In 2009, when General Motors (GM) was struggling for its own survival, it tried to sell its wholly owned subsidiary Opel, which operated in Germany and elsewhere in Europe. Different potential buyers, the German government, and European Union officials were also involved. Although eventually GM decided to keep Opel, as a foreign investor GM received tremendous criticisms for its handling of Opel during these challenging times.

Opel and GM Europe

Opel is a wholly owned subsidiary of General Motors (GM) in Germany. Opel was founded in 1863, began making cars in 1899, and was acquired by General Motors (GM) in 1929. The GM-Opel relationship survived World War I, during which Opel factories were seized by the Nazis and then bombed by the Allies. Only in 1948 did GM regain control of Opel. In 2008, Opel generated €18 billion in sales and a 7% market share in Western Europe. It had 50,000 employees and eight factories in Europe. About half of the jobs and four factories were in Germany. In addition, Opel ran one factory each in Belgium, Poland, Spain, and UK- the latter is a Vauxhall plant that produced cars with its own Vauxhall brand. Opel formed the backbone of GM Europe.

A Bankrupt GM Had to Sell Opel

Unfortunately, the 80-year-old relationship between GM and Opel experienced some unprecedented turbulence in 2009, during which GM itself declared bankruptcy on June 1. Before June 1, the German (federal) government, in an effort to protect Opel assets and jobs in the event of a GM bankruptcy, took unprecedented action by offering a €1.5 billion bridge loan to Opel and pushing GM to form an Opel Trust. The Opel Trust controlled and protected Opel assets during GM's bankruptcy. The board of the trust consisted of representatives from GM, German employees, the German federal government, and the governments of the four German states in which Opel operated. Losing money for a decade, Opel was indeed struggling desperately despite repeated restructuring efforts. In 2008 GM Europe lost $2.8 billion. In the first quarter of 2009, it burned an additional $2 billion with a 25% drop in sales. After June 1, 2009, although the US and Canadian governments bailed GM out by injecting billions of dollars and taking over 61% and 8% of its equity, respectively, there were specific requirements preventing GM from using American and Canadian taxpayer dollars to fund overseas operations such as Opel's. In desperation, GM felt it had to sell Opel to prevent the financial hemorrhage.

Although initially reluctant, GM in September 2009 agreed to support a proposal favored by the German government to sell 55% of Opel's equity to a consortium led by Magna, a Canadian auto parts maker that would take 20% of equity. Magna has two Russian partners Sherbank and GAZ, Russia's second largest automaker-that would take 35% of equity. German employees would get 10% and GM the remaining 35%. Magna agreed to invest €500 million while the German government pledged an additional €4.5 billion in state aid loans, in addition to the €1.5 billion bridge loan already provided. German Chancellor Angela Merkel extracted a promise from Magna to keep job cuts to a minimum (not exceeding 2,500 jobs) in Germany a significantly better outcome than a more ruthless restructuring process during which 40% of Opel's German jobs (10,000) might disappear. In part due to her extraordinary efforts to save jobs, Merkel was reelected for a second term in September 2009.

But GM was never enthusiastic for the sale to the Magna consortium. Of the four bids GM received, it quickly dropped one from Italy's Fiat and another from China's Beijing Automotive, but strongly favored one from RHJ International, a Belgian private equity firm, which would eventually consider selling Opel back to GM in the future. The Germans saw RHJ as a pawn for GM. From a fair bidding standpoint, the fact that RHJ offered only €275 million, substantially lower than the €400 million offered by the Magna consortium, made it impossible for GM to offer Opel to RHJ and bypass the Magna consortium. To lock in the sale to Magna, the German government also announced that its financing would only support Magna and its partners, but not RHJ.

GM had legitimate concerns about the sale to the Magna consortium. It would be hit by a "double whammy." First, GM would lose important passenger car expertise that has fueled many of GM's models beyond those carrying the Opel and Vauxhall plates, including many models that are branded as Cadillac, Buick, and Chevrolet. Second, the sale would turn Magna into a major competitor overnight, although the deal forbad Opel from selling in China until 2015 and forbad any entry into the United States. Further, GAZ would take advantage of Opel technology and boost its position in Russia, soon to overtake Germany as Europe's largest car market. RHJ would present none of these strategic headaches.

Intervention from the Eurocrats

In October 2009, a significant player previously not involved entered the fray. The European Commissioner for Competition, Neelie Kroes, was pressured by the Belgian, Polish, Spanish, and British governments that complained that Opel's sale to Magna would result in disproportionate and thus "unfair" job losses in these countries. Kroes wrote to the German government, expressing her concerns that state aid promised by the German government to the "new Opel" was tied to one bidder and discriminated against other EU bidders such as RHJ. The letter demanded that GM and the Opel Trust "be given the opportunity to reconsider outcome of the bidding process," because state aid "cannot be used to impose political constraints concerning the location of production activities within the EU." After talks between Berlin and the EU, Germany assured that its state aid would be available to any investor with a decent plan. Unfortunately, RHJ had already walked away, so this assurance was entirely theoretical. Satisfied by the assurance, the Eurocrats eventually backed off. They argued that the assurance set a good precedent in the future and that dragging Germany's previously unacceptable behavior into a full-scale probe would push Opel into legal limbo, and the firm could collapse.

GM Changed Its Mind

However, in the middle of such intense politicking and strategizing, in November 2009, GM's board announced a startling shift in direction by cancelling the sale to the Magna consortium and keeping Opel. Outraged, Opel workers took to the streets. German media pointed out that GM might close two factories and lay off 10,000 workers in Germany. The German Minister for Economy and Technology said that "the behavior of GM against the Opel workers as well as against Germany is completely unacceptable." The German government demanded that its €1.5 billion bridge loan be repaid. There were significant concerns about the fate of Opel. Once GM repaid the loan, it could dissolve Opel Trust and could do whatever it pleased with Opel.

In 2010 GM repaid the German government loan and announced that its restructuring would cut over 8,000 jobs, including 4,000 in Germany. But the blow of the widely feared plant closing would only fall on one factory in Antwerp, Belgium, which employed 2,600 people. In an effort to save Opel, GM closed the plant by the end of 2010

Case Discussion Questions

1. What are the costs and benefits of FDI inflows for a host country such as Germany?

2. Will foreign firms such as GM make decisions in the best interest of Germany?

3. How would you vote if you were a member of the GM board regarding the fate of Opel?

Answer rating: 100% (QA)

1 The benefits of FDI inflows for a host country such as Germany include the creation of jobs the tr... View the full answer