C. Complaints to the European Commission, the Kroes-zu Guttenberg Correspondence and GM’s Sudden About Face
Après GM’s announcement of the Magna/Sperbank deal, le deluge. Shortly after GM’s report of its acceptance of the Magna bid, a chorus of complaints about German economic nationalism and improper use of state aid sounded from other European capitals. In Belgium, Deputy Prime Minister Didier Reynolds urged the European Commission to investigate Germany’s actions in promising state aid conditioned upon GM’s acceptance of the Magna/Sperbank offer.55 Belgian Labor Minister Jöelle Milquet seconded this demand, stating that the Opel deal endangered European unity. Milquet was quoted as saying that “the German government negotiated a deal purely in Germany’s interest. There has not been any European cooperation and this is a pity.”56 The complaints from Belgium were undoubtedly a reaction to GM’s statement that the Antwerp plant was a likely candidate for closure.57
In Spain, where 1,650 jobs in the Zaragoza plant were threatened by the sale to Magna, Spanish labor unions threatened strikes and Spain’s Minister of Economy and Finance, Elena Salgado Mendez, cautioned Magna to consider carefully the fact that the Zaragoza plant was one of the most profitable and productive in Europe.58 In Britain, politicians and union leaders criticized the Labour government for being outmaneuvered by Germany, thereby putting the Luton plant at risk. Vince Cable, a leader of the Liberal Democrats, and Tony Woodley, General Secretary of Unite, the largest UK trade union, expressed fears that German jobs would now be protected at the expense of British workers.59
As September wore on, more voices were raised in protest against what was characterized as German economic nationalism and protectionism - - both anathema to the EU’s internal market. Belgian Foreign Minister, Yves Leterme, Spain’s State Secretary for Trade, Silvia Iranzo Guittérez and Hungarian State Secretary for Competition, Zoltán Mester, met to discuss the impact of Magna’s purchase on the Opel plants located in their countries. Leterme also met separately with Bernd Pfafferbach, a State Secretary in Germany’s Economy Ministry, to insist upon German compliance with EU rules on competition and state aid.60 Mandelson again got into the act, arguing that Britain’s Luton and Ellesmere Port plants were “highly efficient” and that the European Commission “not accept anything that looks like a political fix or any linkage between aid and retention of jobs in any specific plant or country.”61 Even one of the trustees of the Opel Trust joined in this criticism, asserting that “the sale to Magna is an example of exactly the type of aggressive industrial politics that Germany is always being criticized for - - and rightly so.”62 This multitude of complaints was not overlooked by the European Commission. In mid-September, a spokesman for Competition Commissioner Neelie Kroes warned that “if something happens against the rules, action will be taken.”63
In articles published in mid-September, 2009, the Financial Times placed the Magna/Sperbank offer under a microscope and concluded that its European critics were making valid points about Germany’s actions being violative of EU competition rules. In an article entitled “A Shift in Gear,” the Financial Times described the impact of the financial crisis on EU member states’ use of state aid in a protectionist manner:
“More than a few analysts see the Opel controversy as symptomatic of an outbreak of malignant economic nationalism that has infected the European body politic since the western world’s financial system came close to collapse last year. ‘The credit crunch and world recession have blown apart EU finance rules,’ says Denis MacShane, a former UK European affairs minster. ‘States have done their own thing and boasted national protection for threatened industries or workers.’. . . For Brussels the lesson is obvious. Few tasks are more fundamental to the EU’s success as a multinational, rules-based entity than the defense of the single market and the enforcement of state aid law.”64
The author continued by noting that over the past 15 years, the European Commission
“has turned itself into one of the worlds most powerful regulators. . . . Under José Manuel Barroso, who on Wednesday won a second five-year term as Commission president, EU regulators have been especially aggressive in levying fines for infringements of competition rules. Since it assumed office in 2004, the Barroso Commission has imposed fines totaling almost €10bn; between 1990-94, when data was first collected, it was a mere €567m.”65
Finally, the author explained that laxness in enforcing these rules would jeopardize the efficiency and the integrity of the single market, thereby threatening the EU itself:
“The relentless pursuit of malefactors would be wide open to attack if the impression were to gain ground that the Commission was bending the state aid rules to favour particular companies under pressure from national governments. But the implications of the proliferating challenges to the single market go further still. European monetary union itself depends in no small degree on the integrity of the single market. During the euro’s 10-year lifespan, the EU has defied gravity by operating a single currency without a common fiscal policy, common government bonds or common eurozone representation in global financial institutions. But without the single market, the euro’s future would be perilous in the extreme, as governments sharing one currency watched each other take measures deliberately intended to gain a competitive advantage over their nominal partners.”66
