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May 20, 2012 6:52 pm
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Automobiles: On course for collision
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By John Reed and Chris Bryant
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All eyes are on GM, which looks increasingly likely to resort to a plant closure in Europe
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GM image



General Motors is contemplating doing something no leading carmaker has dared do in Germany since the second world war: announce it is closing a plant.


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On Monday Karl-Friedrich Stracke, chief executive of Opel/Vauxhall, will brief 3,200 workers in the once-mighty northwestern industrial town of Bochum on plans to restructure the American company’s lossmaking European operation.
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    Mr Stracke will have cause to be nervous as he strolls on to the factory floor, where Opel – the group’s German-based European armmakes its Zafira compact people mover. It looks increasingly likely that GM will allocate the plant no new cars after 2014, and could close it sometime there­after.


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    If so GM’s American-led managers, tasked with sorting out Opel, would be breaking one of continental Europe’s biggest industrial taboos – and risking a worker or consumer backlash that could damage the brand.


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    At a similar meeting at Opel’s headquarters in Rüsselsheim near Frankfurt last week, Mr Stracke faced whistles and jeers. At a time when job cuts in the eurozone are politically toxic, German leaders and GM’s competitors – notably PSA Peugeot Citroën of France, with which it formed a strategic alliance in February, and Fiat of Italy, which may also need to shut plants – are closely watching its next move.
    Opel’s ability to chart a new future will be a test for its management, and more broadly offers potential lessons for the region’s industry as it faces chastening new realities amid the eurozone debt crisis.


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    Listen, there’s a new economic reality in Europe – we can’t deny it, we can’t hide from it, we can’t hope that it’s going to get better,” Steve Girsky, Opel’s supervisory board chairman, said in March. We’ve got to live with it, and that’s what we plan on doing.”


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    GM has said clearly that it can no longer bankroll Opel’s losses. Daniel Akerson, the former US Marine and private equity boss who serves as GM’s chief executive, this month described the European unit as a “work in progress” and vowed to restore profitability, whatever it takes.



    Few who know the car industry would dispute that GM Europe, which lost $747m last year, should act decisively to cut back its industrial footprint to match the continent’s decreasing car sales, of which it is claiming a diminished share. With six car plants in Germany, the UK, Spain and Poland, Opel sold fewer than 1m vehicles last year, compared with over 1.5m a decade earlier, in 2001.


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    Unlike Ford Motor of the US or Renault of France – which are also weathering a tough year but have big global franchises Opel’s business is confined almost entirely to western Europe’s oversupplied car market, tipped into crisis this year as consumer confidence has withered in the face of struggling economies. Executives at GM and its rivals do not expect sales in Europe to recover for several years.



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    In the US, analysts and shareholders say the time has passed for incremental measures at GM Europe, where the Americans have already undertaken two partial restructurings in the past decademost recently, cutting 8,300 jobs and closing a plant in Antwerp in 2009-10. At some point US taxpayers, who put more than $50bn into rescuing GM three years ago, will want to be repaid.


    .“The European situation is the number one factor weighing on investor sentiment for GM,” says Adam Jones a New York-based analyst at Morgan Stanley. He estimates that GM Europe puts a discount of $5 on the global carmaker’s share price. Shares in GM, which is 32 per cent US government owned, are trading well below their 2010 share price.





    But seen from Germany, by enacting an aggressive and decisive restructuring of Opel, GM’s managers are tampering with sacred corporate governance principles such co-determination, whereby workers have boardroom representation, and collective bargaining at what many locals still consider a “Germanbrand.



    GM has infuriated Opel’s works council – which represents employees at shop floor level – by not negotiating a deal centrally. “The strategy of Opel [management] seems to be to travel from factory to factory and put workers under pressure to make concessions so that at the end of the day they can secure as great a sacrifice of wages as possible and toughen employment conditions across Europe,” Wolfgang Schaefer-Klug, Opel’s head labour representative, said earlier this month.




    GM’s plant in Ellesmere Port, northwest England, was saved from the threat of closure when workers agreed to four years of wage restraint and increased flexibility on hours and vacation times. The plant will move to three-shift production from 2015, making the next-generation Astra, the small family car that is Opel’s best-seller, alongside the brand’s low-cost factory in Poland.





    The move to three shifts will only add to GM’s total overcapacity – among the highest of any European carmaker raising further questions over Bochum’s future.



    Rainer Einenkel, head of the works council in Bochum, has called forurgent clarity over GM’s plans, but Mr Stracke will not be showing the company’s full hand on Monday, people who know its plans say. The plant’s fate may be sealed only when GM finalises a new business plan for Europe, expected next month.



