Deep GM revamp of Opel vital for company, market

PARIS (Reuters) -General Motors must push for a deeper restructuring of Opel than thwarted suitor Magna had planned if it wants to reap the benefits of the surprise move to keep the unit. Skip related content

GM's about-face on selling a majority stake in Opel and its British sister brand Vauxhall follows months of tense negotiations with politicians, labour leaders and the Russian-backed group led by Canadian auto parts maker Magna International .

Analysts say the decision to hold on to Opel makes strategic sense for the U.S. carmaker.

It allows GM to keep full control over two key global small car platforms Opel designed, as well as its proprietary electric vehicle technology, a European footprint, and access to the high-potential, if currently depressed, Russian market.

"Strategically, it makes sense to keep a maker of small vehicles that can quickly be sold in the U.S.," said Xerfi analyst Guillaume Mouren.

Nomura's head of European automotive mergers and acquisitions, Klaus Pflum, agreed: "After they offloaded the bad assets in North America this was a good decision," he said.

But Europe's car industry is bloated with overcapacity -- given the downturn, Nomura International analyst Michael Tyndall estimates total excess production capacity at as much as 6 million units. He said full year unit sales in Europe could reach about 13.3 million this year, thanks to scrapping incentive schemes.

GM Europe said on Wednesday its parent's plan for Opel includes a 30 percent reduction in fixed costs, while GM said it expected that restructuring Opel on its own would cost about 3 billion euros, costs expected to cover job cuts and plant closures.

Opel's 50,000-strong workforce had been due to be cut by a fifth under Magna ownership.

"The encouraging thing is that the plans being put forward are some of most aggressive plans we've seen in Europe," said Nomura's Tyndall.

"GM was still going to be a 45 percent shareholder (under the Magna deal) so I'm pretty certain plans in place were amenable to GM. It makes sense for GM to carry on with the plan," he added.

TOUGH TASK

Cost and capacity cuts at Opel could be a key part of a much-needed reduction in capacities overall in Europe.

"Opel will restructure, and play a part in a general of transformation of the European production base -- it doesn't matter if it is GM or Magna that does the restructuring," said Xerfi's Mouren, adding that the restructuring was "vital."

The European market foundered late last year, when the credit crunch stripped away consumer confidence and demand for new cars plunged. Carmakers were left battling to reduce costly stocks of unsold vehicles.

Many launched voluntary redundancy plans and reduced shifts and assembly lines at plants, but straight lay-offs and plant closures have proved politically difficult, after governments stepped in en masse to help the struggling sector, with scrapping incentive schemes and in the case of France, multi-billion euro loans for carmakers.

So restructuring is vital before GM -- or Opel -- reaps the benefit from the move and GM may face a tough battle to renegotiate labour agreements Magna had haggled over for months. GM's U-turn has already sparked fury in Germany.

Nomura's Pflum said that a key question would be whether GM now clinches the necessary political support and concessions from unions to restructure. If it can't, EU doubts over the political objectivity of the original choice of Magna will be confirmed, he said.

(Additional Reporting by Gilles Guillaume and Christiaan Hetzner, Editing by Sitaraman Shankar)