In a declining market, options for Opel’s new management in terms of reducing costs at General Motors’ European operation – other than capacity and job cuts – are limited, IHS Automotive analyst Tim Urquhart wrote in a research note on Wednesday (23 November).
Further job losses and plant closures are the only effective options to reduce costs and improve productivity, Urqhuart said.
“The current restructuring process included a moratorium on further production and job losses until 2014 so further cuts will put the company on a collision course with the powerful German union block, although this situation has been potentially further complicated as works council leader Klaus Franz has just announced his retirement.
“The prognosis for Opel/Vauxhall is not good and it is looking increasingly likely that the new management team, led by GM vice-president Steve Girsky [a former automotive analyst with Morgan Stanley, adviser to former GM CEO Rick Wagoner in 2005 and 2006 and subsequently an adviser to labour unions ahead of GM’s US Chapter 11 bankruptcy filing – ed], will look to take swift action on the company’s costs base and balance its production output with demand,” Urquhart wrote.
“The high cost of manufacturing in Germany would appear to make the company’s large production footprint in the country an obvious target, although any move in this direction would lead to prolonged and potentially damaging labour unrest.”
He said the new management team that General Motors’ (GM) head office “has parachuted in to take control of the firm’s loss-making European unit Opel/Vauxhall faces an extremely difficult task in returning the unit to profitability in the current European market environment”.
The automaker yesterday announced that Girsky would replace the retiring Nick Reilly as the chairman of Opel’s supervisory board, supported by fellow GM board members, chief finance officer (CFO) Dan Ammann and international operations president Tim Lee. Girsky has been on the supervisory board since January 2010 but, according to Urquhart, “the reshuffle is clearly designed to give Detroit direct oversight over attempts going forward to drag Opel/Vauxhall back to profitability”.
“GM simply cannot afford to carry any loss-making units following its emergence from a US-government underwritten bankruptcy process,” he added. “The company is coming under pressure from shareholders as the stock price has fallen back alarmingly from the US$33 that it launched at when GM returned to the New York Stock Exchange in November 2010 following the bankruptcy process, and is now hovering at around the $20 mark. Opel/Vauxhall has no other option but to begin making money for GM again.”
Urquhart described Girsky as “a trusted lieutenant of GM’s chief executive officer (CEO) Dan Akerson” and said “there will be no sentimentality involved in his assessment of GM’s operations, which recently reported a worse-than-expected $292m loss in the third quarter, which was unsettling given the fact that the unit had recorded a solid profit on the first half of the year.”
Girsky said when appointed that GM would focus on boosting margins and cutting costs by leveraging the automaker’s global scale.
“However, GM officials declined to elaborate on the precise detail of this plan and it is not clear exactly what more GM can do to leverage its global scale with reference to its European operations, given that Opel’s research and development (R&D) centre in Russelsheim is already responsible for a large proportion of GM’s global vehicle technology in terms of the R&D capability having developed the Delta II (C-segment) and Epsilon II (D-segment) platforms,” Urquhart said.
“Girsky may have been chosen for the role at Opel supervisory board chairman as a result of his previous experience as a representative of the United Auto Workers (UAW) union on the GM board and adviser to the labour union. He has extensive knowledge of the workings of the automotive industry and labour organisations, and was central to negotiating the concessions that GM won from the UAW in its own restructuring process.
“His options would include reopening negotiations with Opel’s main labour union in Germany, IG Metall, and with the works council over the possibility of imposing more job cuts and maybe even further plant closures.”
Referring to a Reuters analysis, also published today, Urquhart said: “There also exists something of a nuclear option for Girsky… if further negotiations with IG Metall and other European labour unions prove unsuccessful. In its 2010 annual report with US securities regulators, GM had warned that a failed restructuring of Opel could prompt a local bankruptcy filing although this move would apparently trigger the payment of $6bn in order to write off government loans to the unit. This would have to be a last resort option to Girsky and his management team.”
He noted that the resignation of Opel’s high-profile works council leader Klaus Franz, who was instrumental in agreeing the last restructuring deal and in persuading GM to retain Opel/Vauxhall when it abandoned the sale process it was looking to push through with the consortium involving Magna/Sberbank two years ago, further complicates the situation.
“Although Franz has come to retirement age the timing of his departure is not ideal and [his] statement relating to the ‘successful rescue’ comes across as being somewhat presumptuous in light of recent events. Franz’s partial retirement will begin on 31 December but he will stay on in an advisory role in the new year and may end up being busier than ever.”
Urquhart summarised Opel’s situation: “The task facing Girsky and his team appears to be formidable, especially given the contraction that the European market is currently facing with the result of the Eurozone debt crisis. The combined sales of the company’s Opel and Vauxhall brands in the European market are expected to decline marginally to 1.05m units for the full year in 2011, before a further fall to 1.01m units in 2012.
“So Girsky is faced with attempting to improve the unit’s performance when faced with declining demand and sales volume. He can look for all the synergies and to exploit GM’s ‘global scale’ all he wants but there can be little getting away from the fact that, despite the closure of the Antwerp plant, and the ongoing process to shed around 20% of Opel and Vauxhall’s entire workforce, the company will still be left with significant over-capacity.
