Saturday, November 14, 2009

Some analysis of the Manga-Opel deal from early September

It's amazing how quickly things change. I wrote this in September, but it's now horribly out of date. GM has changed their mind and decided to keep Opel, which leaves some in a rage.

Here's my take from a couple of months ago:


On the 10th of September, 2009, General Motors agreed to sell its European operation to a Canadian company called Magna in partnership with Sberbank, a Russian bank. This deal is controversial for a number of reasons. Some think the German government behaved irrationally by lavishing money on a carmaker that should have been allowed to fail; Opel has far too many factories and is perpetually losing money. Secondly, European rules may forbid the deal. Thirdly, it may not be profitable for Magna or for its partner Sberbank. Furthermore, the deal has already jeopardised existing partnerships for Magna, and contributed to the non-renewal of a partnership with Chrysler. The sale has also created disharmony as General Motors was forced into selling off its European arm. Despite the ongoing problems with Opel, it was one of GM’s strongest assets.

As in any international business endeavour, everything is connected. Although the models used to analyse the deal are best centered on Germany, connections with governments and enterprises in Russia, Canada, the United States, and other European countries will influence its success or failure. Therefore, it is also interesting to analyse the effect of the deal on the stakeholders.

Analysis and position

The market Magna is entering by leading this endeavour can be analysed using both SWOT analysis and the STEEPLE framework to provide further details about the threats and opportunities in the German economy. The following analysis shows that this will likely be an unsuccessful venture for Magna and Sberbank, as well as for the German government and for GM.

In general, the deal’s strengths are based on the grants and loans guaranteed by the German government, a strong distribution network in Germany, and industrial technology brought to the table by Magna. The restriction imposed by the deal on closing plants will impair success due to overcapacity. The Russian market would recently have been seen as an opportunity, but it is rapidly contracting. The success of the deal is threatened by resurgent competition from Magna partners like the Volkswagen Auto Group.

The perceptions of German taxpayers are an important social factor of the deal. Detractors have been vocal despite the fact that Opel was saved from bankruptcy. The idea of billions of German government Euros in grants and loans at preferred rates has caused rancour – particularly since the grants are being used to subsidize Canadian, Russian, and American stakeholders. Planned layoffs add to this social discontent. Other social factors will benefit the deal. For instance, all of Germany operates using the same language, Standard German. Furthermore, it is mutually intelligible with the Austrian German spoken by Magna Steyr employees. Two other demographic factors will also benefit the deal. Germany has relatively low unemployment at 8%. Furthermore, the culture of engineering is celebrated in Germany.

Technological factors also affect the deal negatively. Magna partner firms like BMW and the Volkswagen Auto Group are concerned that their intellectual property will not be protected, and that Magna could leverage technology for Opel cars.

Economic influences also put the success of the deal in peril since the global credit crunch resulted in GM selling-off Opel. A German ‘cash for clunkers’ program has greatly increased the number of new cars sold in Germany, but may reduce the number of new cars sold in the next few years. This is because the program has been so successful that many Germans now own new cars. However, Germany is a world leader in manufacturing and machinery, and is the second biggest exporter in the world. The large German economy will also benefit the deal in the long term – Germany is the 5th biggest economy in the world in purchasing power parity terms.

Environmental factors could positively influence the deal. Magna CEO Frank Stronach aims to have Opel become “amongst the leaders in selling and building electric cars.” GM had planned to sell the Chevrolet Volt as the Ampera in Europe , and Magna will continue its development (see exhibit A). Fossil fuel prices are comparatively high in Europe. This combined with increased environmental awareness make hybrid cars desirable.

In addition to the involvement of the German government, other political factors influence the deal. Pressure to save Opel from bankruptcy was also applied by EU regulators and EU partner counties like Spain. Auto unions also pressured governments to save Opel from bankruptcy (see exhibit B). Magna is well connected politically in Canada, having ties with politicians such as Mike Harris, Brian Tobin, and Belinda Stronach, Frank Stronach’s daughter. These political ties may have influenced the Canadian and Ontario government auto bail-out in 2009. Some longer-term German political factors may benefit the deal. Angela Merkel is increasing the mandatory retirement age from 65 to 67. She has also introduced measures to increase female participation in the labour market.

Legislative issues may also complicate the deal, as it may be illegal under European law. However, other legislative factors benefit the deal, as the German legal system is solid and corruption is minimal. Transparency International ranks Germany as the 14th least corrupt country in the world in their Corruption Perceptions Index.

The well-educated German workforce will benefit the deal. Furthermore, Magna has a reputation for having excellent engineers and very well run plants. This will help Opel produce high-quality cars if the integration between Magna and Opel goes smoothly.

There are numerous connections with other stakeholders outside of Germany, and the connections are an essential part of analysis of the deal. Magna is Canadian and Austrian. Opel was the European arm of GM, an American car company. Opel has factories in 3 other European countries, and is subject to EU trade regulations. Magna assembles cars in Austria and builds parts in Canada. Interestingly, one of the most important connections with foreign countries is with Russia, and its influence goes beyond the 27.5% stake held by Sberbank.

Stakeholder Analysis

Russia is a key stakeholder in the deal through Sberbank, Russia’s largest commercial bank. Somewhat coincidentally, the president of the bank, German Gref, is the son of Germans deported to the USSR in World War II. Sberbank has a major client in the auto industry – Russia’s second-biggest carmaker GAZ, which was started in 1929 in partnership with Ford Motor Company. There are interesting connections between the owner of GAZ, a Russian oligarch named Oleg Deripaska, and Frank Stronach of Magna. In 2007, Deripaska and Stronach made a bid to buy Chrysler from Daimler, but lost to Cerberus, a US private equity firm. However, GAZ did acquire the rights to produce a DaimlerChrysler platform, as well as the assembly line to produce the vehicles themselves. The assembly line was shipped to the GAZ factory in Nizhny Novgorod, where it has been producing license-built cars with GAZ branding (see exhibit C).

