Opel Incentives June 2009 to Boost Sales, Save Jobs

General Motors Corp.’s European Opel unit, rescued by German state aid last month, may have to slash prices by 40 percent to sell enough cars and fulfill a pledge to save jobs in the country.

“The market will be a combination of struggling brands and cheap cars,” if Opel gets restructured as planned, said Simon Empson, managing director of Broadspeed.com, a U.K. online car retailer. He predicts the carmaker, which operates Opel in Europe and Vauxhall in the U.K., will have to discount models by “40 percent or more” to meet its sales targets.

Canadian auto-parts maker Magna International Inc. is leading the group negotiating to buy the GM unit. Because of the structure of the deal, the new owners may be more interested in boosting output than generating profit, said Tim Adam, a corporate finance professor at Humboldt University in Berlin. The company agreed to save German jobs in return for 1.5 billion euros ($2.1 billion) in short-term loans from the government.

Ford Motor Co. and PSA Peugeot Citroen may be drawn into a price war if a Magna-led Opel pushes discounts, stoking concern the European auto industry will struggle to recover from the worst recession since World War II because consumers will become hooked on markdowns.

“Everybody is looking to generate cash, and the quickest but not necessarily the most effective way is to discount,” said Stefan Bratzel, director of the Center of Automotive Research at the University of Applied Sciences in Bergisch Gladbach, Germany. “Peugeot, Renault and Ford need to make sure they don’t fall by the wayside.”

Production Curbs

European automakers probably will build 17.7 million cars this year, or 10.4 million fewer than their factories are capable of churning out, according to IHS Global Insight. GM’s European operations may use less than 62 percent of production capacity this year, according to estimates from the research firm.

Opel aims to sell 2 million cars a year once it can market vehicles worldwide, perhaps in about five years, according to Klaus Franz, Opel’s top labor leader. That would require the carmaker to boost capacity by more than 200,000 vehicles. The current factories can produce 1.76 million cars a year, according to Global Insight.

“We reject the assertion that Opel has to reduce prices by 40 percent to run factories at full capacity,” Frank Klaas, a spokesman for the carmaker, said by telephone. “This is complete nonsense.”

Job Protection

GM, the Detroit automaker selling Opel while reorganizing in bankruptcy, employs half its European workforce in Germany, and Aurora, Ontario-based Magna has assured officials that all four factories in the country will remain open. The deal depends on a total of 4.5 billion euros in loans from European governments.

Magna’s offer, with financial backing from Moscow-based OAO Sberbank, includes a pledge to expand in Russia, further adding to speculation that Opel will push output with cheaper cars. The Canadian company beat Fiat SpA in becoming preferred bidder, in part because the Italian carmaker wanted to trim production capacity at Opel and Vauxhall.

The interests of the new Opel ownership group may lead to decisions that extend the carmaker’s losses, Humboldt University’s Adam said.

“None of the new owners have strong incentives to maximize profits in the years to come,” he said. “Rather, the new owners have incentives to increase costs.”

Magna will benefit directly from sales of parts to Opel, while GM will get patent fees and technology royalties for each car sold, Adam said. Sberbank may gain from a planned Russian carmaking partnership with OAO GAZ, which the lender also has financed, he said.

GM in Russia

The sale of Opel won’t alter GM’s plans to start production of the Chevrolet Cruze this summer at a St. Petersburg factory, Hans-Juergen Michel, GM Russia chief, told reporters today.

Magna, which grew from founder Frank Stronach’s one-man tool-and-die shop to become one of the world’s top auto-parts suppliers, insists profit at Opel is a priority. Chief Executive Officer Siegfried Wolf said June 3 that unprofitable companies are “not good for society.” Magna spokesman Daniel Witzani declined to comment for this story.

And Magna may still close Opel plants. Labor leader Franz said June 3 that there would be tough negotiations to keep factories open in Luton, England, and Antwerp, Belgium. The deal may lead to as many as 11,000 jobs cuts, including 2,600 in Germany, according to German officials.

‘Looking for Margins’

“No one as smart and entrepreneurial as Frank Stronach is going to make that kind of a move without looking for margins,” said Tim Urquhart, an analyst with Global Insight in London.

Magna will hold 20 percent and Sberbank will own 35 percent of Opel, based in the Frankfurt suburb of Ruesselsheim. Workers will receive a 10 percent stake in exchange for $1.2 billion in concessions, and GM will retain about 35 percent. GM expects a final contract by July.

Peugeot expects European Union authorities will “remain vigilant to ensure that European competition rules are fully respected,” spokesman Pierre-Olivier Salmon said by telephone. He declined to comment on the potential impact of the deal on pricing. John Gardiner, a spokesman for Ford in Cologne, Germany, declined to comment on pricing.

Ford is wary that government loans may give Opel an unfair advantage, saying it is “imperative” German aid to Opel does “not breach EU state aid, internal market rules or competition policy.”

Ford Wants Fairness

“It is vital that a level playing field is enforced to ensure a fair and equitable distribution of any governmental assistance,” the Dearborn, Michigan-based automaker said in a statement in response to questions about Magna’s plans.

Price cuts could reverse some steps taken by carmakers to weather the recession. Ford, the top car retailer in the U.K., has raised prices in Britain twice this year by a total of 8.6 percent. Opel raised prices in the U.K. almost 5 percent in February. Both carmakers cited currency fluctuations in addition to a slumping market.

Since the Opel deal, Peugeot Citroen, the continent’s second-largest carmaker, has said it’s open to partnerships to spur growth amid the worst auto-market slump in 15 years. The expected Opel purchase by Magna makes size more important in maintaining profits, Chairman Thierry Peugeot said June 1.

Ultimately, Opel will have to be able to finance itself, because the planned state funding isn’t enough to make Opel a viable, independent carmaker, said Bergisch Gladbach’s Bratzel.

While competitors may cry foul if a state-funded Opel cuts prices too aggressively, Magna’s lack of experience in selling cars, especially the complex relationship between new-car prices, financing rates and used-car values, could force Opel into discounts, Broadspeed’s Empson said.

“Magna’s understanding of new- and used-car markets could probably be written on the back of a cigarette package,” he said.