On September 22, 2009, just 5 days before the German elections, the Financial Times published in its “Comment” section an article entitled “Germany Retreats to Old Certainties,” in which the author, a regular FT columnist, criticized Germany and Chancellor Merkel in particular for permitting the global financial crisis to turn Germany inward towards protectionism. According to the author, the “protective, interventionist state is back in fashion . . . . The mood of the country is ‘profoundly parochial.’” The state aid promised by Germany to GM to grease the sale of Opel to Magna was a prime example:
“Mrs. Merkel’s successful effort last week to broker a rescue deal for the Opel car manufacturer, part of General Motors, is a case in point. The bail-out has been cheered in Germany - - but greeted with horror in Belgium, Britain and Spain - - all of which fear that it means that the axe will fall on car plants in their countries. In theory, EU rules on state aid are meant to prevent beggar-thy-neighbour subsidies. Germany used to pride itself on being scrupulous about obeying Union rules and respecting the sensibilities of smaller EU countries. But, in a deep recession, old instincts about the importance of industrial policy and the car industry have trumped worries about Germany’s industrial obligations.”67
Perhaps the most damning articles were those published on the weekend of the Bundestag elections in the Financial Times’ Weekend Edition of September 26-27, 2009, entitled “Magna’s European Cuts Face Further Scrutiny” and “Threatened Opel Plants Still Shine.” These articles discussed “confidential figures” from internal company data obtained by the FT demonstrating that Opel’s Rüsselsheim plant, a survivor under Magna’s restructuring plan, was the most inefficient of all of Opel’s European factories. At Rüsselsheim, workers spent an average of 33.1 hours to assemble an auto compared to 25.2 hours at Antwerp, 24.2 hours at Luton, 23.2 hours at Ellesmere Port and 19.5 hours at Zaragoza. At the Opel plant in Bochum, Germany, another survivor, automobiles were assembled at an average pace of 24.4 hours, making that plant less efficient than the plants at Zaragoza, Ellemere Port and Luton and only slightly more efficient than Antwerp.68
These facts and figures were not lost on politicians from the countries that could be disadvantaged under Magna ownership of these plants. Flemish Prime Minister Kris Peeters presented figures that he claimed established “that it was cheaper to build cars at the plant - - which Magna says it may close - - than in Bochum, Germany.”69 Baron Mandelson wrote to Neelie Kroes arguing that “Magna’s plan penalised relatively efficient plants in the UK and Spain, and that it risked distortion by ‘political intervention and subsidies.’”70
Commissioner Kroes, for her part, appeared to be impressed by these arguments. She was quoted by the Financial Times as warning “countries against ‘bribing’ carmakers in an attempt to ‘steal’ jobs from other countries.”71 In mid-September, Kroes discussed her continuing skepticism of Germany’s use of promises of state aid in the Opel negotiations. In an interview in the German daily newspaper, Bild, she told her interviewer that there were
“doubts about the potential conditions for financing by the German government. It is possible that, during the painful but necessary restructuring at Opel, German workers would be given preferential treatment over plants in other countries.”72
Der Spiegel reported later on a speech made by Kroes to the European Parliament in Strasbourg in which she again addressed the state aid issue:
“Kroes had already said that the financing must come without any strings attached. The German government had said that it would be taking advantage of a temporary European Commission program that allows states to aid business during the current financial crisis. But Kroes said that she would look at the scheme very carefully to see if Germany could use it in this case. Any negative conditions ‘would create unacceptable distortions in the internal market and could trigger a subsidy race which would significantly damage the European economy in the present delicate moment,’ she said. More importantly, Kroes explained that any financial aid needed to be based on commercial considerations, designed to sustain viable jobs, and not protectionist motives.’”73
On Sunday, September 27, 2009, voting in the Bundestagswahl was conducted across Germany, with the voters giving a solid majority to the CDU-CSU-FDP coalition. This group of three parties captured 332 out of 622 seats in Parliament and thereafter formed a government with Angela Merkel as Chancellor and Guido Westerwelle of the FDP as Vice-Chancellor and Foreign Minister. Frank Walter-Steinmeier’s SPD suffered the worst electoral defeat in its history, gaining only 23% of the party vote and retaining only 146 seats in the Bundestag. The new ruling coalition and especially Chancellor Merkel looked forward to the closing of the Magna/Sperbank acquisition and the consequent rescue of German factories and jobs.
