Last-ditch deal as world's biggest bankruptcy looms

As a Russian-backed consortium sealed a deal to buy GM Europe last night, Sean O'Grady explores the crisis in the motor industry
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In the car industry, few things stand still for very long. Yesterday though, the future for 5,000 Vauxhall workers in Luton and at Ellesmere Port in Merseyside seemed a little more stable. For days the negotiations surrounding the disposal of General Motors' European operations, including Vauxhall, have become something of an international soap opera. The Business Secretary, Lord Mandelson, has been accused by the unions of having nothing more than a walk-on part in scenes dominated by the American and German governments and the three private sector bidders for the business, which employs 50,000 people, half of them in German Opel factories.

Yesterday, the Canadian Magna company, the only prospective purchaser remaining after Fiat and US private equity group Ripplewood Holdings flounced off the set, took control of GM Europe, in a deal backed by at least €1.4bn (£1.22bn) in loan guarantees from the German government and €500m- €700m in cash from the new investors, who include the Russian oligarch Oleg Deripaska. Now GM in the US will still hold 35 per cent of GM Europe: the Russian state-controlled bank Sberbank, part of Magna's consortium, will own another 35 per cent, while Magna itself has 20 per cent. The remaining 10 per cent will be given to the workers. Russian auto firm Gaz, nominally controlled by Mr Deripaska, is also involved in the deal, and has an existing Russian joint venture with GM.

With the sale under way Detroit-based parent General Motors can now proceed to an "orderly" bankruptcy under America's special Chapter 11 rules. GM will file for bankruptcy on Monday in what will be the biggest failure in corporate history, once unthinkable, and a powerful badge, were any needed, of how a financial crisis originating in an obscure corner of the securities market has penetrated to the heart of the world's economic life. When GM emerges in a few months time, it will be smaller and 72 per cent owned by the US taxpayer. It will join AIG, Freddie Mac, Fannie Mae and other unwanted children of the economic crisis in President Obama's corporate orphanage.

Attention on this side of the Atlantic will now focus on Magna's intentions especially for the British business. During the talks, Magna was reported to be prepared to guarantee the continuation of production at all four of GM's Opel German plants, implicitly in the grounds that that was where the bulk of the funding was going to come from, with job losses limited to 2,500. That also carried the implication that other important centres, in the UK and Belgium and maybe Spain, were less secure. Lord Mandelson said last night: "I will, of course, look forward to a very early meeting with Magna. I will be seeking from them reinforcement of the commitment they gave to me last week to continued production by Vauxhall here in the UK. They made clear to me that they are committed to continued production by Vauxhall in the UK. I take that at face value."

Magna co-chief executive Siegfried Wolf has in the past only gone so far, on the record, as to say he would look for ways to keep the British and Belgian factories open. Ellesmere Port is due to begin production of the new generation Astra later this year, so a closure in the short term there seems less likely. But all players in the drama have stressed that GM Europe can make about 30 per cent more cars than it can ever hope to sell, and that painful cuts, somewhere, are inevitable.

Indeed, that is the fundamental problem facing every car-maker today – chronic overcapacity – and it has made adjustment to the downturn doubly difficult. The world's car factories can make 10 million more cars than they can sell, even in good times. To put that in perspective, GM's European production in 2007 amounted to 1.8 million units. New factories in China and India are only adding to overcapacity: no wonder some only half-jokingly suggested a consortium of Ford, Volkswagen, Renault, Toyota and Honda should have bought GM and Chrysler to close them down, thus helping to restore their own profitability.

Recession has certainly hit even the most respected names hard. Toyota, still the most efficient player in the world, has lost $8bn in the last two years. Almost every car-maker seems to be in trouble of one sort or another, even Porsche, the brand with the fattest margins in the business. A new car is the ultimate "big ticket" purchase, and is nowadays easily deferred. The revolution in quality and reliability over the past 20 years has meant that few consumers are forced into a buying a new car because their old one is dying, though scrappage schemes will help speed the automotive ageing process. The credit crunch has cut the ready supply of car loans.

But General Motors engineered its own faults. Generous lifetime healthcare and pensions benefits left it lumbered with costs its younger rivals from Japan and Korea never had to bear. That was a product of GM's 101-year history; but its overreliance on sports utility vehicles was not. When the US was framing its fuel-efficiency targets years ago energetic lobbying from the Big Three left a loophole for "light trucks". In common with the other US giants, Ford and Chrysler, GM became dangerously dependent on SUV and pick-up sales: they are simple (and cheap) to make and can be tarted up to command a high showroom price and decent margins. Then came dearer oil and the slump: Americans started to downsize to smaller sedans, and the best selling car is now the Toyota Camry.

Like all the Wall Street executives who sent their banks spectacularly bust, GM's management was recklessly negligent over the exposure the company was running to a particular set of economic conditions – cheap fuel and booming credit – that could not last forever. A firm worth over $50bn a decade ago is worthless today, an historic destruction of shareholder value, with the livelihoods of 150,000 staff in jeopardy. Very recently, GM has produced promising electric cars such as the Chevrolet Volt concept: it was too little too late. GM died of complacency.