GM Euro-Union's Case for an Opel/Vauxhall Spin-Off

Open letter from GM’s Union Leaders:

“Renaissance” plan for Europe is not viable. It will finish off the European GM brands and companies and includes unacceptable risks of litigation—the alternative is the spin off of the European operations

1. Overview

The approval of the loans for General Motors in the United States by the Bush administration was a kind of a “poisoned gift” for the corporation. The terms of the loans to General Motors will be nearly impossible to meet.

The term sheets mainly focus on cutting labour costs with potential plant closures and mass dismissals and did not specifically offer ideas about increasing revenue and developing new products. The obligation for General Motors to pay back the loans starting in 2011/12 will have the result of preventing investments in future products which are especially needed under the new rules for fuel efficiency of the Obama administration and the global CO2 challenges.

As part of the terms of the loan, the Senior Leadership of General Motors has been working on a restructuring plan which is due on February 17, 2009. Last week GM Management provided the main data for this restructuring plan to selected analysts for examination. Originally, the provisions of the term sheets targeted the domestic business of General Motors in the US. Now General Motors Europe and its brands and companies are included in the restructuring plan.

The management restructuring plan formulated in Detroit for Europe is known internally as project “Renaissance.” The current plan could include for the Opel/Vauxhall brand and the GM/Opel/Vauxhall subsidiaries mass dismissals and probably several plant closures. This would have disastrous consequences for the GM brands and companies in Europe and will finish them off.

Moreover, the plan is not viable taking in consideration the needed loans guaranteed by European governments and the existing legally binding contracts on the European and national level.

It is also important to know that the competitiveness of GM’s European operations is quite different from the situation of GM in North America. GM European operations are very competitive in terms of productivity and flexibility, consumer-driven demand-pull production, and the product portfolio.

2. The situation in Europe before the “Renaissance” restructuring plan was revealed The Saab brand and subsidiary is currently in the process of re-capitalization with the potential to be taken over by the Swedish government. Moreover, GM Management in Europe has been in negotiations with several European governments about guarantee loans to safeguard the European operations on a sustainable basis.

These talks are taking into consideration that the corporation cannot and will not support financially the European operations any longer. In addition, GM Management in Europe has been in negotiations with its European Works Council, the General Motors European Employee Forum (EEF), and with the national and local unions and works council to cope with the current crisis affecting the European auto market.

The goal is to save approximately $750 Million in labour costs in 2009. The first result was a European Framework agreement as a basis for national and local solutions on volume adjustments which allows the company to use flexible short-term volume adjustments and respective cost savings.

The EEF representatives as well as the national/local union and works council representatives requested from General Motors Europe a sustainable European business plan based on a viable business model. They made clear that no business can be saved on a short-term basis by cutting only labour costs. The EEF pointed out that the postponed product plan for Europe – if not changed or further postponed—will be a road to death.

Short-term cost savings will do nothing to avoid a collapse, because the loss of contribution margins for the subsequent years will be a tremendous burden on the company.

The EEF and the national/local unions and works councils are actively supporting GM’s application for government guaranteed loans in Europe. However, their support is based on a sustainable European business plan and a viable business model which includes the necessary investments that create a future for the European brands and companies. They do not want to gamble away Opel/Vauxhall competitiveness in the tough European marketplace.

3. Consequences of the restructuring project for GME/Opel/Vauxhall

If General Motors seriously wants to try to implement the measures of the Renaissance” restructuring plan in Europe, it would have dramatic consequences for Opel/Vauxhall. The consequences and an alternative position of a spin-off of Opel/Vauxhall will be outlined briefly below.

• No European government or European bank would give guaranteed loans to close plants and to dismiss thousands of employees. Especially the potential use of loans guaranteed by one European government to close down a plant in another European country. This would lead to major conflicts and will be avoided by any European government. This would mean that also any chance to fix the revenue side of the business would be destroyed.

• The estimated cost savings in 2010 are not viable because of the existing legally binding European and national contracts with General Motors. Violation of this contracts will trigger several law suits making it impossible to get the targeted savings as outlined in the plan.

• The only option left would be that GME/Opel/Vauxhall asks for rescue-aid instead of loans guaranteed by European governments. Then it must cut capacity by 30%. No company has ever survived this large of a reduction.

