MERKEL PAINTS HERSELF INTO A CORNER: WHY THE OPEL

C O N F I D E N T I A L SECTION 01 OF 03 BERLIN 001093 SIPDIS TREASURY FOR RON BLOOM AND JEFF BAKER E.O. 12958: DECL: 09/04/2019 TAGS: ECON EFIN ELAB ETRD GM SUBJECT: MERKEL PAINTS HERSELF INTO A CORNER: WHY THE OPEL NEGOTATIONS ARE STALLED Classified By: DCM Greg Delawie for reasons 1.4(b) and (d) ¶1. (C) SUMMARY. No one could have predicted that the Opel rescue would take this long. The parties in the Grand Coalition government, the CDU/CSU and SPD alike, all had a strong interest in resolving the matter and preserving jobs well before the national elections on September 27. Opel itself needed a quick remedy to its financial woes in order to survive. This sense of urgency helped push Chancellor Merkel to back a consortium led by Canadian auto parts manufacturer Magna and the Russian Sberbank earlier than probably necessary, complicating the task of reaching consensus with Opel parent General Motors. Unless Germany and GM can find a happy compromise, the Berlin government may have to consider delaying the decision until after the elections, a risky commercial and political maneuver. END SUMMARY. Upcoming Election Makes Jobs an Issue -------------- ¶2. As hard as it may seem to believe now, the German government was initially not eager to save Opel. The Finance Ministry certainly did not savor the thought of coming up with the estimated 5 billion Euros needed to restructure the company. Over-capacity in the auto sector led some auto analysts to conclude that Opel should be sacrificed to preserve the overall health of the German auto industry. As recently as February, Chancellor Merkel (Christian Democratic Union -- CDU) said Opel was not a "system-relevant" company, in contrast to failing financial institutions like Hypo Real Estate, Germany's equivalent of AIG. And Economic Minister zu Guttenberg -- speaking for many conservatives in his Christian Social Union (CSU) and the CDU, as well as the pro-business Free Democratic Party (FDP) -- made it clear that he opposed any industrial bail-outs whatsoever. ¶3. Nonetheless, the looming September 27 national elections made it almost inevitable that the government would step in if private bankers and investors did not. Even then, business analysts, including executives from GM-Europe and Opel, originally assumed that one or two German plants would be shut, along with several other facilities in Europe. Intense pressure first from Germany's unions, and then Roland Koch, the Minister President (CDU) of Hessen where Opel's Ruesselsheim headquarters is located, forced the government to change its position and seek a deal that would keep all four plants open in Germany, minimizing job losses while shifting more of the burden onto other European countries. Although Merkel backed down from her original position in the face of this pressure, she insisted that the government itself would not become a shareholder in, or run, Opel -- hence, the need for a private investor. The Germans did not seem to consider the possibility that other EU member states with Opel plants might object to such a solution, nor that it might be in violation of EU law. The Magna Magnet -------------- ¶4. From the start, the Magna-Sberbank offer, which includes the Russian auto manufacturer Gaz, contained many flaws, notably Russia's spotty record on intellectual property (IP) protection and rule of law. Still, Merkel and her advisers quickly concluded that Magna seemed to fit the bill better than the offers from Fiat and RHJ International (Ripplewood, a relative late-comer to the negotiations). A critical factor was the strong support that workers at the four Opel plants showed for Magna. At first, the plight of 25,000 blue-collar workers at one of Germany's oldest auto firms and just as many jobs at Opel suppliers seemed tailor-made for SPD Chancellor Candidate Frank-Walter Steinmeier (the Vice Chancellor and Foreign Minister). Yet Merkel, sensing which way the winds were blowing, quickly joined her rival in endorsing Magna, in part to defuse it as an election issue. Another factor pushing the government toward a rapid decision was the imminent bankruptcy of GM in early June. Lacking a Chapter 11-type bankruptcy law, Berlin had to find an investor before GM went under, or else Opel would instantly become insolvent under German law. ¶5. It was bad enough that political considerations had entered into what was supposed to be a straightforward business deal. Worse, the Chancellery did not seem to understand what it agreed to in the MOU it had signed with Magna and GM. They interpreted the MOU as a done deal committing all parties to Magna, whereas both GM and the independent German representatives serving in the Opel Trust set up to oversee completion of the deal saw it as only a BERLIN 00001093 002 OF 003 starting point in the negotiations. Further, neither Merkel's Chancellery team nor the Economic Ministry-led Opel task force set up to guide government policy anticipated what mischief Magna's Russian partners were capable of -- namely, the introduction of some 31 amendments to the MOU, including