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

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.

Arts and Entertainment
Banksy's 'The Girl with the Pierced Eardrum' in Bristol
art'Girl with the Pierced Eardrum' followed hoax reports artist had been arrested and unveiled
News
peopleJust weeks after he created dress for Alamuddin-Clooney wedding
Life and Style
tech

Sales of the tablet are set to fall again, say analysts

Life and Style
A street vendor in Mexico City sells Dorilocos, which are topped with carrot, jimaca, cucumber, peanuts, pork rinds, spices and hot sauce
food + drink

Trend which requires crisps, a fork and a strong stomach is sweeping Mexico's streets

PROMOTED VIDEO
Arts and Entertainment
George Lucas poses with a group of Star Wars-inspired Disney characters at Disney's Hollywood Studios in 2010
films

George Lucas criticises the major Hollywood film studios

Sport
football West Brom vs Man Utd match report: Blind grabs point, but away form a problem for Van Gaal
Arts and Entertainment
Bloom Time: Mira Sorvino
tvMira Sorvino on leaving movie roles for 'The Intruders'
Arts and Entertainment
Gotham is coming to UK shores this autumn
tvGotham, episode 2, review
News
i100
News
ebooksAn unforgettable anthology of contemporary reportage
Sport
Adel Taraabt in action for QPR against West Ham earlier this month
footballQPR boss says midfielder is 'not fit to play football'
News
First woman: Valentina Tereshkova
peopleNASA guinea pig Kate Greene thinks it might fly
Voices
Chris Grayling, Justice Secretary: 'There are pressures which we are facing but there is not a crisis'
voices

Does Chris Grayling realise what a vague concept he is dealing with?

Life and Style
The charity Sands reports that 11 babies are stillborn everyday in the UK
lifeEleven babies are stillborn every day in the UK, yet no one speaks about this silent tragedy
News
Blackpool is expected to become one of the first places to introduce the Government’s controversial new Public Space Protection Orders (PSPOs)
news

Parties threaten resort's image as a family destination

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Customer Service Executive / Inbound Customer Service Agent

£18 - 23k + Benefits: Guru Careers: We are seeking a Customer Service Executiv...

ASP.NET Web Developer / .NET Developer

£60 - 65k + Benefits: Guru Careers: We are seeking a ASP.NET Web Developer / ....

Operational Risk Manager - Asset Management

£60,000 - £80,000: Saxton Leigh: Our client is an leading Asset Manager based...

Project Coordinator - 12 month contract

£27000 - £32000 Per Annum: Clearwater People Solutions Ltd: Our large charity ...

Day In a Page

Two super-sized ships have cruised into British waters, but how big can these behemoths get?

Super-sized ships: How big can they get?

Two of the largest vessels in the world cruised into UK waters last week
British doctors on brink of 'cure' for paralysis with spinal cord treatment

British doctors on brink of cure for paralysis

Sufferers can now be offered the possibility of cure thanks to a revolutionary implant of regenerative cells
Ranked seventh in world’s best tourist cities - not London, or Edinburgh, but Salisbury

Salisbury ranked seventh in world’s best tourist cities

The city is home to one of the four surviving copies of the Magna Carta, along with the world’s oldest mechanical clock
Let's talk about loss

We need to talk about loss

Secrecy and silence surround stillbirth
Will there be an all-female mission to Mars?

Will there be an all-female mission to Mars?

Women may be better suited to space travel than men are
Oscar Pistorius sentencing: The athlete's wealth and notoriety have provoked a long overdue debate on South African prisons

'They poured water on, then electrified me...'

If Oscar Pistorius is sent to jail, his experience will not be that of other inmates
James Wharton: The former Guard now fighting discrimination against gay soldiers

The former Guard now fighting discrimination against gay soldiers

Life after the Army has brought new battles for the LGBT activist James Wharton
Ebola in the US: Panic over the virus threatens to infect President Obama's midterms

Panic over Ebola threatens to infect the midterms

Just one person has died, yet November's elections may be affected by what Republicans call 'Obama's Katrina', says Rupert Cornwell
Premier League coaches join the RSC to swap the tricks of their trades

Darling, you were fabulous! But offside...

Premier League coaches are joining the RSC to learn acting skills, and in turn they will teach its actors to play football. Nick Clark finds out why
How to dress with authority: Kirsty Wark and Camila Batmanghelidjh discuss the changing role of fashion in women's workwear

How to dress with authority

Kirsty Wark and Camila Batmanghelidjh discuss the changing role of fashion in women's workwear
New book on Joy Division's Ian Curtis sheds new light on the life of the late singer

New book on Ian Curtis sheds fresh light on the life of the late singer

'Joy Division were making art... Ian was for real' says author Jon Savage
Sean Harris: A rare interview with British acting's secret weapon

Sean Harris: A rare interview with British acting's secret weapon

The Bafta-winner talks Hollywood, being branded a psycho, and how Barbra Streisand is his true inspiration
Tim Minchin, interview: The musician, comedian and world's favourite ginger is on scorching form

Tim Minchin interview

For a no-holds-barred comedian who is scathing about woolly thinking and oppressive religiosity, he is surprisingly gentle in person
Boris Johnson's boozing won't win the puritan vote

Boris's boozing won't win the puritan vote

Many of us Brits still disapprove of conspicuous consumption – it's the way we were raised, says DJ Taylor
Ash frontman Tim Wheeler reveals how he came to terms with his father's dementia

Tim Wheeler: Alzheimer's, memories and my dad

Wheeler's dad suffered from Alzheimer's for three years. When he died, there was only one way the Ash frontman knew how to respond: with a heartfelt solo album