    While Mr Stracke is Opel’s Germanic public face, Mr Akerson has since late 2011 stocked the brand’s supervisory board with many of his most senior lieutenants from Detroit. Behind the scenes, they have been trying to fashion a future product plan, brand strategy and industrial blueprint for Opel durable enough to withstand a long European downturn.




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    Mr Girsky, GM vice-chairman, is himself a former car industry analyst who went on to advise the United Auto Workers union before GM’s bankruptcy filing in 2009 – after which he joined the company’s board. Speaking in March, he joked that the group’s history in Europe is “a bunch of Americans trying to sell German cars to French people, and wondering why it never works”.


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    Within GM, fixing Opel is seen as an important management test for both Mr Girsky and Mary Barra, GM’s product development head, who also sits on Opel’s board. Both are mentioned as likely candidates to succeed 63-year-old Mr Akerson as chief executive.






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    The stakes are high. Opel has already played a role in undoing one GM chief executive. Fritz Henderson presided over his company’s politically rancorous, bungled attempt to sell the European unit in 2009, a move that ended up entangling the German, US and UK governments, demoralising employees and even affecting consumer sentiment and depressing the brand’s sales.



    If anyone has the credentials to get it right this time, it is Mr Girsky. He played a critical role in GM’s much more dramatic and deeper restructuring and bankruptcy in the US. When the US government forced GM to restructure as a condition of financing GM’s bailout, the carmaker axed four brands and cut more than 30,000 jobs between 2008 and 2010.


    -He should ostensibly have an easier time in Europe. Opel has smaller financial losses and some promising forthcoming models in popular segments, including its Mokka small sport utility vehicle and Adam city car. Reviewers have compared their designs and features favourably with those of industry leaders such as European market leader Volkswagen.



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    German unions have urged GM’s Detroit brass to allow the brand to take on the competitionspread its wings and grow out of its troubles by exporting more overseas, and building Chevrolets at its plants. But Opel’s cars do not command the sticker prices or resale values of those made by, say, VW. Opel sells the industry’s cheapest German-made cars while paying German fixed costs.



    GM’s ability to set Opel right is further constrained by its promise to workers, made during its earlier restructuring, not to close any plants before 2014. However, GM has given no guarantees that Bochum has a future beyond that date. Within GM, executives have for months described the factory as likeliest of any at Opel to be closed.



    Doing so would carry risks, and not only from the threat of costly industrial action. Another is an exodus of customers: Opel’s brand was sullied during GM’s earlier restructuring. Since 2008, the marque has made news headlines in the context of trouble at its business, not its cars .



    Across western Europe, Opel has lost a point and a half of market share to rivals including VW and Hyundai/Kia since 2008. Market share now stands at about 6.5 per cent, down from 8 per cent four years ago – a considerable amount in Europe’s intensely competitive, segmented car market. “Opel hasn’t been helped by the broader issues around GM in the last few years,” says Jonathon Poskitt of LMC Automotive, a consultancy.



    GM’s deal to keep its UK plant open only makes Bochum look more precarious. Announcing plans for the Astra, Mr Stracke’s team also said that Opel’s mother plant in Rüsselsheim had a future. This heightened anxiety in Bochum, which labour leader Mr Einenkel speculated might lose the Zafira to Rüsselsheim, serving the plant a “death blow”.



    He also railed against the deal reached with UK workers, describing it as a “declaration of war against the German factory”. In cutting a deal in Ellesmere Port, GM could conceivably be laying the groundwork to pitch for similar sacrifices from workers at Bochum – and to hand the plant a reprieve if it receives them.


    .But with the UK plant now preparing to make Astras around the clock, GM’s overcapacity problem will only grow. What they are doing at Ellesmere Port only makes sense if they close another plant,” says Tim Urquhart of the IHS Automotive consultancy.




    GM is for now keeping its plans discreet. Amid last week’s booing and whistling, Mr Stracke announced a 10-point turnround plan for Opel, in which he spoke of opening new export markets, improving customer satisfaction, and strengthening the brand’s valuenone of which is a controversial prospect for unions.


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    But he also hinted that the axe was still hanging over the operation’s manufacturing base. “We must do our homework in Europe,” he said.

     

    Peugeot alliance: Carmakers avoid talk of closing plants in tie-up


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    As Opel’s board decides what cars to build at which plants later this decade, its parent General Motors is also grappling with another part of its strategy to fix its European business: the group’s three-month-old alliance with PSA Peugeot Citroën, writes John Reed.


    Experts from both sides have been working in teams to see how the two car makers – which face similarly straitened circumstances in Europe – can pool manufacturing and cut costs.


