GM May Face a Standoff Over Opel

The new board of General Motors could soon be in a standoff with the German government. But even if GM is determined to get a more satisfactory disposition of its Opel auto operations in Europe, there aren't any clear-cut paths to success.

The company's board of directors met Tuesday and will again on Wednesday to discuss Opel's fate. If the board chooses not to accept a bid from Canadian parts maker Magna International (MGA) and its Russian partner, OAO Sberbank (SBER.RTS), a very complex drama will unfold.

Every one of GM's options is laden with problems. If GM sells control of Opel to Magna and its Russian partners, the companies could create a rival to GM in Europe and Russia using GM's technology. But keeping Opel requires getting €3 billion in funding from either the German government or the Spanish and British governments, who want to protect Opel jobs in their countries. Even then, getting German union IG Metall to grant the wage and work-rule changes and job concessions that Opel needs will be very difficult. "It's a Gordian knot," says James N. Hall, principal of auto consulting firm 2953 Analytics. "It's more of a mess now than it was before."

A Bridge Loan Too Short GM originally wanted to keep Opel and asked the German government for financial help. The Germans gave Opel €1.5 billion as a bridge loan, which was enough to keep Opel going but not enough to fund a real restructuring. Unable to secure more financing, GM looked at sale options. Magna stepped forward and won support from the German unions and the government. GM sources say company executives never really liked the deal, but it was their only option if Germany wouldn't fund other bidders.

Sources say GM's board has soured on the deal with Magna, making it a less likely option without changes. So some board members want to try to line up funding for a sale to rival bidder RHJ International (RHJI.BR) or even keep Opel. So far, the German government has refused to back RHJI, and both government and union officials want GM out of the picture.

Sources close to the process say the board will keep Opel only if GM CEO Fritz Henderson can show a credible plan to restructure the operation. GM has held talks with officials in Spain and Britain. So has RHJI. But there's no deal in place yet.

GM has time on its side. Opel has enough cash to get to December and possibly January, says one source briefed on the company's financial situation. But German Chancellor Angela Merkel wants a deal done before the Sept. 27 German election to show that she has saved at least 15,000 of Opel's 25,000 jobs. That means GM could wait Merkel out to see if she will bend and let GM restructure the company with German funds, or back RHJI's bid.

High Labor Costs Some GM insiders think that if GM refuses the Magna bid and the German government won't provide more financing to let GM keep Opel, RHJI's bid could be the compromise solution. Whoever ends up controlling Opel will still have to tackle its big problems. The company's costs are way too high for the prices its cars bring on the market. Opel used to make money when it commanded a premium for its cars from the 1960s through the late '80s, Hall says. But GM started cutting corners and pricing fell. Add in high labor costs and restrictive work rules that come with the IG Metall contract, and Opel has been a money loser for years, Hall says. GM or any buyer will need to cut jobs and costs in Germany to make the company successful. IG Metall agreed to concessions, but only if Opel was sold to Magna.

Opel sells 1.2 million cars a year, so the stakes are huge. Its cars are developed using the same underpinnings as the compact cars and family sedans that GM sells the world over. Losing Opel's sales volumes would reduce the scale GM needs to be cost competitive. GM's new, more hands-on board is determined to strike a better bargain before it gives that up.

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