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Germany right to fear for Opel jobs as US giant ditches sale, but UK may benefit

It brought some cheer to the UK and provoked jeers from Germany, but General Motors' startling decision to hang on to its EU operations is most certainly not the end of the story for Vauxhall in UK.
In what was roundly described as a surprise U-turn by the US auto giant, GM announced on Tuesday that it would scrap talks to sell Opel and UK subsidiary Vauxhall to Canadian parts manufacturer Magna and state-owned Soviet Union bank Sberbank.
Citing improved conditions in the embattled car market, GM said it would instead seek to launch its own restructuring of the business with 3billion of backing from various European governments.
The 11thhour decision appeared to catch German chancellor Angela Merkel off guard. Having invested months of political capital into negotiating the deal with Magna and Sberbank – including the promise of ?4.5bn in state aid – Merkel and her government cohorts believed they had secured the jobs of thousands working in Opel's German factories. GM chief executive Fritz Henderson reportedly told her of the change of heart on Tuesday afternoon in Washington DC, where she had been invited to address the US Congress.
The outcry from Germany was almost immediate. One state premier described GM's behaviour as "the ugly face of turbo-capitalism", while workers at Opel threatened strike action. The German government, meanwhile, said it would ask GM to return the rest of a partially-repaid ?1.5bn bridging loan that has been keeping Opel afloat since May.
Yet not everyone was completely taken aback. Pete Kelly, senior manager with JD Power Automotive Forecasting, says he thought political momentum would have pushed through the sale to Magna-Sberbank. However, he also notes that GM's board postponed finalising the deal three times in the months leading up to last week's decision.
"I was not as surprised as everyone else, simply because this has been such a twisty-turny tale, and it was always obvious that GM never wanted to sell Opel," Kelly says.
There is some sound reasoning behind GM's position. The board, which has brought in seven new directors since the Magna deal was initially agreed in May, was deeply concerned about letting go of Opel's expertise in developing new compact cars. This is becoming an increasingly important segment for GM in its home territory of North America, where consumers are shifting to such models.
"With the whole market making that transition, to jettison the unit that is making your best smaller cars runs counter to operating a sound business going forward," Kelly says.
GM also has reason to believe that it can now afford to keep this valuable asset. It is coming though its government-sponsored bankruptcy in record time, and is aiming to regain a stock-market listing as early as next year. Though its finances are still perilous, it is in far better shape than domestic rival Chrysler, which is laden with debt and continuing to report sharp declines in sales.
GM, by contrast, has been greatly helped by the US "cash for clunkers" programme, as well as similar scrappage schemes across Europe. Last week, GM reported its first monthly gain in USA car sales in nearly two years, notching up a 4.7 % rise for October.
It has been a similar story in the UK. Figures released on Thursday from the Society of Motor Manufacturers and Traders (SMMT) showed there were nearly 169,000 new registrations in October, up more than 31 % on the same period last year. The recovery was better than expected, the SMMT said, with the government's £400m scrappage scheme accounting for more than one-fifth of sales.
Of the five top-selling models for the month, two were from Vauxhall: the Astra, in second place, and the Corsa, in fourth place. On the continent, Opel's business has also been running better than expected, again thanks to scrappage schemes.
These promising signs both at home and abroad strengthened GM's resolve to maintain control of Opel and Vauxhall. "GM's overall financial health and stability have improved significantly over the past few months, giving us the confidence that the European business can be successfully restructured," Henderson said last week.
However, Kelly at JD Power warns that what governments give can also be taken away.
The top five economies of Germany, France, the UK, Italy and Spain account for about 80 % of all car sales in Western Europe, and all have been running scrappage schemes. While France and Italy are likely to renew their programmes, the German government has stopped taking applications. Although the UK committed an additional £100m to its scheme in September, Kelly predicts that will run out some time towards the end of this year, while Spain will probably run out of funding by mid-2010.
As a result, Kelly predicts that car sales in Germany, Europe's largest market, will fall from an estimated 3.8 million units this year to just 2.7 million next year. He expects similar consequences in the UK.
"We know this from the past, because it happens absolutely every time – when you withdraw these schemes, the market falls quite sharply," Kelly says.
How much this affects Vauxhall and Opel remains to be seen. GM has also yet to detail where the axe might fall in its restructuring plans for the European business, which is due to shed 10,000 jobs.
Kelly says the 5,500 employees at Vauxhall's UK plants should fare reasonably well – particularly those at Ellesmere Port, on Merseyside– because these facilities are more modern than others in Europe. However, the picture could be complicated by the political rift with Germany, which would have to supply some of the ?3bn GM needs to carry out its restructuring programme.

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