Friday, 6 November 2009

Industry Structure – GM & Opel – No Real U-Turns in a EinBahnStrasse.

The recent news that General Motors had altered its decision regards the sale of its Adam Opel division to Magna-Sberbank has created shock-waves through the industry; not least in Ontario, Nizhny Novgorod, Moscow, Berlin and Brussels.

Magna International's Stronach, GAZ's Deripaska and Sberbank's Gref, having thought it was only a matter of crossing the t's & dotting the i's will be fuming at the lost opportunity to re-align their interests in both the massive European Tier 0.5 arena and rapidly enhance a large, update sections of the Russian auto-industry and grow B2B and B2C banking expansion.

In Germany, Angela Merkel has rebuked with distain, having heard the news just as she departed from a Washington trip - but the fortunate paradox for her government is that having been re-elected on the back of a massive Opel aid package, which undoubtedly worried Treasury officials and instigated the concerns of the EU Commission, is that her government's fiscal and regulatory woes have now been greatly diminished.

Whilst in Brussels, the EU Competition Commissioner Neile Kroese can retract the regulator's claws now it seems that any future GM aid requests will be legitimately spread across the region relative to the national industrial and jobs impact. Across town however, the private equity company RHJ International (held by Ripplewood and Rothschild interests) can smile once again as its initial business proposal previously beaten by Magna-Sberbank can be potentially re-tuned and re-submitted to the GM Board.

Whilst GM remarks that the Russian related Magna deal had too many negative strategic implications for both the company and no doubt Washington aswell, GM cannot possibly operate Opel AG in the same form. It may quote the delights of improved revenues over the last 2 quarters for the North American and European divisions, but without government bail-out monies and (pointedly) stimulus generated / subsidised consumer spending GM could not boast such a claim. In real terms there has been improvement in NA with the divestment of portions of its asset portfolio and much talk of a latter-day IPO, but its European arm is still loosing ground in the region, literally through market share and practically via overweight obligations relative to underweight productivity and capacity. As stated in the past, the idea for the profitability of the crammed EU marketplace and so the regional industry would have been to see Opel/Vauxhall disappear completely; its assets sold-off to other PE and trade-buyers with VM and Tier 0.5 & Tier 1 interests.

Thus the Magna deal would have assisted in the positive restructuring of the region, but the manner in which it was undertaken with so much German financial bias showed it to be less than 'democratic' to others such as RHJ International and other interested parties such as FIAT Auto.

The recent deal-retraction news has typically brought the usual government rhetoric and counterpoint union cheer in the UK versus union dismay in Germany, but for Opel/Vauxhall itself as a commercial entity it travels down a One-Way-Street (an EinBahnStrasse) of massive structural re-alignment. That achieved either through far more low-cost parts procurement from outside the EU, labour reduction and flexibility, plant closure(s) and dealer-rationalisation. However, the obvious and correct objection is that vitally previous management did not achieve this requirement throughout its loss-making era, hence its being put up for sale.

Thus the hopefully new path for Opel/Vauxhall is that it instead be put back under the reality of the commercial spotlight by GM's Henderson, Whitacre et al in Detroit, the representatives of the Autos Task Force in Washington, and crucially objective, insightful and independent advisors who understand both micro and macro-level requirements necessary to re-shape the over-bloated and lack-lustre animal that is Adam Opel AG. This of course must be done relative to those micro-macro trends.

Presently for GM, relative to the big-picture EU issues, we have a sharp juxtaposition emerging which must be dually exploited. The somewhat painful ratification of the Lisbon Treaty further integrates policy of mainland national administrations, yet this level of Federal Statism is vehemently countered by the UK's (expected) next government. The Conservative Party recognition is that Lisbon ratification without critical 'get-out-clause' stipulations endangers the competitive trade position of the UK – a country which from the economic perspective is in a far worse off than its EU neighbours given debt-to-GDP levels and other indicators. The UK, with its weakened Sterling currency seeks to benefit from the £ vs Euro differential, both intra-regionally throughout the EU and inter-nationally across the world.

Thus the GM Board must be ready to exploit the political fracture by ensuring that the new political harmonisation of the EU mainland allows it both any nation-based fiscal benefits (aid or taxation dispensations) whilst highlighting its need for operational freedom to restructure through partial or even 'sum-of-parts' whole divestment to PE and trade buyers....which puts RHJ International and FIAT Auto back in the frame, especially so since FIAT's Marchionne and his generals have achieved a similar singular nation-based rationalisation programme for FIAT Auto that could act as a template for GM's progress with Opel.

Objectively, the dead-weight of Opel has been a drag on the European automotive sector's fortunes - ask any CEO of any local car company 'off-the-record' and he'll say similar. Hence, in a globalised world the component entities of the EU, or en block, can not and should not act as a nanny-state. Do to so only undermines regional automakers and the futures of their employees and local economies.

Thus whilst there may now be nation-based aid with arms-length oversight from Brussels, it should be short-termist whilst GM Opel and its bankers seek alternative retained and divested futures for the Opel/Vauxhall's assets – both tangible (plant, R&D centres, admin offices etc) and intangible (brand, IPR, etc).

Capital markets, though over-bought in recent times, are on a historical trend basis slowly strengthening. This together with the pressure to break-up of banking roles & remits means that 'Productivity-Push' will (as investment-auto-motives has long stated) be the real focus for M&A , Fixed Income and Convertibles deal-making across Wall Street, The City, Brussels, Paris, Milan and Frankfurt

So for the future of Adam Opel AG (inc Vauxhall), Round 1 may have ended but the bell will soon ring for Round 2 in the fight for GM profitability.