• Without government guaranteed loans, Opel/Vauxhall would have no chance to restart important postponed future product projects or in case of a further deteriorating of the market, to avoid further additional project postponements. At the same time, 3 competitors are investing heavily to enhance their competitive position in the European marketplace during the current crisis.

• Current status of projects that have been postponed are not sufficiently reflected in the business case and will hurt revenue dramatically.

• Plant closures and redundancy programs generate costs (several hundred million Euros).

• The impact on European market share of Opel/Vauxhall will be roughly -1.5% and in Germany -2%. Chevrolet cannot fill this gap. This will lead to major gains for VW, Ford and non-European carmakers. It has to be taken into consideration that the situation in the market place in Germany has dramatically improved for Opel generating revenue because of the government’s environmental incentive to purchase new cars.

• The impact on the value of the Opel/Vauxhall brands and subsidiaries will be tremendous which will wipe off the assets of Opel/Vauxhall as reflected in the balance sheet of the corporation.

• Demolition of the European business (filing for bankruptcy) including most of the dealership network which will also hurt Chevrolet.

• If Opel has to file for bankruptcy, there will be no further access to European Engineering for GM which is needed for the corporation and GM operations outside of Europe.

• Skilled employees and managers will leave the company.

• GM Promisory notes of Adam Opel GmbH (Limited Company) will become due immediately in case of bankruptcy.

• Finally, every scenario with the implementation of the “Renaissance” project in Europe will ultimately lead to a collapse of Opel/Vauxhall within 1 and half to 2 years at the latest. This means “scorched earth” will be left in Europe with major conflicts all the way to the end.

Against the background of the consequences of “Renaissance” project for the European operations of General Motors the following questions has to be asked to the Senior Leadership: How valid are the basic assumptions of the restructuring project for Europe?

4. Spin-off of Opel/Vauxhall—the alternative to the “Renaissance” project. The alternative to GM’s “Renaissance” project for Europe is the spin-off of Opel/Vauxhall in addition to the already planned spin-off of Saab.

• Spin off Opel/Vauxhall potentially with minority stake of GM.

• No plant/facilities/location closures. Either in part or in total.

• No call for rescue aid.

• No violation of existing contracts.

• General Motors Europe will not be a financial burden and no risk for GM any longer.

• Opel/Vauxhall could self-finance its business.

• Opel/Vauxhall will deliver technology to GM and Opel/Vauxhall gets unlimited access to technology of GM paying royalties to each other (license agreements).

• Opportunity for the Opel brand to enter new markets.

• Opportunity for Opel/Vauxhall to look for partners, investors and shareholders. Government shares are an option to get equity. A change of corporate governance will also be necessary.

• Using the roughly 3 billion Euro guarantee loans potentially provided by European governments to bring forward the postponed projects as basis for a sustainable European Opel/Vauxhall business model and business plan.

• Opel/Vauxhall Management structure would have to be independent from Detroit and GM. Elimination of bureaucratic and inefficient functional organization (involvement in global matrix organization). No double functions, less red tape.

• Relocation of GME headquarters from Zurich, Switzerland and cut of overstaffed Management functions.

• If the market development makes it unavoidable, Opel/Vauxhall will deal by itself with potential restructuring and volume adjustments. Selling of a plant could be done in a socially responsible and financially reasonable way.

• Consolidation of all European subsidiaries under Opel/Vauxhall umbrella (European holding).

• Review of adequate corporate structure for the consolidation of operations. =

• Potential increase of market share of Opel/Vauxhall after spin-off.

5. Conclusions:

The current restructuring plan for General Motors Europe and its brands and companies is not viable. It will finish off the European operations and implies several risks of litigation for the corporation.

The spin-off of Opel/Vauxhall as outlined above and the spin-off of Saab is the only reasonable and feasible option for General Motors which would not destroy the European operations and its European assets and could avoid law suits.

The spin-offs would exclude any further financial risk for General Motors. The deal could be structured in a way to provide GM with important access to technology developed at the European Engineering Centers which General Motors desperately needs to stay alive.

Klaus Franz Chairman EEF

Rudi Kennes Vice-Chairman EEF