On October 13, 2009, GM CEO Fritz Henderson announced that he expected the Magna/Sperbank acquisition to close later that week.74 According to news reports, lawyers for GM, Magna and Sperbank were busily reviewing contracts in Frankfurt in an effort to resolve final issues, including obtaining the agreement of Opel workers to reduce costs estimated at €1.6 billion through 2014 in return for a 10% equity interest in “New Opel.”75 GM and Magna had reportedly reached agreement with Unite, the UK’s largest union, and were close to an agreement with Spanish unions.76 Late at night on October 15, 2009, however, a glitch occurred. The Financial Times reported that Magna and GM had “postponed their expected announcement of a definitive sale agreement on GM’s Opel business because of delays in approving the paperwork involved in the transaction” but that the delay was expected to last for only a few days.77
Also in mid-October, EU Competition Commissioner Neelie Kroes wrote to German Economy Minister Karl-Theodor zu Guttenberg about Germany’s alleged improper use of state aid. The European Commission reported that, in this letter, Kroes claimed that “significant aid promised by German government to New Opel was subject to the precondition that a specific bidder, Magna/Sperbank, was selected” and that any such precondition “would be incompatible with . . . state aid and internal market rules.”78 The European Commission explained further that “GM and the Opel Trust should be given the opportunity to reconsider the outcome of the bidding process on the basis of firm written assurances by the German authorities that the aid would be available, irrespective of the choice of investor or plan.”79 (Emphasis added.) Responding to these reports, GM’s Global Vice-President for Communications ominously observed that if the proposed sale to Magna “couldn’t pass EU regulations, [GM would] have no recourse but to reconsider the deal. Right now we are working on a defined agreement with Magna and it’s a complicated process with a lot of dialogue. There are discussions going on at the moment and there’s a lot of detail to be ironed out between the German government and the EU.”80
Although Kroes’ letter to zu Guttenberg demanded assurances from the German government that the state aid would be granted “irrespective of where plants were to be closed and that the choice of Magna as the principal investor was not the result of political pressure,”81 the EU Commissioner for Enterprise and Industry, Günter Verheugen,
“who is German, cautioned the government in Berlin not to write the letter Kroes was demanding, because it would enable the Americans to reopen a case that had long since been decided. Petra Erler, the head of Verheugen’s team, warned senior officials at the German Economics Ministry and Chancellery against ‘playing with fire’ and suggested that it would be sufficient for Berlin to state publicly that the government bailout funds for Opel had been provided independently of the carmakers commitments to individual plants.”82
Notwithstanding these warnings, zu Guttenberg declined to follow Verheugen’s advice and, on October 17, 2009, sent a letter to Fritz Henderson requesting GM to provide the assurances requested by Kroes. However, zu Guttenberg went further by declaring that Germany was prepared to support the investor selected by GM “irrespective of the investor’s identity.”83 Der Spiegel reported that GM executives interpreted this correspondence “to mean that the door was open again and that perhaps they could hold onto [Opel] after all. If Germany was promising financial assistance to other investors, they reasoned, GM could also qualify.”84 The zu Guttenberg letter also arrived at a time when the future appeared much brighter to GM - - New GM had emerged phoenix-like from the ashes of the old corporation and was experiencing a significant upturn in auto sales due, in part, to the U.S. government’s “Cash for Clunkers” initiative:
“The letter was received with great interest in Detroit, arriving at a time when General Motors was already feeling stronger. For a long time, the company was so cash-strapped that it saw no alternative to abandoning its European operations. In the meantime, however, the US and Canadian governments had provided the carmaker with a total of $58.5 billion (€38.9 billion) in fresh capital, receiving more than 70% of shares in the company in return.”85
This shift in mood was also evident among many members of New GM’s board of directors, most of whom had been recently installed by the Obama Administration and were led by Ed Whitacre, a former CEO of AT&T with a reputation for ruthlessness. Whitacre, along with Bob Lutz and a few other directors, had consistently opposed GM’s attempts to sell Opel. By October, however,
“[t]he mood within the GM board began to shift, prompted by those who had been skeptical about the Opel deal from the start and by irritation over the German government’s maneuvering. After initially pressuring GM to sell Opel to Magna, [the German government] was now claiming that all investors would be equally welcome. Only one senior executive, CEO Fritz Henderson, had apparently failed to recognize that the winds had changed. . . . Only four days earlier, he had insisted that the Magna deal was going to happen.”86
