It’s an axiom of auto-makers — as it is of most producers of goods — that they are squeezed between suppliers and customers. Upstream suppliers have options to reduce costs and improve profits while their customers downstream, the retailers, can set prices to suit their markets. Although the producer likes to think of himself as king, in fact his thankless task is to squeeze such profit as he can from the narrow margin between supplier and customer. So why, you may well ask, does Magna International, a Canadian supplier of vehicle components, unheard of to the British and European public, want to relieve ailing General Motors of the challenge of running Vauxhall and Opel?
In the motor industry in particular, suppliers are loth to be seen as competing with their customers. Automakers, who jealously guard their exclusive access to the market through contracted dealers, dislike suppliers with ideas above their station. Once in a while they’ve been allowed to stick their heads above the parapet. In the early 1980s, for example, when Fiat stopped making its X1/9 and 2000 Spyder sports cars, it gave coachbuilders Bertone and Pininfarina permission to build and sell the cars under their own brands.
Those two Italian companies are examples of businesses that have successfully produced branded products for the car industry over many years. Once a maker of cabriolets for Opel and Vauxhall, Bertone has fallen on hard times, while Pininfarina carries on as a producer for Ford, Alfa Romeo, Mitsubishi and Volvo. Karmann, long a supplier of complete cars to the German industry, recently filed for bankruptcy protection. In Austria, Steyr-Daimler-Puch, a joint-venture producer of cars for Chrysler, was bought in 1998 by none other than our new friends Magna.
That Magna made its first major European investment in Austria occasions little surprise. That was the birthplace of Frank Stronach, who arrived in Canada in 1954 at the age of 21 with $200 in his pocket. In 1957 he started a workshop in Toronto that marked the beginning of Magna. He developed a profit-sharing formula for his workers that allowed Magna to expand rapidly without union interference, and gained a reputation as a man who liked to please his customers.
As it expanded, Magna had a chequered financial history, only surviving in the 1990s thanks to the willingness of some of its customers to buy factories which Magna repurchased when times improved. Meanwhile, Magna added a new division, Vehma, standing for ‘vehicle manufacturing’, to produce complete niche vehicles after the style of Karmann and Pininfarina.
To promote its total-vehicle capability, Vehma spent $8 million designing and building the prototype of a bold sport-utility called the Torrero. Shown at Geneva in 1989, the Torrero was deliberately ‘OTT’ — as one magazine said — to show that Magna-Vehma wasn’t trying to steal the thunder of its auto-maker customers. None of them was about to introduce a 4×4 with an eight-litre V8 producing 535 horsepower. Vehma’s aim was to produce up to 300 Torreros a year, at $250,000 apiece. With hopes dashed that Austrian-born Arnold Schwarzenegger would promote the car, this never happened. Having produced only a few vehicles, Vehma was wound down.
But the idea of making cars didn’t die. Stronach first realised it with his purchase of Steyr-Daimler-Puch. Then, in 2007, when Daimler was severing its relationship with Chrysler, the Canadian entrepreneur put up his hand. Bragging of his 80,000 employees in 229 factories in 23 countries, Stronach put Magna forward as a candidate to rescue Chrysler. This looked quixotic at the time, but it prepared the way for Magna’s grab at the European operations of an almost-broke General Motors — chiefly Opel and Vauxhall — two years later.
Another link in the chain was forged in the late 1980s, when long negotiations led to the signing of an agreement between Magna and Mikhail Gorbachev’s Soviet Union to create a component-supply joint venture. ‘The Soviets like the way we do things,’ said Stronach. Just over 20 years later, Russian interests loom large behind Stronach’s bid for GM Europe. This surprised one analyst, who said, ‘I thought he would have been done with the Russians.’ The reference was to a 2007 episode that left Stronach sharing control of his company with controversial Russian aluminium tycoon Oleg Deripaska. The latter’s heavy debts led to the loss of his Magna stake last autumn.
Ever adaptable, Stronach and his Russian allies made common cause to win the approval of the trustees tasked with deciding the fate of GM Europe. The minds of all concerned were concentrated by the opening of Frankfurt’s biennial motor show on 17 September. To have gone to this industry showcase with Opel’s fate undecided would have been disastrous for all concerned.
Last-minute deliberations were sharpened by the new GM board, which sent chief executive Fritz Henderson back to the bargaining table to be sure Magna’s package outranked a rival offer from a Belgian private equity outfit. GM having opted to keep 35 per cent, a trust for GM Europe workers would hold 10 per cent and the 55 per cent controlling share would be held half-and-half by Magna and a Russian bank, Sberbank.
The Russian involvement gave pause to GM’s directors, worried that GM’s intellectual property would leak to Deripaska — owner of the Gaz motor works in Nizhny Novgorod that makes ‘classic’ Volga models as well as the former Chrysler Sebring, whose assembly lines it acquired in 2007.
With these concerns allayed, and attracted by the £5.3 billion support package that the German premier Angela Merkel said would only go to the Magna-Sberbank consortium, the GM board gave its approval. At Frankfurt, GM chief Fritz Henderson said that the cost-cutting plan of the new owners was sufficient to return the European operations to profit by 2011. Magna says it made no employment promises to Germany in return for financial support. Of the expected 10,500 jobs lost from the total of 50,000, 4,000 are likely in Germany. GM’s elderly Antwerp plant is for the chop.
In Britain, the outlook for GM’s Ellesmere Port plant, dating from 1961, is good. The Cheshire factory is the sole European source for the new Opel/Vauxhall Astra, which is Britain’s best-selling UK-built model. And with the UK government’s planned subsidies for low-carbon technologies, Ellesmere Port is in pole position to make the European version of GM’s Volt plug-in hybrid, the Ampera.
Thanks to the pound’s weakness against the euro, Britain is still a good place to make cars for export. It is also GM’s largest European market. Thus Ellesmere Port is worth fighting for, which is what Lord Mandelson is doing by challenging the Magna bid, according to a letter leaked to the FT. ‘We do not believe the case has been demonstrated that the current Magna proposal is commercially the most viable plan,’ the Business Secretary told EU competition chief Neelie Kroes, who has still to rule on the deal.
Less secure is what is now the IBC plant at Luton — formerly the home of Vauxhall for more than a century — which survives thanks to a deal with Renault to build vans there, badged as Nissans, Renaults, Opels and Vauxhalls. Vans are highly profitable products so it is likely that IBC will be able to carry on through 2013, when the Renault deal expires. In the meantime IBC needs to make a case for its production flexibility, an attribute that will appeal to Magna.
Ironically the British van market has been expanded for IBC by the failure of the LDV van plant in Birmingham. Hope of a rescue for LDV and its associated company Birmin gham Pressings finally faded during the summer. And who was the proprietor who left LDV in the lurch? None other than Gaz chief Deripaska.
Gaz’s failure to make good its ownership of LDV is typical of the reversals that have made industrialists wary of partnering with Russians. Leading motor-component makers have been slow to establish plants in Russia, although its antiquated industry desperately needs their expertise. Establishing such suppliers is seen as one of the missions underlying the Magna-Sberbank purchase of GM Europe.
This commitment to Opel and Vauxhall will be a test of Russia’s sincerity in its external dealings. Vladimir Putin has been quoted as saying that he wants the GM Europe deal to be the first of many large-scale projects with Europe. He foresees joint ventures in defence and aerospace, saying that ‘co-operation builds mutual trust’. So not only Magna but also Russia has a lot riding on a successful outcome for the new GM Europe.
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