Capacity too high
“In terms of a cold hard analysis of the cost base of the company, Opel simply has too much passenger car production capacity in Germany. The high costs of manufacturing in Germany are a drag on competiveness, especially when the company’s plants there are operating at between 60 to 80% capacity on average.”
Urquhart also queried whether the Astra should be made in three factories in three countries as is currently the case – Glwice, Poland: Ellesmere Port, England; and Bochum, Germany – but noted that production is being phased out in Bochum and has started at Russelsheim [GM insiders recently made clear to just-auto that Astra production distribution is being eyed, however -ed].
Urquhart added: “It appears that there must be question marks over one of the three main German plants: Bochum, Russelsheim, and Eisenach. Bochum looks like it could be vulnerable as it now only turns out the Zafira and Zafira Tourer, although the initial response to the latter model following its launch has been positive. However, any talk of these plants being affected by capacity or job cuts will attract fierce opposition from the German union base, despite the forthcoming retirement of Franz.”
A form of bankruptcy?
Analysts interviewed by Reuters for the article published today said starkly that options for restructuring Opel range from bad to worse and could include a form of bankruptcy.
They suggested Girsky could look for new partners for Opel to share costs, and even return to the idea of selling the brand once it has been repaired.
“You can’t say the words ‘all options are on the table, we rule out nothing’ unless there’s something fundamentally changing,” Morgan Stanley analyst Adam Jonas, who expects GM’s latest restructuring plan to be announced by early 2012, said.
“[Girsky’s appointment] suggests that fixing Europe is a top priority for General Motors and they are shrinking the chain of command so that Detroit is on top of every detail,” Jonas added.
Reuters noted this was not the first time Girsky has come to the rescue of Opel. As a GM director, he voted to keep the unit when GM reversed a decision to sell it in 2009.
“People tend to view Opel as this thing you can just flip overboard and that’s sort of not the way we view it,” he said at an investor conference in September. “We view it as something that’s integral to GM.”
Just 12 days ago, Opel/Vauxhall responded to speculation about its future by emphasising its range of new models and product initiatives to just-auto.
“Opel/Vauxhall restructuring is essentially complete,” a spokesman said in an emailed statement. “Of course, we are working on continuous improvements to further decrease our structural costs and increase efficiency.
“Thus we will further drop the profit threshold – accounting for the international debt crisis and and a resulting weakness in the European automotive market. At the same time, the company is following a strategy to further increase its income. This includes the improvement of retail and fleet business margins, increase in market share and volume and entering new markets and segments.”
The spokesman highlighted the Ampera – currently on sale in Germany and, from early spring, due in right-hand drive form in the UK – as well as its EUR11bn (US$15.1bn) initiative comprising six new products in 2012.
Reuters noted that this week’s changes at the top come only two months after GM executives voiced satisfaction with Opel’s restructuring and denied it was for sale. But, since then, the eurozone debt crisis and weakening demand have led to Reilly’s exit and resulted in a $300m Q3 loss for GM in Europe. GM also dropped its 2011 break-even target for Opel.
Akerson, one of two board members who voted to sell Opel in 2009, has called Europe’s economy a “morass” and said the unit needed to lower its break-even point.
After emerging from bankruptcy in 2009, GM dropped plans to sell Opel to a consortium led by parts maker and contract vehicle assembler Magna International and Sberbank Rossii following months of negotiation that involved the German government.
Instead, in a move that “confounded those in Berlin”, according to Reuters, the GM board launched a restructuring intended to get the unit, which lost $1.6bn last year, back on track.
Reuters said Girsky, whose responsibilities include GM’s global strategy, will need to draw on his experience as a Wall Street analyst and an adviser to the UAW as he takes on the Opel dilemma.
“The job represents the highest-profile assignment for a GM outsider seen as a dark horse candidate to succeed Akerson.”
Reuters noted that, in its 2010 annual report with US securities regulators, GM had warned that a failed restructuring of Opel could prompt a local bankruptcy filing. Morgan Stanley’s Jonas told the news agency he did not believe that was the preferred course for GM management, estimating it could force payments of up to $6bn to write off loans to the unit.
Opel sale to be revisited?
While GM officials have denied they want to sell Opel, that talk will not go away, especially after Akerson and Ammann each said nothing was off the table. But bankers told reuters Opel’s cost issues must be solved first.
“It’s very difficult to sell assets in Europe currently, but Opel is even more difficult. You can’t sell a restructuring case,” an unidentified auto banker said.
Also, there is no sign that past would-be Opel buyers are lining up to talk to Girsky now, the news agency said.
Magna officials declined to comment to Reuters, but a source familiar with the company’s thinking said the parts maker is not interested in buying any automaker. Fiat CEO Sergio Marchionne said in June the Italian automaker had no interest in buying Opel. That has not changed, a person close to Fiat said.
The longshot remains the China card, Reuters added. In September, IG Metall’s Franz called on GM to offer shares in Opel to its joint venture partner in China, SAIC.
But in any scenario, big questions remain unresolved, including access to GM’s technology and intellectual property as well as the treatment of the US automaker’s pension obligations in Europe, Jonas said.
“What you’re seeing here is a prelude to a massive restructuring, and I don’t think it will be limited to GM. Europe has soft-shoed this for a long time. It’s awfully close to a total meltdown,” said a second unidentified banker.