General Motors Corp."s European Opel unit, rescued by German state aid last month, may have to slash prices by 40 percent to sell enough cars and fulfill a pledge to save jobs in the country.
"The market will be a combination of struggling brands and cheap cars," if Opel gets restructured as planned, said Simon Empson, managing director of Broadspeed.com, a U.K. Web site that sells cars. He predicts the carmaker, which operates Opel in Europe and Vauxhall in the U.K., will have to discount models by "40 percent or more" to meet its sales targets.
Canadian auto-parts maker Magna International Inc. is leading the group negotiating to buy the GM unit. Because of the structure of the deal, the new owners may be more interested in boosting output than generating profit, said Tim Adam, a corporate finance professor at Humboldt University in Berlin. The company agreed to save German jobs in return for 1.5 billion euros ($2.1 billion) in short-term loans from the government.
Ford Motor Co. and PSA Peugeot Citroen may be drawn into a price war if a Magna-led Opel pushes discounts, stoking concern the European auto industry will struggle to recover from the worst recession since World War II because consumers will become hooked on markdowns.
"Everybody is looking to generate cash, and the quickest but not necessarily the most effective way is to discount," said Stefan Bratzel, director of the Center of Automotive Research at the University of Applied Sciences in Bergisch Gladbach, Germany. "Peugeot, Renault and Ford need to make sure they don"t fall by the wayside."
Production Curbed
European automakers probably will build 17.7 million cars this year, or 10.4 million fewer than their factories are capable of churning out, according to IHS Global Insight. GM"s European operations may use less than 62 percent of production capacity this year, according to estimates from the research firm.
Opel aims to sell 2 million cars a year once it can market vehicles worldwide, perhaps in about five years, according to Klaus Franz, Opel"s top labor leader. That would require the carmaker to boost capacity by more than 200,000 vehicles. The current factories can produce 1.76 million cars a year, according to Global Insight.
New Interests
GM, the Detroit automaker selling Opel while reorganizing in bankruptcy, employs half its European workforce in Germany, and Aurora, Ontario-based Magna has assured officials that all four factories in the country will remain open. The deal depends on a total of 4.5 billion euros in loans from European governments.
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