplar of 'deeds supporting words'.