With thousands of jobs across Europe at stake and the spectre of an internal subsidy race that would threaten the hard-fought internal market of the European Union (EU), the General Motors–Opel saga saw another twist in the tale this week, with Brussels stepping in to play referee.
Nick Reilly, the interim chief executive of Opel, GM’s struggling European subsidiary, met EU officials and representatives from countries where the company has factories, including Germany, Britain, Belgium and Spain. He made out a case for state subsidies to support GM’s ¤3.3 billion restructuring plan for Opel, the details of which will be made public in a few days.
The GM-Opel case has brought into sharp relief the conflict between EU member-states’ willingness to hand out large financial subsidies to save jobs in an already crisis-ridden economic environment and the strict competition rules the EU applies to ensure fair competition between corporations by scrutinising and limiting monetary assistance from states.
Germany, the primary home of Opel, has now come out strongly in opposition to member-states’ striking deals with GM that would involve financial assistance in exchange for limiting job losses. But Berlin was itself guilty of the same offence until a surprise about-turn by GM earlier this month saw the American company reneging on an agreed-upon deal, leaving Angela Merkel’s government smarting and furious.
The story began several months earlier, ago when Germany offered GM Europe a ¤1.5 billion bridge loan and further loan guarantees amounting to upwards of ¤3 billion, conditional on its selling the majority of its European Opel and Vauxhall units to Canadian car parts maker Magna International Inc and Russian lender Sberbank.
In turn, Berlin was given guarantees from Magna and Sberbank not to close any of the four German plants, which would have saved thousands of jobs.
At the last minute, however, GM backed out, deciding instead to restructure Opel on its own. This process, it says, will require a 20-25 per cent cut in the capacity of the European car maker.
Thus, Berlin suddenly finds thousands of jobs in Germany under threat again, as do other EU member-states with Opel and Vauxhall plants. But although once bitten, twice shy Germany is now opposed to any extending of state aid to GM for the new restructuring plans, other European countries are understood to have made informal pledges of subsidies in exchange for preserving jobs.
Enter the EU. Brussels issued a statement on Monday warning all member-states that “EU rules (in particular on state aid and the Single Market) must be fully respected”. Adding, “any financial support by one or more Member States should be based strictly on objective and economic criteria, and not include non-commercial conditions concerning the location of investments and/or the geographic distribution of restructuring measures”.
It is widely accepted by industry analysts that some form of state support for GM’s latest restructuring plans will be necessary. Interim CEO Nick Reilly made this much clear as well. Despite recently improved fortunes, in part due to booming sales in China and a $58.5 billion injection of capital from the US and Canadian governments, GM remains highly debt-ridden, as well as lacking in management capacity.
Thus, it is unclear how, even in the event of state bailouts, Opel can emerge from its crisis, given the disarray its parent company continues to be in. Other German car makers are, consequently, unhappy with events as they have played out over the year.
Saving Opel plants with government funds, they say, will not reduce excess capacity in the auto industry, which is at the heart of the crisis. Instead, they make the case that such a bailout would only threaten jobs at other manufacturers like Fiat, Renault and Volkswagen (VW), penalising competitors that are not receiving government bailouts.
VW CEO Martin Winterkorn has calculated that his company could sell 300,000 more cars if Opel and its sister company, Vauxhall, disappeared from the market.
For the moment, it is unclear if Berlin will stick to its new hardline tactic of rejecting state aid to GM. Analysts say this is unlikely, given the 25,000 Opel jobs in Germany at stake. On the other hand, bailing out GM in this instance could spell further trouble for the country’s auto industry as a whole.
Between January and February of this year alone, more than 58,000 jobs were lost at German car makers and their suppliers. Daimler and BMW are wrestling with the massive costs of developing the electric cars of the future, while being faced with dramatic declines in sales.
Some analysts say Berlin should be focusing on funding research for new environmental friendly cars and let the ship of a mismanaged and uncompetitive company like Opel sink. Given the political realities, however, this is a scenario few believe will come to pass.
How the drama plays out will be of significance beyond Europe’s borders. Indian negotiators of the free trade agreement with the EU would do well to keep an eye on it. The treatment of state subsidies remains an unresolved part of the Competition chapter of the proposed FTA.