The relationship between Sberbank and GAZ has provoked some controversy in terms of intellectual property from Opel. In late September, the Economist reported that “Sberbank intends to make Opel’s technology available to its client, GAZ, Russia’s second-biggest indigenous car maker”. However, in early October, the Economist mentioned “There had been hope that the purchase of a majority stake in Opel by Sberbank would boost Gaz, one of its clients.” Sberbank seemed to think it could simply pass on Opel’s technology, but Gaz will have to pay royalties to use GM’s intellectual property, just like any other company.

Magna also has a partnership with Avtovaz, Russia’s largest auto maker. Opel may be able to leverage these connections to gain access to the Russian market and use the distribution channels developed by GAZ and Avtovaz. Unfortunately, the global financial crisis has hit Russia particularly hard and the Russian auto market is in free fall. Avtovaz and GAZ are the hardest-hit players in the Russian auto industry. Although growth in the Russian auto market was once the fastest in the world, car sales in 2009 are expected to be about half those in 2008. The STEEPLE analysis focussed on Germany contrasts with the Russian market which has less advanced technology, less market freedom, more corruption, a weaker economy, and a less educated workforce.

Magna, based in Aurora Ontario, also owns 27.5% of Opel. Its zeal to participate in the deal has raised questions about the wisdom of its strategy. Some have even cynically speculated that the only compelling reason for Magna to participate in the deal is owner Frank Stronach’s lifelong goal to own a car company. Magna’s corporate structure is broken into many companies controlled by the same trust managed by Stronach: Magna International, Magna Steyr, and Magna Entertainment. As a result of building vertically, it is sacrificing relationships with some of its biggest customers of parts and assembly services. Moving away from a focus on these core competencies is risky in general. It will be further hamstrung by its guarantee not to close 4 factories regardless of inefficiencies, a restriction imposed by the deal.

General Motors is a ‘big 4’ American carmaker, and continues to own 35% of Opel - its European arm since 1929. GM was reluctant to lose the controlling share in Opel – the German government dismissed GM’s bids to keep control once the US bail-out gave them the necessary capital. Although it would have preferred to keep Opel, GM would have had to repay €1.5 billion of bridging loans to the German government. Losing control of Opel and Vauxhall diminishes GM’s international reach, leaving Holden in Australia as the only wholly-owned GM overseas subsidiary, and minority shares in Daewoo in South Korea.

Opel employees are also a major stakeholder in the deal, and own 10% of the company. Integrating corporate cultures with Opel’s unionized workforce could prove challenging for Magna, as unions have only recently been introduced to Magna’s workforce. Opel unions are vocal and have political clout. This will make the 10,000 expected layoffs particularly difficult for Magna despite severance costs being covered by grants from the German government.

The German government led by Angela Merkel is also a key stakeholder, and invested €4.5 billion (about $7.1 billion CDN) in subsidies to provide incentives and finalize the deal. The government’s involvement is controversial, as some taxpayers wonder why it forced the sale of a subsidized auto manufacture to a foreign-owned entity. Others feel it may have been swayed by Stronach’s skilful playing up of his Austrian roots. The deal also generated controversy by dismissing GM’s bids to keep control, and the bids of a Belgian bank. However, overall the government was politically expedient to make a deal as auto unions had promised huge actions if the Magna deal did not go through , which would have been embarrassing in the run up to the federal elections. Both Angela Merkel and the leader of the opposition are taking credit for the deal.

Furthermore, there are many connections between Magna and other car companies. At least one of these connections has been shattered as a result, and others have been threatened. In October 2009 – Chrysler ended its contract with Magna. Ferdinand PiĆ«ch, VW chairman, expressed his reluctance to continue a relationship with a partner who had become a competitor, and stated “We could easily find other suppliers“. BMW is also re-evaluating its relationship with Magna out of intellectual property concerns. For instance, Magna Steyr assembles the BMW X3 SUV in Austria, which gives it access to particularly valuable technology.

Other European governments are minor stakeholders in the deal. Opel has a factory in Spain, and the Spanish government relies on loans and credit guarantees. Opel also operates other factories in Belgium and Britain and controls a British car company called Vauxhall.


The restructure of Opel may not be successful, but the implications for other multi-national enterprises are interesting, and emphasise the fact that in global economics, everything is connected. Influences from German companies, as well as from Russian, Canadian, American, and other European enterprises all contribute to facets of the deal. Social, technological, economical, environmental, political, educational, and demographical factors within Germany all contribute to the strengths, weaknesses, opportunities, and threats facing the deal. The many layers of controversy brought forward by the many stakeholders underscore the interrelated nature of doing business internationally. Unfortunately, in this case, complexity may preclude long term success.


Briefing: The electrification of motoring, “The electric-fuel-trade acid test” The Economist (September 5th 2009).
Opel and Magna, “A deal that stinks” The Economist (September 26th 2009)
Russia’s sickly car market, “Feast and famine” The Economist (October 3rd 2009)
Russia’s sickly car market, “Feast and famine” (October 3rd 2009)
GM and Opel, “Magna force” The (September 10th 2009).
GM and Opel, “Magna force” The (September 10th 2009).

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