Howard Wheeldon says the signs are ominous for GM Europe despite sale
Five years, ten years – how much longer I wonder will GM Europe survive? This is of course a very tough question to answer but as I am not paid sit on the fence I must give it a go.
So, right from the start I’ll stick my head on the block and say maybe not as long as ten years! Believe me, it gives me absolutely no pleasure to suggest just twenty four hours after the announcement that a majority stake in GM would after all be acquired by the Russian backed Canadian auto-parts player Magna that the deal would do little more than to buy a little more time. Sure, while one disliked the political glee that was written all over the face of German Chancellor Angela Merkel yesterday one is naturally pleased for the German and other workers who will benefit through the facilitation of new German government loans and that the company will soon have a management that believes there is something worth saving.
I hope they are right. But do I believe that Magna will have enough cash to carry out the longer term plot without coming back for more? Do I believe it will be able to pay back the EUR4.5bn it will have borrowed by 2015? Do I believe that it won’t attempt to close more plants in Europe including Germany and the UK? No, I certainly don’t.
Next question then – is there something worth saving? Frankly given the overcapacity in Europe there is too little within the Adam Opel portfolio worth saving. And the UK? Well, given the new Astra investment and that this new vehicle is about to come on stream initially the answer is yes, Ellesmere Port is worth saving. However, given that the new Astra will probably be the last, five years from now may need to be the marking period that car production at the plant may end. Equally important to realise if you happen to be in the UK is that although we ship out more ‘home’ built cars now than at any point since the good old days of the early 1960s the amount of economy value that we add here in the UK is but a fraction of what it was back then. By this I am referring to the fact that the majority of parts for all car assembled within the UK based Japanese transplant operations – Toyota, Nissan and Honda plus those made under the Vauxhall brand at Ellesmere Port – rely on components imported from abroad. Sure, some engines for some of the above are still made here in the UK and Ford also build engines here in the UK. But the real point is that it is surely time to realise that we don’t really ‘build’ many cars here in the UK anymore – we merely glue them together from others parts!
I recently saw a description of carmaker Adam Opel as being third rate with a fourth rate reputation. This may be closer to the mark than many think but it is not for me to elaborate on here. Nevertheless, the stress of factory closure is not of course going to be in the Adam Opel heartlands in Germany. Though jobs will of course go in Germany plant closures are most likely in Spain before anywhere else. Given that the four German Opel factories, big though they are in the overall GM Europe portfolio, are just part of the overall production overcapacity the tendency is to believe that they will just plod on. However, if customer sales support falls further as it may well do then I believe that there is no way that Magna will be able to continue the promise of maintaining production at all four German plants. We already know about Spain and I will leave aside a view on the other UK plant at Luton plus those in Poland, Russia, Belgium and Sweden for another day.
The real point is that if consolidation isn’t going to occur then capacity has got to be removed – around 30% of existing European capacity.
So the answer? GM Europe can’t survive!
Howard Wheeldon is the Senior Strategist at BGC Partners brokerage firm.