totally unacceptable demands on rights to many of GM's patents and the right to sell the consortium's 55 percent stake to a wholly Russian government-owned entity. By the time the Germans realized the gravity of the problem, GM had lost confidence in the Magna-Sberbank group -- not because of some lingering Cold War distrust of Moscow, as some German journalists have suggested, but because the deal could potentially gut GM's burgeoning auto business in Russia. ¶6. A secondary advantage of the Magna deal, in the German government,s view, was that it could help improve overall German-Russian relations. Germany already had massive investments in, and substantive exports to Russia, and regarded the growing Russian market as one of its most promising new markets. It also welcomed promised Russian investment in ailing German shipyards and the like. And clearly, Merkel wanted to warm up her relationship with Medvedev, seen as a liberal alternative to Putin. While important, these factors were not decisive: Magna got the nod primarily because it seemed most likely to preserve German jobs, which was of critical importance during an election year. ¶7. RHJ International, in contrast, never received serious consideration. Some insiders have told us that the firm did not do a good job selling itself to either the German government or the Opel workforce. Significantly, its initial plan did not promise to keep open all four German plants. Within Germany, politicians (especially in the four states where Opel has plants) also feared that RHJ International's lack of experience in the auto industry meant it would quickly sell the company back to GM or someone else once it made a quick buck, the workers be damned. GM, moreover, is widely albeit unfairly blamed for bleeding Opel to death, ripping off its superior technology while making fatal mistakes in the design and marketing of its German subsidiary's cars. And perhaps most decisively, foreign (especially American) equity firms -- often dismissed as unscrupulous "hedge funds" or even "locusts"-- have a dreadful reputation in Germany since the collapse of Lehman Brothers and the onset of the financial crisis. The Germans, in short, trusted RHJ International no more than GM trusted Magna. Who's Calling the Shots? -------------- ¶8. The German government also miscalculated regarding GM and its relationship with the USG. When negotiations commenced, GM was suffering a near-death experience and in no condition to bargain. At first, state politicians and the unions toyed with the idea of an independent Opel, set free from GM once and for all. Soberer minds eventually prevailed, but the Berlin government believed at that point that its offer to provide approximately 4.5 billion Euros in loan guarantees would be irresistible to GM -- and the U.S. government. Projecting their own way of doing business onto the Americans, the Germans thought the USG, with over $50 billion invested in GM, would naturally call the shots on Opel. So long as Washington did not openly object to Magna, Berlin concluded, it was a done deal, no matter what GM executives might think. ¶9. The mid-August decision by GM to postpone a decision on Opel thus shocked everyone in the German government. Merkel and Steinmeier in particular wanted to sign a deal well before the September 27 elections. For their part, Opel executives were desperately anxious to get the green light before the September 17 Frankfurt auto show, critical to marketing new Opel products to choosy German consumers. ¶10. since no one wants insolvency, the options boil down to Magna, RHJ International, and or GM going it alone. The German government continues to stand steadfastly behind Magna and insists that German state aid is open only to Magna. Neither of the other alternatives would be easy for Merkel to swallow. RHJ International has continuously improved its offer and would now require less government aid than Magna, but it would be difficult for Merkel to accept RHJ International without losing face -- and possibly giving an opening to Steinmeier, who is urgently in need of an issue to boost his terrible showing in the polls. If GM chose to take back Opel in its entirety, the German government could conceivably retract its offer to finance the deal, but a BERLIN 00001093 003 OF 003 GM-only solution would almost certainly require more plant closings and lay-offs, making it look as if Merkel were indifferent to the plight of Opel workers. Putting off a decision until later in the fall may be tempting, but could threaten Opel's very survival. Comment -------------- ¶11. So far, the Opel mess has not hurt Merkel's chances of returning as Chancellor, but she knows the CDU/CSU and its favored partner, the FDP, will need every vote they can get in order to form a new coalition government, and that accepting a deal with anyone but Magna before the election would likely damage the CDU/CSU's standing. Having taken a risky bet on Magna and gotten her fingers burned, Merkel will likely return to her cautious ways and seek any compromise that reduces her chances of taking blame for the Opel mess. Murphy