GM update: Germany gives up on GM

A further update in the battle for state intervention in General Motors (see here and here) - today the German Economy Minister, Ranier Bruederie told GM that they would have to fund the restructuring of their European arm, Opel, alone. It now seems unlikely that GM will get state aid in Germany, a move unlikely to be popular with the German carworkers unions. The Germans are upset that GM had called off its decision to sell Opel to the Canadian parts manufacturer Magna, which was backed by the Russian state owned Sberbank. Magna had guaranteed Opel jobs in Germany in return for state aid. GM is presently 61% owned by the US government, (and 12% by Canada, making it a rare joint State Owned Enterprise). At its most sinister the reversed decision to sell to Magna might represent intervention from a US government concerned about technology transfer in the car industry to Russia, a present growth market. At its least sinister, the US government is putting pressure on GM to hold onto their European division, with its access to the EU and the growing Russian market to make the IPO that it is desperate to hold next year more attractive to investors. In Germany, meanwhile we have been treated to the rare spectacle of a government deciding not to intervene in the car industry. Although Germany may loose jobs in the short run if GM does decide to move Opel east, in the long run it will benefit from cheaper car imports. It just depends if this is a silver lining that the German government are prepared to accept. Given their history of intervention, other EU governments still seem likely to support GM remaining in the countries as far as EU law allows. Perhaps the tax payers of Europe will loose out while US and Canadian tax payers profit.

GM execute an international U-turn

On September 24th this blog commented on the viability of the volume car industry in mature economies, using the UK as a case study to argue that the industry has generally only been sustained by government intervention of some sort. Today an international row has opened up between at least five countries over state intervention in the car industry. The US company General Motors (GM), featured in Alfred D. Chandler's 1962 book Strategy and Structure as an example of a successful multi-divisional corporation, was forced into bankruptcy earlier this year. The US government provided US$60bn of new financing for the firm; a new GM company was registered to purchase the operations and trademarks of the old. Presently the US government owns 61% of the new company, while Canada owns 12% of the equity. Effectively this makes the company a US State Owned Enterprise (SOE), although the US Government claims not to be involving itself in the day to day management of the company.

As mentioned on Sept 24th GM was close to selling its European subsidiary Opel, which also includes the UK brand name Vauxhall, to the Canadian car parts manufacturer Magna. Today GM announced that it had reversed the decision to sell Opel to Magna, and would instead be pressing ahead with 10,000 redundancies in Europe, from a workforce of 55,000. This decision was motivated by a wish to remain within the European market, which GM says is starting to improve. GM are also thought not to want to miss out on expansion in the growing Russian market, a motive perhaps driven by the US Government's wish to float GM on the stock exchange as soon as possible. It will be easier to do this if GM has strong growth prospects. Meanwhile the German government and car unions are unhappy with GM's decision as they had negotiated a guarantee from Magna not to close any German factories. The German government is now also demanding the return of a €1.5bn bridging loan made to Opel to keep it going while the sale was negotiating, while the IG Metall union has announced a series of walk-outs in protest. Meanwhile in the UK the government and trade unions welcomed the news as it meant that factory closures in the UK now seem less likely. Even the Russians are in the mix - their state owned Sberbank had provided capital for the Magna takeover, and Russian Prime Minister Vladimir Putin announced that the Sberbank-Magna consortium would 'carry out a deep legal analysis of the situation' with GM.

Why then are all these governments fighting for their share of influence over GM? The US, Canada, Germany, and the UK can all be considered to have mature economies, while Russia's economy perhaps presents the main growth opportunity for the car manufacturing industry. It appears that the western governments were again acting to try to halt the long term decline of car manufacturing in their particular jurisdictions. Yet it surely seems likely that while government intervention may prolong the decline of the industry, as previously argued emerging economies like Russia are likely to be in a position to maintain production most economically in future. To complicate matters we now have an SOE in the unusual position of operating across borders, although as with other SOEs that operate across borders such as Électricité de France or Deutsche Bahn, it is unclear why the firm should be an SOE if it is operated like a private firm. Once again, it is clear that governments should accept that if an industry is declining, the government should concentrate on encouraging replacement industries to develop, rather than trying to keep dead ducks alive.