news20090530nyt

[Today's Newspaper] from [The New York Times]

[Global Business]
Tentative Deal for G.M.’s Opel Is Latest Shift for Industry

By NELSON D. SCHWARTZ and CARTER DOUGHERTY
Published: May 29, 2009

The global reordering of the auto industry took a big step forward on Friday as an unlikely alliance led by Magna International, a Canadian auto parts maker, and Sberbank of Russia tentatively agreed to buy the European operations of General Motors.

The deal was brokered by the German government in Berlin, with negotiations stretching from Moscow to Washington, Detroit, Ontario and New York, where G.M.’s board gathered for a meeting ahead of an expected bankruptcy filing on Monday.

With sales plunging to levels not seen in decades, auto companies are seeking refuge in mergers or bankruptcy court. Other companies, like Magna and Fiat, are seeing opportunities in beaten-down automakers, hoping to buy them or form alliances on the cheap.

The deal in Germany will have ripple effects in the United States.

Fiat had hoped to grow into a top-tier global company virtually overnight, with its nearly completed alliance with Chrysler and by buying G.M. of Europe, which includes Opel of Germany as well as the British auto company Vauxhall.

Although stitching together established companies on different continents is challenging, Chrysler’s prospects might have improved as part of a larger company.

Now, with Fiat apparently losing out to Magna for G.M.’s European operations, prospects for Chrysler’s long-term future could darken.

By contrast, a deal for G.M.’s European operations could resolve an important issue for the beleaguered company and help speed its restructuring in bankruptcy court, which appears all but certain.

“It’s an extremely important step forward for our company and our operations in Europe,” said Carl-Peter Forster, the president of G.M. Europe, in an interview shortly after the talks concluded at 2 a.m. Berlin time.

“We had three interested parties and it came down to one, Magna, and we hammered out a memorandum of understanding in what was basically 36 hours,” he said. “It’s a well-founded, pretty detailed M.O.U.”

Some industry experts immediately panned the proposed Magna alliance with G.M. in Europe, saying the German government had picked the Magna deal over the rival Fiat offer to safeguard nearly 25,000 jobs at home in an election year, while adding yet another player to an industry already burdened by chronic overcapacity.

German labor leaders and politicians feared that Fiat would be more aggressive in cutting jobs.

“It solves nothing in terms of the industry’s structure,” said Philippe Houchois, an analyst with UBS in London. “It’ll be detrimental to the whole industry’s pricing ability, and not much good will come out of this.”

Losing Opel to Magna would be a blow to Sergio Marchionne, Fiat’s chief executive, who was initially favored to acquire Opel.

After his recent deal for 20 percent of Chrysler, without having to put any of Fiat’s money down, Mr. Marchionne had hoped Opel would deliver the kind of scale he believes is crucial for survival in the global auto industry.

Putting Fiat, Opel, and Chrysler under one roof would have created a company with the capacity to build nearly six million cars a year, which would have made it the second-largest global automaker after Toyota.

Instead, Fiat and Chrysler now face competition from a new player, Magna, while Mr. Marchionne and his team work to revive Chrysler’s battered fortunes.

A final deal would lift Magna, whose specialty is making parts and assembling vehicles for other automakers, into the role of manufacturer. Under the terms of the deal as initially proposed by Magna, G.M. would retain a 35 percent stake in the new company, with Sberbank, a bank controlled by the Russian government, taking 35 percent, Magna holding 20 percent and Opel’s employees controlling the remaining 10 percent.

While Sberbank’s stake is larger, Magna, along with G.M. Europe’s executives, would supply the carmaking expertise to the new company.

G.M. surprised German officials on Thursday night when it disclosed that an additional 300 million euros would be needed because Opel’s finances were deteriorating so quickly.

Magna and its Austrian-born chief executive, Frank Stronach, have long dreamed of joining the ranks of the automakers it now sells parts to. It is a major supplier of components to G.M., so the two companies already have a relationship, which observers said would help Opel as G.M. navigates its way through the expected bankruptcy process.

Ferdinand Dudenhöffer, director of the Center for Automotive Research at the University of Duisburg-Essen, said that if the Magna deal came through, it would “take some work to make it a sustainable business.“

Though Magna rose from machine shop to auto parts maker, the company, based in Aurora, Ontario, has deep experience in engineering, assembling vehicles like the BMW X3, a sport utility vehicle, at its Austrian subsidiary, Magna Steyr, in Graz. In 2012 it will begin assembling the Porsche Cayenne, also an S.U.V.

The deal also represents a watershed for Russian companies in the West. This month, Vladimir Putin, the Russian prime minister, talked about the Magna offer by phone with the German chancellor, Angela Merkel.

After initial friction developed between German and American negotiators, as well as G.M., earlier in the week, the tone improved Friday and the pace of negotiations quickened, according to an administration official who insisted on anonymity because of the sensitivity of the talks. A senior member of the Treasury’s auto task force in Washington spent the last three days focused on the talks in Berlin, and the Treasury also had a senior adviser there.

With roughly two million vehicles a year produced by G.M.’s European operations, Magna will not be in the front ranks of the automotive world.

But Magna’s trump card could be the Russian market, which could reach annual sales of five million vehicles by 2015, Mr. Dudenhöffer said. By cooperating with Gaz, the Russian automaker, Magna could sell up to 500,000 cars a year there, he said, and steadily increase thereafter.

At first, Fiat’s abrupt exit from the negotiations was assumed to be a bluff on the part of Mr. Marchionne. But it looks to be an exit for Fiat, which was surprised to learn earlier in the week that Opel would lose 2 billion to 3 billion euros this year, far more than the 1.5 billion euro loss analysts had anticipated, according to officials with knowledge of the negotiations who declined to be identified because they were not authorized to speak publicly.

Politics rather than finances may have been be the crucial factor ahead of an election later this year in Germany. German officials believe the Magna bid will mean fewer job losses than any deal with Fiat. G.M. Europe and Opel employ roughly 50,000 workers in Europe, about half of whom are in Germany.

On Friday, the European Commission convened a meeting of ministers to address concerns that the aggressive action by individual countries, like Germany, to protect local jobs, risks dividing the unified market of the 27-nation European Union.

In a statement following the meeting, the commission said, “All participants agreed that any financial support by one or more member states must be based strictly on objective and economic criteria, and not include non-commercial conditions concerning the location of investments and/or the geographic distribution of restructuring measures.”

But the statement failed to satisfy critics who say action, rather words, is needed.

“We have always said there is not a level playing field,” said Ivan Hodac, secretary-general of the European Automobile Manufacturers Association. “The commission has to create a level playing field because the last thing we need is to get out of this crisis with a destroyed internal market.”