Magna International Inc. this week is seeking to assure its auto maker customers adequate “firewalls” will be in place to keep proprietary information far removed from fellow OEM Adam Opel GmbH, which Magna intends to partially own.
The industry’s most diversified auto parts supplier is slated to take a 55% stake in Opel to be shared with its Russian investment-partner OAO Sberbank, in a deal blessed by the German government as the best hope to save the auto maker, which has struggled under General Motors Co. ownership.
GM would retain 35% ownership, while Opel employees would hold the remaining 10%.
Protection of customer product data is critical if Magna wants to be the first company in the industry to be a full-time parts supplier while owning a significant share in a global auto maker. Magna has managed to successfully juggle dozens of multi-faceted customer relationships since 1998, when it became a contract vehicle assembler by acquiring a controlling stake in the Steyr Daimler Puch Fahrzeugtechnik AG & Co. KG plant in Graz, Austria.
The Opel transaction pushes Magna further into uncharted territory and obliterates the traditional boundary between OEM and supplier. But Magna Co-CEO Don Walker vows the wall that will separate his company from Opel will be permanent and uncompromised.
“There will have to be a clear firewall put up between everything we do at Magna and everything that happens in Opel,” Walker tells journalists on a conference call from company headquarters in Aurora, ON, Canada.
Walker says Magna this week is arranging meetings with customers to discuss the structure and answer their questions.
“They are asking, how do we maintain a firewall?” he says. “And I think we’ll demonstrate to them that shouldn’t be a concern. We will get specific feedback, and I expect there might be some emotions or personal views.”
But the feedback he’s gotten so far has been positive. “They understand it and will respect the fact we have successfully kept any concerns about confidentiality separated within the company,” he says.
At the Steyr operations in Austria, Walker says complete vehicle programs have proceeded with multiple customers simultaneously, without breach.
“We’ve never had a concern on technology leaking from one customer to the next, and this will be no different,” he says.
Also on the conference call, Executive Vice President Jim Tobin notes that BMW AG executives at the Frankfurt auto show this week credit Magna with successfully isolating the X3 cross/utility vehicle while in production at the Steyr plant, which also assembles the G-Class wagon for rival Mercedes-Benz.
“Opel will be a separate company altogether for Magna International,” Tobin says.
OEM customers may want answers, but in reality Magna has few to give until all the details are finalized and regulatory hurdles have been cleared. The deal isn’t expected to close until November.
Among the questions Magna executives could not answer on Monday’s conference call:
- Will the security firewall extend to the board level?
- How much more is Magna willing to invest in Opel?
- How and how soon will Magna make money with Opel when GM could not?
- Will Magna founder Frank Stronach sit on the new Opel board?
It’s also too early for Magna to discuss Opel’s product strategy, they say, although GM has said it will continue to collaborate closely with Opel and its British Vauxhall affiliate on new vehicles. The agreement keeps Opel and Vauxhall fully integrated in GM’s global product-development and purchasing organizations.
This week in Frankfurt, Opel unveils the 10th generation Astra 5-door hatchback, derived from the same styling language as the Insignia, as well as the Ampera extended-range electric vehicle, slated for production in 2011 and similar to the Chevrolet Volt.
Walker does say Magna management is studying Opel’s internal structure and will move some employees there fulltime. “But it is not our decision totally,” he says. “It’s up to the Opel board and the Opel management team.”
No employees will work simultaneously for both Opel and Magna, Walker says.
But the deal is not assured approval, as the European Commission is under pressure from the U.K. and Belgium to scrutinize the terms and ensure that potential job cuts are distributed fairly, without favoritism for German workers.
Britain and Belgium fear Opel plants in their countries are more likely to close or face significant downsizing because Berlin has promised E4.5 billion ($6.5 billion) in aid.
Speaking to journalists Monday in Frankfurt, Magna Co-CEO Siegfried Wolf says some 10,000 jobs could be eliminated at Opel, which currently employs about 50,000 workers.
But where those cuts will be made is yet to be determined, Walker says.
Decisions about the future of Opel facilities and products will be made by a management team that reports to a supervisory board. “We will be involved in that process,” Walker says.
Asked if Opel or Vauxhall plants could be converted to contract-assembly sites similar to Graz, Walker says he is not aware of any such discussions.
But Tobin does not rule it out. “Who would have thought three or four years ago that Volkswagen minivans would be rolling off the Chrysler assembly line in Windsor, Ontario, (Canada),” Tobin says and refers also to reports about Mercedes and BMW potentially collaborating in the U.S. “I think it’s unprecedented times in the industry, and who knows what the future will bring in any of the car companies out there.”
Tobin says the supplier entered discussions about Opel because GM has been Magna’s customer for 51 years, longer than any other OEM.
“When we initially got into it, we said, ‘We’ve got a customer in trouble,’ and the German government encouraged us,” he says. “Hopefully stability comes around, and the developed market of Western Europe will get back to where it was a couple years ago.”
Wolf also says Magna and its Russian partners plan to invest E170 million ($247.5 million) in Russian operations.
But Walker says the equity stake in Opel is not intended to gain access to the Russian market. The supplier began a relationship in 2007 that allowed OJSC Russian Machines to take an equity stake in Magna, but the arrangement has since been withdrawn.
Stronach still has a keen interest in Russia, as evidenced by the recent tie-up with Sberbank.
“I think it might be an opportunity for Opel that we could help out with,” Walker says of the Russian market.
The success of the Russian economy hinges on the market for raw materials, allowing investors such as Magna to find a silver lining when oil prices skyrocket.
“If commodity prices come back, if oil prices return, the Russian economy will turn around,” Walker says. “We think there will be tremendous opportunity for growth of vehicles there.”
Another compelling question is whether Magna intends to become a car company. Walker says it does not and that Magna remains focused on supplying innovative, lightweight components to auto makers.
“Nothing will change day-to-day within the company,” he says. “Auto makers are looking for strong suppliers with healthy balance sheets. Magna has a healthy balance sheet, with no net debt. And we won’t have any debt after this transaction.”
And if the Opel deal comes unglued? “Then Magna carries on what we’re doing today,” Walker says. “It wouldn’t have an impact on us.”