    The tie-up, which the two companies say could save them $1bn each a year by the middle of this decade, will probably see PSA plants making some GM models and Opel facilities turning out Peugeots and Citroëns.


    One logical division of labour – because of Opel’s proven expertise in making larger cars could see PSA farm out some of this work to Germany, and Opel develop more small cars in France, capitalising on PSA’s minicar expertise.


    PSA is, alongside Fiat, arguably the only European carmaker facing financial challenges as deep as Opel this year.


    Like Opel, it works in a country where car plant closures are almost taboo. Also like Opel, PSA is being secretive about its plans as it weighs the costs and benefits of closing what industry analysts expect would be at least two west European factories.


    While Opel’s managers are taking flak from unions and regional politicians where it has plants, PSA’s plans are under even more intense scrutiny after a French presidential election that swept François Hollande, a socialist, to power.


    Little wonder, then, that both companies are seeking to stress the merits of their partnership and restrict details of which cars will be made where – and subsequent speculation about how synergies could cost jobs.
     
     
    Responding to a report Opel might cut jobs in research and development, Karl-Friedrich Stracke, chief executive, last week reassured workers any development work GM gave to PSA in France would be made up for at its technical centre in Rüsselsheim.
     
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    Both PSA and GM have said they will pursue any rationalisation of their oversized manufacturing operations on their own, outside the framework of the alliance.
    But analysts say the industrial logic of a tie-up of two lossmaking European carmakers points inexorably toward cuts in manufacturing.
     
     
    . “The GM and PSA alliance only makes sense if they share production networks across Europe,” says Tim Urquhart, an analyst with IHS Global Insight. That would then make the closure of some PSA plants inevitable.
     
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    Copyright The Financial Times Limited 2012


    ABREAST OF THE MARKET
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    May 20, 2012, 5:12 p.m. ET
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    Walking a Treasury Tightrope
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    By BEN LEVISOHN and MATT PHILLIPS
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    Investors in U.S. Treasurys stand a good chance of losing money over time. And yet they can't seem to get enough of Uncle Sam's paper.


    Getty Images



    Many money managers aren't thinking about Treasurys' low yields or long-term performance. They are rushing in because Treasurys are a safe place to stash cash in the short term. Above, the U.S. Treasury building in Washington.

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    With the European crisis heating up and concerns about economic growth in the U.S. and China, money once again is pouring into safe U.S. government debt, sending Treasury prices higher and yields, which move in the opposite direction, to near-record lows.



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    The benchmark 10-year Treasury yielded 1.702% late Friday, not far from the 1.67% intraday level it hit back in September, the lowest tracked in Federal Reserve records dating back to 1962. The last time interest rates were near these levels was the early 1950s, when World War II-era interest-rate caps were in place.



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    Why so much buying? Treasurys "give safety, and I get a constant yield," said John Baumann, head of institution sales and client service at PineBridge Investments, a New York asset manager focused on institutional investors such as public and corporate pension funds, endowments and foundations, with $67 billion in assets under management. "That's the only reason I want Treasury bonds."

     

    The Big Round Trip: Yield on the 10-Year Treasury Note

    ABREAST


    Over the long term, however, Treasurys pose risks of their own.



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    The biggest risk, experts say, is a prolonged rise in interest rates, which would reduce prices of existing bonds and produce losses for investors holding Treasurys.



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    Many investors worry the three-decade-long decline in interest rates—and rise in bond prices—is nearing an end. The rally started in 1981, after then-Federal Reserve Chairman Paul Volcker ratcheted up interest rates to quell inflation. Back then the 10-year Treasury yield stood at almost 16%. It has been on a general downward path—with a few interruptionsever since.






    Tad Rivelle, chief investment officer for fixed income at Los Angeles-based TCW Group Inc., who oversees more than $30 billion in client assets, is skeptical the Treasury rally will last much longer. "If it is not over, it is far closer to the end than the beginning," he said.




    Treasurys pose another big risk: With yields this low, investors could well lose money over time in inflation-adjusted terms.


    The core consumer-price index, a measure of inflation, clocked in at a 2.3% annual rate in Aprilhigher than the 10-year Treasury's current yield of about 1.7%. If that relationship persists, inflation will eat away at the fixed returns on bonds over time, leaving investors with less purchasing power when they cash in the bonds in 10 years than they have now. At current yields and prices, the only way buy-and-hold investors will make money on Treasurys is if inflation drops.


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    But many money managers aren't thinking about Treasurys' low yields or long-term performance. They are rushing in because Treasurys are a safe place to stash cash in the short term.



