Government doubts Magna/GM takeover

The UK government has expressed doubt over the commercial viability of Canadian car-parts maker Magna’s plans to take over General Motors Europe.

The business secretary, Lord Mandelson, stated in an open letter to European Competition Commissioner, Neelie Kroes, that Magna’s plan would cost more than rival offers.

Peter Wells, director of the Centre for Automotive Industry Research at Cardiff Business School, said this is just another indication the deal has the potential to fall through.

‘It could all go horribly wrong at this point,’ he said.

GM chose Magna earlier this month to take over its European operations. If formally agreed, the deal would see Magna and Russian bank Sberbank owning 55 per cent of the company. GM would still retain 35 per cent and its employees would hold a 10 per cent stake.

‘My gut feeling is that the commercial relationship between Magna, the Russian bank and GM is not likely to be stable in the medium term,’ Wells said. ‘It has all the feelings of an interim arrangement.’

Wells added that GM North America is still heavily tied to GM Europe, which he believes is too small to survive on its own.

‘The two entities still need each other, GM Europe and GM North America,’ he said.

‘We’re trying to treat GM Europe as a separate issue and I don’t feel it is. You still have to think of it as a global business at some level and it’s going to take many years to disengage those two.’

Wells said the negotiations between Magna and GM have mostly been fuelled by political pressure in the UK and Germany to preserve jobs. There have been media reports that as many as 10,500 jobs at Opel and Vauxhall in Europe could be lost with a Magna take over.

‘It may be the case that in the absence of a commercial revolution, the political will is going to run out of steam,’ he said. ‘If that happens, then the whole business in Europe will have to go through bankruptcy processes and be completely restructured.’

If Magna does formally agree to the deal, Wells said he still does not see a bright future for the company, which would begin operations in the middle of a recession. There is also the whole issue, he said, of Magna having no experience in the business of selling cars.

‘Magna has a huge expertise in production, component supplies, sourcing and purchasing,’ he said. ‘It also has a good track record in terms of financial management, but it, of course, has no track record in actually selling cars. That has to be a concern.

‘In the end, it has to be able to do both sides of this business, production and sales, and it cannot necessarily demonstrate any competence in that area.’

Magna is currently asking the German government for €4.5bn (£4.1bn), which Lord Mandelson has stated is much more than investment group RHJ International would have requested.

While some have criticised the business secretary for not getting as involved in the Magna/GM deal as the German government, Wells said the UK approach has been more realistic.

‘We’re not in any position to cross subsidise,’ he said. ‘There are a lot of questions being asked about the German proposals and whether they contravene European competition law.

‘Certainly with the restructuring process, if German plants are saved when more efficient plants elsewhere are closed, there is going to be serious questions in the European Parliament and European Commission because it will be in direct contravention of European rules on free trade and free competition. There are very real limits as to what the government can do in these cases.’

Wells said it does not really matter what the government does now, because its opportunity to secure Vauxhall jobs has already passed.

‘You’re always going to have these reactive approaches unless you have a long-term industry strategy,’ he said. ‘We don’t appear to have one and that is a core problem.’

Siobhan Wagner