Wednesday, November 4, 2009

The right royal mess at GM Europe

Politicians should, in general, not meddle in business. A great illustration of this danger is the mess brewing in General Motors Europe.

Facts of the case are as follows. When GM was entering bankruptcy last year, the fate of GM Europe was in serious doubt. In any case GM Europe had too much of manufacturing capacity in Germany, the UK , Spain and Belgium. Even under normal circumstances a big restructuring was inevitable. Now there was serious threat of complete closure.

In waded the politicians. No less than the redoubtable Angela Merkel, Chancellor of Germany. She was coming up for an election. In Germany, auto workers are next only to God. No way was she allowing job losses amongst auto workers in Germany. So she forced an auction, put together a curious alliance of a Canadian spare parts manufacturer (Magna) and a Russian bank (Sberbank) to buy GM Europe. She then offered them $6.6 bn (yes 6.6 billion) and they had to commit no closures and job losses in Germany. Unsaid, but obvious, was – I don’t care what happens in Britain and Belgium – you can go and shut those. She forced a reluctant GM to agree to this ; at that time GM was weaving drunkenly on the ropes and in no position to even talk back to Merkel.

Now Britain, Belgium & Spain would not take this lying down. But they didn’t have the money to do anything about it. But a case is on in the European Union’s competition commission against the German plan. Merkel is no fool – she knows how to twist the Commission and get what she wants. So there the situation lay.

In waded the US of A. The US government has been overseeing the restructuring of GM. One of their demands has been for GM to produce greener and smaller cars. Now GM was doing a fair bit of development of such cars in Europe. If GM Europe went away, all that would be lost.

GM was also not too keen to sell GM Europe to Magna. They saw them, and especially the Russian connection, as competition and did not want all that technology to go to them for them to compete with GM in Russia where Chevrolet is doing pretty well. And how could they be a global company with no business in Europe ?

GM has got over its hangover now having come out of Chapter 11. It is now not mortally terrified of Merkel. So it said a couple of days back, that it was pulling out of the deal that she had forced on them.

There’s complete chaos. The Germans are absolutely furious (holy cow – plant closures in Germany and those b$%# Americans are backing out). The British are delighted (less job losses in the UK). The Russians are livid (not really sure why). The Americans are smug. GM is bracing for a huge fight. With all the politicians mucking about, what chance does GM Europe have ?