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Fresh doubts over viability of Magna’s business plan

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Fresh doubts over viability of Magna’s business plan

General Motors’ decision to sell control of Opel to a Canadian-Russian consortium this week was applauded by the Kremlin, Angela Merkel’s government and the “Opelaner”, as the carmaker’s 25,000 employees in Germany proudly call themselves.

See the attempts General Motors has made over the past decade to reinvent itself – and track the key events since the turn of the year

But a day after Berlin’s triumphant announcement that Magna International and Sberbank would buy 55 per cent of GM’s lossmaking European operations, fresh doubts were voiced on Friday about the viability of their business plan.

While officials in Belgium, the UK and Spain cried foul over a deal tailor-made to minimise job losses in Germany, analysts raised questions about Magna’s ability to execute a restructuring of Opel needed to return it to profitability, even with the help of €4.5bn ($6.5bn) of mostly German government aid.

The deal hinges on a plan to expand Opel’s 1.5m-vehicle-a-year European business into Russia with the help of Gaz, the carmaker owned by cash-strapped oligarch Oleg Deripaska, to which Sberbank said it would later sell its stake.

John Smith, GM’s chief negotiator, said Magna planned to bring the “New Opel” – also comprising GM’s British Vauxhall marque – to profitability within two years and pay back the government loans by 2014. But even as GM and Berlin were announcing the deal on Thursday, Manfred Wennemer, the former chief executive of supplier group Continental appointed to the trust managing Opel by Germany’s government, angered it by voting against the sale and voicing his misgivings. “The whole risk lies on the shoulders of the taxpayer – I don’t think we’re building a future-resistant company,” he said.

Opel’s cash drain is significant. In documents sent to Magna and other bidders this year, GM said it expected a loss before interest payments and tax of $3bn in 2009. It has posted pre-tax losses for the past eight years totalling more than $6bn.

Magna’s original bid document spoke of cutting costs by axing 10,000 jobs across Europe, about a fifth of the total. The task will be a delicate one as GM’s new majority owners seek to secure agreements from unions in five countries and hammer out in parallel talks how the burden of financing the spin-off will be shared.

In an industry driven by volumes, however, profitability hinges less on cost-cutting than on manufacturers’ ability to build scale by selling more cars. GM currently builds 450,000 units a year on the production platform that makes its Astra model, a volume analysts describe as too small to recoup costs.

“The critical volume per platform is at 600,000 to 800,000 units for a mass carmaker,” said Arndt Ellinghorst, head of automotive research at Credit Suisse. “Unless Opel can reach that level, its business model remains fragile.”

Opel’s sales have been buoyed by Germany’s €5bn scrappage scheme, which ended this month. The brand is making well-received models such as its award-winning Insignia family car and a new Astra that will premiere next week in Frankfurt.

However, it faces intense competition from PSA Peugeot Citroën, Renault, and other rivals also launching popular models and jostling for the same mass-market business.

“They are fighting for ground on the same saturated market,” said Tim Urquhart, autos analyst with HIS Global Insight.

In spite of the lift from scrappage, in its biggest market Opel lost market share in western Europe in the first half of this year. Its sales fell by 15.8 per cent, while the overall market only dropped by 9.8 per cent.

This raises the stakes in Russia where, after record growth until last year, sales there will drop by about 60 per cent this year, Moody’s analyst Falk Frey said. Mr Urquhart said Russian car sales would return to their pre-crisis peak of about 2.8m units reached last year only in 2013.

Apart from the potential risk to German taxpayer funds, analysts on Friday warned of the threat to Magna, one of the industry’s biggest supplier groups.

“While we know that the upfront investment on behalf of Magna is limited, we caution . . . that car companies consume tremendous amounts of capital every year,” Credit Suisse analyst Chris Ceraso wrote.

Analysts have also warned that Magna’s move into volume carmaking could cost it business. However Frank Stronach, its chairman, pledged this week that the company would put “appropriate firewalls” in place to ensure a separation between its parts business and Opel.

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How often have we seen companies try to do buisness with other companies and still be owned by a majore MFG. Seldom does it work no matter how much they say they will keep it seperate.

GM owned Lotus engineering and lost buisness. Other have done the same too. The Lotus deal worked well when it was a small MFG that was not a threat to anyone.

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