On October 23, 2009, GM announced that it would reassess the Opel transaction at the next board of directors meeting on November 3rd. GM’s chief negotiator in the Opel transaction, John Smith, wrote in a blog that day that the GM board would consider the “changes to the Magna Sperbank proposal that have occurred since its last review on September 9” and that the directors would discuss zu Guttenberg’s letter which stated that “German aid for the deal was not restricted to Magna but available to all bidders.”87 Ironically, also on October 23rd, the European Commission announced that it would not investigate the alleged improper use of state aid to influence GM’s attempts to sell Opel. One suspected factor in the Commission’s decision was that the matter was so complex that an EU investigation would have taken months to complete, thereby jeopardizing Opel’s survival; at that time, Opel had liquidity only until mid-January, 2010.88 According to Der Spiegel,
“[i]f the company collapses during the EU investigation, Kroes fears ‘Brussels’ will be held responsible for the direct loss of 50,000 jobs across the 27-member bloc . . . . Kroes, who has a reputation for being very tough on anti-trust and single-market issues, seems stuck between a rock and a hard place. If she chose to investigate the case, she could be held accountable for the Opel bankruptcy. If she refrained from it, she would undermine the European Union’s internal market and the rules that govern that market. If Germany gets away with state aid, why wouldn’t other countries? Kroes’ choice for the latter option proves how hard it is to reconcile the European single market rules and regulations against protectionism with the reality of the current recession.”89
On Tuesday, November 3, 2009, GM’s Board of Directors voted to cancel the sale of a controlling equity in Opel/Vauxhall to Magna/Sperbank, the same day that Chancellor Merkel addressed the United States Congress on her visit to Washington, D.C. In a written statement, GM asserted that the board made this decision due to “an improving business environment for GM over the past few months and the importance of Opel/Vauxhall to GM’s global strategy.” The board declared that it had “decided to retain Opel and will initiate a restructuring of its European operations in earnest.”90 In a separate statement, Fritz Henderson stated that GM would soon “present its restructuring plan to Germany and other governments and hopes for its favorable consideration.”91
D. The Fallout From GM’s Decision to Retain Opel
The initial reaction to GM’s announcement of “no deal” over Opel was generally greeted with frustration and anger in Germany. Ulrich Wilhelm, a spokesperson for Chancellor Merkel, stated that an “investment process that was being intensively undertaken by all parties - - including GM - - for over six months has been aborted.”92 The new German Economy Minister Rainer Brüderle remarked that GM’s action was “completely unacceptable” and Klaus Franz, the head of Opel’s Works Council predicted the possibility of strikes within a few days by Opel employees protesting the decision.93 Roland Koch, Minister-President of Hesse, complained that he was “very shocked” and “angry that months-long efforts to find the best possible solution for Opel in Europe have failed due to GM.”94 Koch also said that, because of GM’s business practices, he had “major concerns about the future of [Opel’s] business and the jobs there,” and called for GM’s prompt repayment of the €1.5 billion bridge loan to Opel by the German government.95
After cancelling the sale to Magna, GM said that it would nonetheless seek state aid from Germany and other affected European governments to restructure Opel. Some politicians reacted negatively to this news whereas others appeared to leave the door open for state aid. Rainer Brüderle rejected GM’s approach, saying that it was “the responsibility of the parent company GM to overcome the problems at its Opel unit.”96 However, Wolfgang Schäuble, Germany’s Finance Minister, was quoted as saying that the Germany government could not refuse state aid to Opel now that GM had decided to keep its equity interest.97
Shortly after GM’s announcement that the Magna deal was dead, “high-ranking GM officials were to be found lobbying the federal and state governments in Berlin, Wiesbaden and Düsseldorf for state aid.”98 According to the Financial Times, during these visits, GM was “reportedly threatening the federal and state governments with sending Opel into insolvency if there [was] no state aid forthcoming.”99 The FT suggested that, even though there was not a pan-European insolvency law, a “much leaner and stronger Opel could emerge” were Opel to file for relief under German insolvency law, which was described as being “similar but not identical to America’s Chapter 11.”100 This procedure “would allow Opel to restructure while continuing to produce and sell cars and employ people.”101
