Detroit: Behind General Motors’s hesitation to sell its unprofitable car business in Europe lies a Cold War fear: American technology will fall into Russian hands.
It’s among the main reasons why General Motors Co. has balked at finishing a deal to sell its Opel unit to a group led by Canadian auto parts maker Magna International Inc. and Russia’s state-owned Sberbank.
GM announced the tentative deal with Magna in May at a time when it was desperately trying to avoid bankruptcy protection. But now, after exiting bankruptcy in better financial shape and encouraged by signs of better sales, the Detroit-based automaker is second-guessing the deal, worried that future auto designs could wind up with Russian rival GAZ, which competes with GM’s Chevrolet, the No.2 brand in a growing Russian market.
GM is pushing a competing bid from Brussels-based investor RHJ International SA and may even keep Opel if its worries can’t be resolved. It’s playing hard ball, even though the German government, eager to preserve many of Russelsheim-based Opel’s 25,000 German jobs in an election year, has offered €4.5 billion in credit for the Magna-Sberbank deal.
In the murky world of Russian capitalism, both Sberbank and GAZ, maker of the Volga sedan, have strong ties to the Russian government, which has made no secret of its desire to help its ailing and outdated auto industry.
“It makes sense that GM is looking to the other alternative,” said Jan Svejnar, a professor of international business and public policy at the University of Michigan. “In Russia these days large companies that have a significant state stake are obviously linked.” Russian Prime Minister Vladimir Putin repeatedly has said that the government supports Magna and Sberbank’s bid and hopes that the deal would help the Russian car industry.
While GAZ is years behind GM and other Western automakers in vehicle technology, GM fears that down the road, GAZ could catch up by getting GM car architecture for Opel’s small and midsize vehicles and other property at no cost, using it to compete with GM in its second-largest European market.
Under the German financing deal, Opel would stop paying technology royalties to GM if Opel defaulted on its private loans, yet GM would still be required to provide new technology to Opel, said a person briefed on negotiations between GM and the German government. The person didn’t want to be identified because the talks are private.
GM and Magna worked out a deal to protect GM’s current technology, but the GM board fears future technology could be lost if Opel goes into default, the person said.
GAZ, a maker of popular trucks, buses and minivans, has had trouble selling cars like the outdated Volga sedan. It is owned by Russian aluminum magnate Oleg Deripaska, who has strong ties to Putin. GAZ once owned a stake in Magna and recently hired GM’s top purchasing executive to head its board of directors.
Also, the German government increasingly relies on Russia for oil and natural gas, so it wants to stay on Russia’s good side, Svejnar noted.
The U.S. government, which now owns 60.8% of GM and has given it $50 billion in aid, would not comment on the prospect of technology going to the Russians.
Some analysts believe Russia may create a national holding company by bundling its ailing domestic car manufacturers in an effort to drive efficiency and set out a strategy for the sector. Yet others say GM’s fears are overblown because GAZ has such a long way to go to really be competitive with Western automakers.
GAZ remains in business only because its cars are cheaper than those of other manufacturers due to Russian government subsidies and import tariffs, said Serguei Netessine, associate professor of operations and information management at the University of Pennsylvania’s Wharton School. “GAZ is in the business of producing very cheap cars from very, very old technology,” he said.
GAZ, known in Russia for quality and corrosion problems, has tried to modernise through joint ventures or buying used technology from Western automakers. In 2006, it bought factory equipment from Chrysler that made old versions of the Sebring and Dodge Stratus sedans and used it to make the Volga Siber.
Netessine said that even if GAZ received Opel technology today, it would take years for it to begin producing vehicles because its manufacturing operations are so inefficient.
Also, GAZ, Sberbank and the Russian government don’t have the capital to invest in new factories, nor do they have the political will to eliminate thousands of jobs by updating production from 1970s technology.
“Even if GM completely stops doing any research and doing any product development, maybe they’re going to catch up with them in five or 10 years at the earliest,” he said. “I think those fears of GM are sort of a little overestimated.”