Tuesday, 17 November 2009

Industry Structure – GM & Opel – A Temporary Case of Irrational Exuberance?

“Irrational Exuberance” was once the phenomena of stock markets, yet it now seems that such misplaced optimism can be found in the annuls of a still heavily shocked and sedated western auto-sector.

Recent weeks witnessed a U-Turn of attitude in the RenCen at Detroit, after 'New GM' decided to remove the sale of Adam Opel GmbH from the negotiating table. The heady mix of intra & inter-national industrial policy-making, the social strings of financial aid packages and business-centric strategy formulation ultimately clashed, and the triangular relationship of the 3 prime stakeholders - GM, Magna-Sberbank-GAZ and Angela Merkel – pulled and torn.

The protagonist GM has decided that it should, after all, direct the future of its European division, parachuting in Nick Reilly from his successes at GM Asia-Pac to take the reins from Carl Peter-Forster, his role at Opel presumably seen as untenable given his preference for the unit's sale to the the Canadian auto-supplier and Russian bank that would have given GAZ its much needed transformation.

Unable to arrive at a satisfactory conclusion, it has rebuked the Russian backed offer on strategic grounds relating to IPR, R&D, Russian sales territory and longer term global competitiveness implications. Its stance is understandable, given the strategic importance of Opel as GM's medium car creation hub, and the opportunity the relatively new SCCS platform (created as a JV with FIAT) offers a rival automaker such as GAZ which can leverage to its own export advantage Magna components pricing, low cost labour & overhead and its geo-political position between Europe, the CIS states and 'Chindia'.

Unsurprisingly GM does not wish to 'hand on a plate' its relatively knowledge advanced division to an arguably better placed competitor. But it must in due course and at some point acknowledge that something radical must be done to alter the very DNA of Opel as part of an environment reactive evolutionary process if the company is to not simply survive on the largess of state sponsorship in the face of withering consumer attraction.

Critics rightly judge GM by its historical lack of good parenting toward Opel and the 21st century mis-management of its own North American operations, since Detroit has indeed been less than adept in profitably operating such a sprawling monolith - with typical internal & legacy conflictions - caught in a ravenous sea of global sector change.

The 'New GM' with new leadership and a largely new board seeks to redress such criticism, but realistically can it? What exactly will it do to redress the situation and specifically the Opel GmbH challenge?

Recent news indicates it seems to be replaying the 'set-play' recently created in the US by GMNA, which effectively draws in state and union stakeholder for interim term survival. Read between the news-report lines and this appears to be the case; GM using US and EU aid finance aswell as its own rebuoyed balance sheet.

But let us not forget the fact that the political will to keep financially bolstering under-performing companies is withering, and the fact that GM's improved balance-sheet is only – re-iterate 'only' – a function of a macro-enabled external assistance(s).

These being:

1. a fast-track (investor debilitating) Chapter 11 procedure,
2. massive financial injections from Washington ($13.4bn of which still sits in Treasury escrow)
3. the CARS 'cash for clunkers' scrappage scheme which effectively drove an estimated 50% of GM dealership footfall in the period (& with the by-product that it actually benefited Toyota, Honda, Hyundai and Ford far more so than GM).
4. it is effectively US tax-payer cash that repays Opel's E1.5bn bridging loan from the German tax-payer – done so to eradicate the implicitly socialist agenda of the 'custodial' Opel Trust

Given that this is the reality, GM though better placed, is not in a position convey any swagger, or indeed “irrational exuberance”. For its is far from out of the woods in the US, and especially not so relative to Opel's diminished prowess in Europe.

Removing the remit and need for the Opel Trust is indeed a good development, since it partially de-shackles management, but instead of simply re-running the 'GMNA set-play' of state & union equity provision – and thus simply replacing one set of shackles with others - a truly viable plan of action is needed to re-shape Opel. One to suit its diminished place within the EU consumer market yet of possibly more marked importance to a global GM and indeed a global auto-sector.

And it is from the hopeful 'lessons learnt' by way of the Magna-Sberbank-GAZ consortium that GM Europe must re-invent itself.

Such aspiration may or may not be the case, we shall have to wait and see.

In the meantime, instead of an Opel sale, GM has arrived at its own plan, one which reduces the level of German aid reliance and so presumably freeing itself from much of the present plant & labour overhead obligation. Following the FIAT lead with a pan-European approach it seeks to spread the $3bn cost and load of re-structure across various EU nations and labour unions, with $1.48bn of company capital re-directed from Detroit to Russelsheim and beyond.

GM states that Opel has enough liquidity to maintain operations (effectively 'as is') but lacks the resources to undertake the full re-structure required.

So beyond the lower level contribution of EU state and union aid – including 'only' hundreds of millions of Euros from Germany vs the previous E2.2bn relative to the Magna deal – the largest slice of such additional resource presently look to come from the US Treasury.

It will be of little doubt that as GM was negotiating with Magna as to the IPR package made available for sale, it would have also been convincing the Obama Administration of Opel's central strategic role to the company given its R&D exposure to Germany's advanced eco-engineering sector that realistically downplays high-cost EV and hybrid R&D for that of low-cost clean diesel development. Whilst the Japanese may have the petrol-NiMH hybrid lead, GMNA may realistically wish to ultimately pursue a more conventional path for all the rhetoric of presently limited available US-made hybrids or next generation L-ion range-extender vehicles (NB GM Volt est $35,000 vs Toyota prius $22,000!)

Beyond the US's own intrinsic benefit from Opel (ie Germanic) know-how, and we see that with FIAT & RHJ International still probably in the background, GM recognises that Opel's constituent parts of: R&D capabilities, project development assets (HR, IT, studios, test-cells, tracks etc), plants and company dealerships and company land can be very probably further sweated. The company is less than the sum of its parts as a whole, but what if the parts themselves can be informally or formally hived-off?

Investment-auto-motives suspects that even if Opel's full and final sale is not imminent, a new period of corporate asset re-evaluation is so. Led by Reilly he will note: the EU's supplier base ambitions to become Tier0.5 players (not still discounting Magna); FIAT's own growth ambitions (yet cogniscent of historical FIAT-CCCP relationships), and lastly and very importantly his experience of China's auto-industry structural growth path with GM seeking a leading role.

The new Opel plan is ultimately an interim step, and undoubtedly will mean a required metaphysical 'deconstruction' of the entity. Exactly how that comes to play out in the future remains unclear. At one extreme via a 'GMNA set-play' Opel GmbH could be floated to become an AG or more likely an SE via an IPO to reflate its value. At the other extreme it could become a discreet set of self-propelled cost-centres, acting as an eco-engineering house, contract manufacturer, Tier0.5 player and yet more; tasked to compete within the GM empire (esp vs NA & China) to drive down costs and improve quality, and indeed reach out beyond GM to assist at a price in the development of BRIC auto-sectors.

As President Obama talks trade with President Hu Jintoa, that old adage of “what's good for GM is good for America...” is given the additional line “...is good for Sino-American relations”

However, for the moment that is a far-horizon possibility.

Any present GM jubilence should be recognise as only a momentary respite in the battle for GM transformation, since reports of Frederic Henderson's self-pronounced reliance on near-term sales which will now slacken after CARS will not provide GMNA with the momentum to turn the corner.

Hence it must look critically at the corporate and sector functions of Adam Opel GmbH.