On November 17, 2009, GM announced that it planned to cut capacity at Opel by 20-25% and to reduce its workforce by 9,000-10,000 employees.102 At the same time, GM declared that it would not engage in a “bidding war” over jobs with European governments.103 GM indicated that it was seeking €3.3 billion to restructure Opel, some of which GM would contribute with the remainder coming via state aid from affected EU member states.104 Notwithstanding GM’s promise of “no bidding war,” Nick Reilly, then Opel’s acting CEO, slyly remarked that “if a country refuses to participate at all, then of course it could influence plans somewhat,” although this was a “hypothetical situation.”105 On November 23, 2009, after a meeting with representatives of EU states with Opel plants, the governments reported that the member states in attendance would not make any commitments of state aid to GM before resumed discussions could be held on December 4th.106
On December 1, 2009, GM dropped another bombshell. That day, GM’s board of directors announced that interim CEO Fritz Henderson had resigned although it was later discovered that the board had forced him to resign.107 One significant reason for Henderson’s release was his advocacy for the sale of Opel to Magna, a strategy that was opposed by board chairman Ed Whitacre and other board members.108 Later in December, German Gref of Sperbank in an interview on Russian television stated that Sperbank had demanded compensation from GM to recover the Russian bank’s costs incurred in the failed Opel sale and that if this payment was not made on a voluntary basis, Sperbank would commence legal action against GM.109 Gref remarked that “nine months of talks, 9,000 intended pages of the contract had been ready for signing, and two days before the deal, GM abandoned it.”110
During January and early February, 2010, GM inched closer to finalizing its restructuring plan for Opel and submitting that plan to EU member states with corresponding requests for state aid. On January 21, 2010, Nick Reilly of GM confirmed that Opel’s Antwerp plant would be closed down.111 This announcement led to a threat of a strike by the European Metalworkers’ Federation if Antwerp was shuttered.112
On February 9, 2010, GM finally delivered its detailed plan to restructure Opel. The plan was announced by Nick Reilly at a press conference in Frankfurt, where he said that, in order to make the plan succeed and return Opel to profitability by 2012, as envisioned, GM needed “more help from European governments.”113 The primary elements of GM’s restructuring plan were as follows:
GM was requesting €2.7 billion in loans of loan guarantees from EU member states where Opel factories are located. Opel sought €1.5 billion of this amount from Germany.
GM would contribute €600 million to Opel for use as working capital.
Labor unions would forego €265 million in employee annual pay over the next five years.
8,300 jobs in Europe would be eliminated, 6,900 in manufacturing and 1,300 in sales. Of this amount, 3,900 German jobs would be cut.
The jobs held by 1,000 employees planning to retire would not be replaced.
€ 11 billion would be invested in a “new product offensive” by Opel over the next five years. This would include the launch of 8 new models in 2010 and 4 new models in 2011. In addition, Opel would aggressively market its electric car, the Ampera, and push its exports to the Middle East and Asia-Pacific.
The Antwerp factory would be closed.114
Shortly after the announcement of GM’s restructuring plan, German politicians were quoted as saying that GM’s contribution of €600 million as additional working capital would be insufficient to apply successfully for state aid and requested a substantial increase in GM’s contribution as the owner of Opel.115 Opel’s annual financial statements dated as of December 31, 2008 and published in the German Federal Gazette (the Bundesanzeiger) on February 12, 2010116, demonstrated that the car manufacturer had incurred a loss of €1.1 billion. Consequently, further doubts arose as to whether Opel could qualify for German state aid117. However, a GM spokesman immediately announced that Opel’s financial statements produced under German GAAP were not relevant, and that one must rather examine the financial statements of GM Europe.118
In the meantime, the German Federal Government asked PriceWaterhouseCoopers to review GM’s restructuring plan for Opel prior to making any decision on state aid. According to press articles, doubts about the viability of the restructuring concept persist. Even the German auditing firm, Warth & Klein, who are reviewing GM’s business plan for Opel, appears to question Opel’s ability to overcome its overindebtedness.119
On March 2, 2010 GM announced that it will triple its spending for the Opel restructuring up to €1.9 billion.120 Opel’s CEO, Nick Reilly advised that GM had “shared this decision with the European Commission as well as the national and state governments involved.” GM now estimates that €3.7 billion will be required to turn Opel around, €400 million more than when the restructuring plan was announced on February 9, 2010.121 The immediate reaction in Germany to GM’s new proposal has been mixed. Klaus Franz, the chief of Opel’s Work Council, cheered GM’s step because it would help to establish confidence with governments all over Europe. Nevertheless, a number of questions must still be answered including whether an insolvency of Opel should now be off the table.122 The German Economy Minister, Rainer Brüderle, remained skeptical, stating that the new proposal demonstrated that “GM has the funds.”123 Brüderle reiterated that an agreement on state aid has not yet been reached and emphasized that a number of questions have been raised by the Federal Government arising from GM’s application for state aid.124