Day 554
When we sensed a while back that Magna was gaining the edge over Fiat in nabbing Opel-Vauxhall, that was before Fiat dealmaker/CEO Sergio Marchionne began to reveal his petulant side. Magna founder Frank Stronach (pictured below), by contrast, played a weaker hand beautifully. The trump card, he understood and Marchionne didn't, was the upcoming German elections.
And so Berlin ultimately favoured the bid by a consortium led by Magna. Opel-Vauxhall becomes the first major automaker with substantial Canadian ownership since 1918. when the Oshawa, Ont.-based McLaughlin family sold its business to General Motors. And the Fiat plan to leap from regional player to the world #2 automaker is in ruins.
German Chancellor Angela Merkel's governing coalition partner, which her party will face in September at the polls, was poised to use a Fiat deal - with resulting losses of German Opel jobs - to paint her as insensitive to the fate of the 50,000 Opel-Vauxhall employees at a time of severe recession in the world's third-largest economy. The chancellor is smarter than that, of course, and made it weeks ago that (a) she would be much more tight-fisted than the Americans in doling out corporate bailout funds to a successful Opel bidder, and (b) the bidder winning Berlin's approval would be the one pledging to preserve the greatest number of Opel's German plants and employees.
Thus the Stronach-led bidding consortium vows to preserve all four Opel plants in Germany, and put a substantial sum of its own money into Opel. Magna is one of the few healthy firms in the global auto industry, with a $1.5-billion cash hoard. Fiat, by contrast, is pretty close to flat broke. With both Chrysler and Opel, Fiat was offering not a penny by way of a purchase price or subsequent cash injection to bolster these troubled automakers, but simply offered its managerial expertise in attempting a turnaround of the firms. That worked with Chrysler, whose management talked with two dozen or so automakers worldwide and could not find even one willing to assume management of the Detroit-based firm or invest a nickel in the legacy of Walter Chrysler, as the former president of Chrysler testified last week at the Chrysler bankruptcy court hearings.
A sounder Opel-Vauxhall, however, attracted four bidders - in the case of Magna, a failed bidder two years ago for Chrysler. Yet having got his 20 per cent stake in Chrysler gratis, Marchionne was determined to do the same with Opel, expecting Berlin to pick up the entire tab of bailing out GM's main European division. (Vauxhall is the British brand of GM Europe.) When that proposition was greeted icily by German officials, Marchionne had a very public hissy fit and boycotted a crucial Berlin meeting last week with Merkel. In the deal struck Saturday, the Magna-led consortium will put $977 million (U.S.) into Opel-Vauxhall, and Berlin and governments in four states in which Opel has plants will put up $2.1 billion (U.S.) in emergency financing.
“The chancellor has to examine the offer by Magna very closely because in my opinion, as far as I’m informed, it’s the most realistic, the best offer,” said Peter Struck, the parliamentary leader of the Social Democrats, who, with the Christian Democratic Union of Mrs. Merkel, form the governing coalition.
“On an industrial basis, there is no doubt that Fiat makes more sense, since it provides scale and sustainability for Opel,” said Philippe Houchois, an analyst with UBS in London. “But Magna has been astute politically, and politics could determine who wins,” he added.
So Stronach becomes the first auto-parts maker in history to become a full-fledged automaker, using Opel's superior technology and production methods to help partner, GAZ, the large Russian automaker, sell more vehicles in the enormous Russian market. And at a time when Magna's reliance on a shaky GM and Chrysler - long a grievance for Magna critics - threatens Stronach with declines in parts volume, he now has Opel and Vauxhall to make up at least some of the difference.
That is provided, of course, that Magna is up to the task of reviving the two brands. We have our doubts. Magna has been assembling complete vehicles for years, at its Magna-Steyr plant in Austria, but in limited numbers and on contract to established automakers. Without the backing of a major automaker - Fiat or former parent GM, which will retain 35 per cent - Opel will lack shared technologies for new-product development and leading-edge manufacturing methods. Magna has no experience dealing directly with motorists or dealers. It also can be argued persuasively that in a global industry with two many cars chasing too few customers, Opel and Vauxhall needed to perish or be absorbed by an existing automaker rather than achieve independence from GM and add to an industry with too many self-standing players.
For Fiat, this is a huge setback. Opel is a much stronger brand than Chrysler. Opel is better established in its fast-growth markets of Germany and Eastern Europe (when they recover from the recession), boasts far more technology and design prowess (which were stripped from Chrysler by previous owner Daimler AG), and has a demonstrated ability to make money in good times.
Opel's current woes have mostly to do with the sharp economic downturn in Germany, Eastern Europe and Russia. By contrast, Chrysler was a chronic moneyloser even in economically robust times in its U.S. market during the nine years of the DaimlerChrysler experiment. For Fiat, Opel was the real prize, and Chrysler merely a dealer-network pipeline for a second bid to win U.S. consumers to a Fiat brand that Americans have rejected in the past.
“Fiat needs this deal,” Max Warburton, an analyst in London with Sanford C. Bernstein, told the New York Times. “Marchionne himself has said Fiat lacks the scale to thrive in the long term.” Opel’s technology is especially valuable, Mr. Warburton said, as Fiat develops the next generation of small-to-midsize cars.
More often than not, political considerations figure into big-business decisions. In this case, they were the determining factor.
Stronach, with his Austrian background and Magna-Steyr's longstanding operations, was more of a known factor for Merkel and her cabinet than Marchionne, a transplanted Canadian of Italian descent with no background in politics. Stronach, meanwhile, has for years stacked the boards of his companies with retired pols. He once sought a seat in the Canadian federal parliament. Stronach has long been active in Austrian politics. He has been an advisor to Vladimir Putin on the Russian auto industry.Former German chancellor Gerhard Schroeder endorsed the Magna bid for Opel.
That Stronach would more easily read Berlin is something Marchionne apparently failed to anticipate. And that has made all the difference.
Related
* Financial Times: The Magna fiefdom.
* Economist: Magna the riskier choice over Fiat.
* Opel model line-up. (photo gallery)
* Vauxhall model line-up. (photo gallery)
Note: For the purposes of this blog, the inception of the Great Recession in the U.S., the epicentre of the crisis, is taken as the start date for the global slump. The U.S. has been in recession since December 2007.
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