How wheels fell off the General Motors sell-off

Sarah Arnott reveals the boardroom chicanery and political manoeuvring behind decision to pull the plug

GM is playing down the spectacular volte-face over the sale of its European business this week as a simple matter of industrial logic. But the now-defunct deal always had more backers in Berlin than in the Detroit boardroom, and the seeds of its collapse were sown in Brussels rather than the US.

Even before GM's U-turn, the saga of the US car giant's efforts to offload the ailing European business – which includes Opel in Germany and Vauxhall in the UK – was packed with high drama. Labour unions from Poland to Spain railed against massive job losses; Lord Mandelson, the British Business Secretary, was pitted against Germany's Chancellor, Angela Merkel, in a tit-for-tat fight to save factories and votes; and cynics and doom-mongers muttered about the long-term implications of inviting Russian money into the heartland of European industry.

GM says its change of heart merely reflects a change of circumstances. When the sale was mooted in April, it was teetering on the brink of what was to be the biggest bankruptcy in US corporate history. The only option was to sell. Now, however, with the global auto industry showing signs of life, and with GM itself back from the dead, everything is different. A reborn GM in North America left the board free to look beyond the immediate future. What they saw was a once-great global car company stripped of manufacturing capacity in one of the world's biggest markets. John Smith, one of the company's lead negotiators, said: "The short version of why we ended up here is that the condition GM finds itself in now, compared with earlier in the year, is significantly different and vastly improved."

So far, so reasonable. GM's explanation is not untrue. But it is not the whole story. With 54,000 jobs in nine factories across six countries at stake, the heavy hand of politics was always in the small of GM's back. Add the fact that any plan to turn the loss-making, over-extended European operations into a well-functioning business relied on public money from countries with GM factories, and the decision was barely Detroit's to make.

And so it proved the first time around. When, after months of backroom talks, GM finally announced the deal with Magna International in September, there was little surprise. The Canadian car parts maker, bankrolled by Russia's state-owned Sberbank, was a favourite from the start, openly backed by Chancellor Merkel's government in return for guarantees to keep Germany's four factories open. Meanwhile, it was an open secret that the UK government preferred an offer from RHJ International, a private equity company, thanks to its public commitment to save the Vauxhall factories at Luton and Ellesmere Port.

By July, the tension was breaking through. The Berlin government pledged €4.5bn (£4bn) to GM for the Magna deal amid heavy hints that such a sum was not available to RHJ, prompting outrage from Lord Mandelson. "This decision should not be distorted by political considerations in any one country," he fumed. But Vauxhall's 5,500 employees were a paltry consideration next to Germany's 25,000, and a UK taxpayer contribution rumoured at "only" £400m could not compete with the German billions.

Berlin did a good job. GM's internal plans for cutting its European business down to size, which were put together before the crisis forced the sale, were used as a basis for all the bidders, including Magna. The crucial difference was that while the GM plan posited the closure of three factories, two of which were at Bochum and Eisenach in Germany, Magna said from the beginning that Germany was safe. Although it has been silent on the politics, GM admits there were problems with the Magna deal. The complexity of dealing with two investors was simply too much, says GM. The rows over intellectual property were never fully resolved. Magna's strategy further down the line – particularly in Russia – would bring it into conflict with GM.

Ironically, it was the Russian connection that made the deal possible in the first place. Magna had no chance without the Russian money, and what Russia wanted in return was technology. Not only that, but Magna's "industrial partner" in Russia was the country's second-biggest carmaker, Gaz, controlled by Lord Mandelson's friend Oleg Deripaska.

Mrs Merkel's use of GM's technology to tempt the Russians into a deal to safeguard German jobs was what raised hackles at GM. Hilton Holloway, an industry expert at Autocar magazine, said: "Russia is desperate to get its hands on car technology. Ms Merkel was using GM's kit as a bargaining chip but she over-cooked it and went too far."

One of the more ill-suited deals in corporate history would have gone ahead were it not for Neelie Kroes, Europe's Competition Commissioner. Last month, just weeks before the Magna deal was announced, Ms Kroes raised concerns that Berlin's €4.5bn for Magna would be "incompatible" with Europe's state aid rules. Spooked, the German Economics Minister, Karl-Theodor zu Guttenberg, wrote to GM confirming that the €4.5bn was available to any successful bidder.

GM's board, newly appointed in August as part of the company's rescue from bankruptcy, saw its chance. The final decision on Magna was hastily put back to late November. Despite official expressions of surprise this week from everyone from Lord Mandelson to the Russian Prime Minister, Vladimir Putin, it was only a matter of time.

The Magna deal was not only bad for GM, it was bad for Magna, which would have been left with a loss-making rump of a company, far too small to compete with rivals like Volkswagen. And though German politicians may be spluttering with indignation, the Magna deal would never have made it through Europe's state aid laws. Ultimately, Ms Kroes would have sliced it up, probably to look much like what GM will now do itself – a point argued by Professor Garel Rhys, at Cardiff Business School's Centre for Automotive Industry Research.

The German government still got what it wanted. Whether Chancellor Merkel would have lost her second term if the furore over Opel's future had come before the election is hard to say. Either way, it was well played.