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GM Europe's Forster says balance of power shifts with Opel deal

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GM Europe's Forster says balance of power shifts with Opel deal

SEPTEMBER 17, 2009 06:01 CET

FRANKFURT (Reuters) -- Magna International Inc.'s planned acquisition of Opel is proof that carmakers have lost the upper hand in the industry by outsourcing development work to suppliers and relying on them for technological knowhow, Carl-Peter Forster, a top General Motors Co. executive, said.

"The fact is the balance of power has somewhat shifted," said Forster, who is GM Europe president.

Forster, who is the likely candidate to run Opel under Magna, said carmakers needed to reevaluate their strategy.

"We all had the vision that the OEMs (original equipment manufacturers) should just assemble bits and pieces, do a little bit of marketing, a little bit of design and all the rest would be done by suppliers," he said.

"That was a nice vision. It sounds very lean, but the profit making opportunity is also shifting to the ones that have the technological knowhow. That is in very many cases now the supplier industry," Forster told a dinner organized by the American Chamber of Commerce in Germany on the sidelines of the Frankfurt auto show.

Forster's Opel vision

Forster indicated what he would focus on as a CEO of New Opel during the dinner. Spotting trends, launching hit models and building a brand determined success rather than managing costs, productivity or even real -- as opposed to perceived -- quality since disparities were minute to average car buyers.

"The difference between a right and a wrong product is a 10, 20 or 30 percent difference in margin per unit, it's a make or break. You have to focus everything on it," he said.

"Fortunately with every new product that is working fine, we see our revenue per unit going up 15 to 20 percent. This delta revenue typically has a margin of 50 percent. That's where you make your money," he explained.

Forster pledged Opel will take installed production capacity that was unneeded out of the system to lower the crushing fixed costs that force factories to churn out cars regardless of demand, but he warned against thinking a collapse of Opel might solve the industry's underlying problem as some experts suggest.

"Let one manufacturer die and all the others will live happily ever after because now the pricing pressure is all gone. Can I be very honest? I think this argument is either very oversimplified or almost naive," he said.

Lower wage costs combined with massive and deliberate political intervention with exchange rates in South Korea and Japan were the real problem, he said. Any capacity taken out in Europe would just reappear in emerging markets like China.

"On average the margin on a Chevrolet imported from Korea priced 15 percent below Opel is higher than an Opel. That's where the pressure is com ing from," Forster explained.

He also defended Berlin's rescue of Opel despite being critical of the months of political wrangling and turbulent debate that attracted a permanent interest in the media.

"Let me tell you about the French way of handling. A French manufacturer was almost running out of cash. No word in the media, not a word - until a Monday afternoon the French president announced that a 3 billion euro loan would be handed out to manufacturer number one and another 3 billion for manufacturer number two.

"Oh there was a bit of uproar in the EU Commission in Brussels, 'is it all right and did you have to commit to some sort of employment in France or not?' A week later the whole story was gone," the president of GM Europe said.

Supplier profits

Forster said automakers are helping suppliers to make bigger profits by outsourcing technology development.

Volume carmakers in good years at best earn an operating margin of 4 to 5 percent, while suppliers that control exclusive technology can make double-digit returns.

"As a manufacturer you have to ask yourself is this the way you want to handle your business or should you consider choosing areas you want to move back into. And interestingly enough one of the areas is electrical propulsion," Forster said.

Except for its lithium-ion cells, the battery powering the Chevrolet Volt is developed and manufactured by GM, for example.

He believes Magna wants Opel deal not so much out of a desire to compete with customers directly but the huge opportunities awaiting its supplier business in Russia.

"You need to manufacture in Russia to be able to serve the market, one of the reasons being the 25 percent import duty. but you can never profitably produce in Russia unless you have a local supply industry and there is virtually no - or very little - supplier industry," Forster continued.

"I think one of the reasons why Magna is interested because together we can develop it ... Our experience shows that it is by no means easy to really attract suppliers to Russia," he added.

GM agreed last week to sell a 55 percent stake in Opel to Magna and Russia's state lender Sberbank.

Magna and Sberbank would each own 27.5 percent in Opel. Russia second-largest carmaker GAZ is an industrial partner in the deal.


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