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GM to pay more to Opel

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GM to pay more to Opel

Turnaround to be pressed if European sales fall as expected



Facing continued resistance in Europe, particularly in Germany, over its turnaround plan for Opel, General Motors announced last week it would nearly triple the amount of money was planning to pump into the operation's restructuring, for a total of about $2.6 billion.

The announcement follows calls from German officials demanding that GM pony up more money and it highlights the challenges that remain for GM, which exited bankruptcy in July.

Turning around Opel is critical to turning around GM, but the effort will be challenged by the European market, which is expected to see further sales declines this year.

GM executives say they can't just walk away from Europe.

"Ford is profitable in Europe. You just can't accept that we're ... somehow incapable of being profitable in an area where our competitors are profitable," Bob Lutz, a GM vice chairman, told the Free Press in an interview last month.

Feathers are ruffled

The way GM has handled Opel over the past year has angered many in Germany, where Opel was founded more than 100 years ago. GM's European operations are managed from Opel headquarters in Ruesselsheim, Germany.

During GM's dark days last spring, as it worked with the U.S. government on a turnaround plan that ultimately included bankruptcy, a tentative deal was crafted to sell majority control of Opel to Canadian auto parts supplier Magna International and a Russian partner, Sberbank.

In Europe, the plan was celebrated as one that would save work, even though job cuts were planned

More telling, the plan was viewed positively, in part, because GM was losing majority control. In Germany, executives in Detroit are often blamed for whatever troubles Opel, and executives talk about tension between American and German managers.

Change of plans

That celebrated plan ran into trouble, however, last summer as a majority of GM's directors was replaced by new members who took a more active role in overseeing the company.

The new GM board and its chairman, Ed Whitacre, questioned giving up control of Opel, believing it has potential if properly restructured. In November, they scrapped the deal overseen by then-CEO Fritz Henderson, who eventually resigned.

Lutz said the reasons for keeping Opel are twofold. "One, scale and European presence. And two, the belief that it should be possible to turn that around if we can actually reduce capacity in some of the more-expensive countries," he said.

Furthermore, GM's Opel and European operations play crucial roles in developing GM's midsize cars, such as the Chevrolet Malibu.

"The payoff is going to be the product they're going to sell here," said George Magliano, an industry expert with IHS Global Insight.

Costs questioned

Some within GM, however, question the decision to keep control of Opel, fearing any restructuring effort will take too much cash and take too long.

They would rather see that money invested in expanding Chevrolet in Europe, for example. This faction also argues that the deal to sell control of Opel would have left the vehicle-development operations fully integrated in GM's product pipeline.

There's also an argument that restructuring Opel will be a distraction for management.

GM has been trying to close factories it no longer needed in Europe for years but often finds itself caught up in battles with powerful labor unions that oppose the push. Thousands of workers walked off the job in November in protest.

N. American optimism

While only two months into the year, GM's North America operations are ahead of plans, creating hope that there could be positive earnings before interest and taxes for the first quarter of this year, according to people familiar with the situation. Meanwhile, there isn't such optimism for GM's European operations.

In early February, Opel announced its latest restructuring plan that called for GM to put in about $816 million into the operations and called for European governments to put in $3.7 billion in loans and loan guarantees to help run the European operations.

GM said the plan would allow Opel to break even next year and turn a profit in 2012. But to the chagrin of European labor officials, the plan would result in about 8,300 jobs being cut as part of plans to reduce production capacity by 20%. Factory workers would feel the brunt of the job eliminations and a plant in Antwerp, Belgium, would be closed.

On Tuesday, GM said it would kick in $2.6 billion and was now asking European governments for about $1 billion less money. The GM infusion removes any potential liquidity risks this year for Opel, the company said.

"We hope that our strong commitment will be well received as a major milestone in our ongoing discussions about government guarantees to cover the remaining gap," Nick Reilly, CEO of Opel and Vauxhall, said in a statement.



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