Manufacturing autos a 'big risk'

THE ASSOCIATED PRESS

An Opel logo is seen on a car outside the General Motors plant in Antwerp, Belgium, Thursday Sept. 10, 2009.

Madhavi Acharya-Tom Yew

BUSINESS REPORTER

There's no doubt that transforming Magna International Inc. into a full-fledged automaker is a dream come true for founder Frank Stronach.

But it's a dream that comes with big questions for Magna's shareholders, customers – and for the company itself.

"There's a big leap between being a $20 billion parts supplier that can make anything for a vehicle and taking it to the next step," said Joe Phillippi, president of Auto Trends Consulting Inc. in Short Hills, N.J.

With its sprawling headquarters in Aurora, just north of Toronto, Magna is Canada's biggest auto-parts supplier. It is smaller than rivals Robert Bosch GmbH of Germany and U.S.-based Delphi Corp., but with Stronach at the helm, it has always aspired to more.

With nearly 80,000 employees in 25 countries, it designs, engineers and builds parts for models from Acura to Volvo, and every big car maker in between. Now, with the purchase of Adam Opel GmbH from General Motors Co., Magna has broken the industry mould.

"There's supposed to be this clear delineation between the automakers and the parts suppliers and Magna is the one company in the world that has walked that line," said Tom Murphy, executive editor of Ward's AutoWorld. "This (deal) smashes the wall between parts suppliers and automakers."

Magna's stock was flat yesterday, gaining just seven cents to $47.41 per share on the Toronto Stock Exchange.

"Until we get some financial details, it's not possible to really get an idea of what it's really going to mean for shareholders," said David Tyerman, analyst with Genuity Capital. Those details may not come until the deal closes at the end of November.

GM said Opel will be restricted from selling vehicles in the Canadian market until at least the fourth quarter of 2012 while GM completes its lengthy restructuring process. After that, GM's chief negotiator, John Smith, said it's up to the Canadian government whether it wants to allow the European brand into Canada.

"Recognizing that's Frank Stronach's home court, we said, `Look, if you can get the Canadian authorities to let you build and sell Opels in Canada, you can do so in the fourth quarter of 2012,'" Smith, said during a conference call yesterday.

Analysts say that when it comes to improving Opel's performance, Magna would be better off cutting costs than trying to boost sales in difficult markets such as Russia.

But Magna may find its hands tied. Opel already has an extensive supply base, much of it in Western Europe and in Eastern Europe, where components can be sourced for much less, Murphy said. "The German government did not just sign this deal so Magna could displace dozens of established component suppliers, which would mean thousands of lost jobs throughout the region."

One former senior Magna insider questioned whether the company is making a wise choice in view of the perceived dangers of operating in the Russian market and the potential financial losses. "This could be a real disaster," said the former official. "It's big risk."

Analysts also wonder what becoming an OEM, or original equipment maker, will mean to Magna's parts-making business.

Magna has managed to build adequate "firewalls" to keep one customer's technology and intellectual property away from others. Stronach has made it clear that he intends to do the same thing with Opel.

"We have to demonstrate to our customers that we are separate companies," he told the Star in an interview yesterday.

But in some European markets Opel competes directly with Volkswagen AG, one of its biggest customers. "If Opel were actually successful in the marketplace under Magna direction, Volkswagen may be reluctant to give Magna its auto-parts business," Tyerman said.

Ultimately, Magna's success with Opel will come down to product, Murphy said.

"Hopefully Magna can identify what it's going to take to excite buyers. That's the only thing that's going to save the company: vehicles that sell."

In the meantime, it's worth remembering who's leading the charge.

"I think a lot of people have probably gone broke second-guessing Frank Stronach," Murphy said. "He's shocked us all by succeeding in an industry where a lot of people thought he would fail."

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