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.

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.