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    "For someone concerned about exposure to capital losses, the yield on the 10-year Treasury is sort of a minor consideration," said Gregory Whiteley, portfolio manager of government securities at DoubleLine Capital, a Los Angeles, Calif., asset manager with about $34 billion in assets under management.




    Last year, Europe's debt woes, uneven U.S. economic growth and the Federal Reserve's "Operation Twist" bond-buying campaign, designed to keep long-term interest rates low, created an ideal environment for Treasurys. Including price gains and interest payments, long-term Treasurys generated a 29.9% return in 2011, according to Barclays Capital index data, topping the broader bond market and easily beating the Dow Jones Industrial Average's 8.3% total return.



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    Some of those same dynamics remain in effect. The Fed is still a significant buyer of long-term U.S. Treasury debt through Operation Twist, which is expected to run through June.



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    All told, through Wednesday, investors had plowed $12.1 billion into U.S. Treasury funds this year, according to fund-flow tracker EPFR Global, while pulling more than $10 billion from U.S. stock funds.




    With worries over Europe's debt crisis flaring anew, some investors have been buying Treasurys as a buffer. During the past month, the Dow industrials have shed about 6.4%, while long-term Treasurys have returned more than 5%, according to Barclays Index data.



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    Michael Brandes, global head of fixed-income strategy at Citi Private Bank, recommended in April that clients add Treasurys to their portfolios in the short term.


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    "Treasurys are not a compelling opportunity" compared with U.S. corporate bonds, Mr. Brandes said. "But during periods where there are more questions than answers, investors are more concerned with getting their money back."


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    But investors could be stung badly if the Europe crisis eases and the U.S. economy strengthens, sending interest rates higher. That's because, with yields this low, prices tend to swing wildly with relatively small changes in yieldsmeaning rates don't have to increase much to generate sizable bond-price declines.



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    For example, from the end of December, when the 10-year yield was at 1.88%, through the end of March, when it stood at 2.21%, investors in long-term Treasury bonds—with maturities of 10 years or morelost about 6%, according to Barclays Index data.


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    Trading such swings in investor sentiment can be profitable, said Mr. Rivelle of TCW, if the timing is right. While he owns fewer Treasurys as a percentage of assets than he ever has, he tried to take advantage of the market's constant back and forth between risk taking and risk aversion. "It is better to [engage in] active trading than curse the market's volatility," he said.


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    But for some investors, the risks of owning Treasurys are too great. Jason Graybill, a senior managing director at Carret Asset Management LLC in New York, who helps oversee $1.2 billion in bonds, currently runs a Treasury-free portfolio.



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    "We'd like to own Treasurys," he said. "But from a risk-reward perspective, the Treasury market doesn't hold much value."

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    Copyright 2012 Dow Jones & Company, Inc. All Rights Reserved

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    Mutually assured destruction in the eurozone
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    Jean Pisani-Ferry


    .May 22, 2012





    The relationship between Greece and the rest of the eurozone is increasingly reminiscent of the cold war’s balance of terror. We are of course speaking only of financial terror and Greece is not the Soviet Union, but the mechanics are strikingly similar.



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    Start with the options for Athens. It is important to distinguish between budgetary and external aspects. Greece is forecast to record a slight primary budget deficit in 2012, so should it default, forcing European partners to unplug assistance, it would have to tighten more, but only marginally.



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    However the current account deficit is still expected to be close to 8 per cent of gross domestic product. Without assistance and in the absence of significant private capital inflows, the European Central Bank would have to increase its exposure even further. Should it refuse, as likely, Greece would be forced into an exit and it would have to close its external deficit precipitously. What remains of the economy would fall into chaos.


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    Financial disruption would be massive, resulting in a chain of bankruptcies. Currency depreciation would substantially overshoot, making foreign goods unaffordable, especially as policy institutions have no credibility. Eventually, depreciation would help rebuild competitiveness, but in the meantime the damage would be severe.


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    A unilateral Greek default would undoubtedly be costly to its partners. Official exposure to Greece through assistance loans, ECB claims on the national central bank and ECB holdings of government bonds amount to more than €250bn. To this sum must be added private sector exposure through bank loans and equity, roughly another €100bn.



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    Additionally, a Greek exit would signal that there is nothing irrevocable with participation in the euro, turning the European currency into a sort of magnified fixed exchange-rates system; equally importantly, it would force to set rules for converting euro-denominated claims into the new currency, thereby indicating to every business or household what assets and liabilities would become in the case of a euro break-up. No doubt this would trigger massive precautionary moves and undermine the rest of the eurozone.



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    What this suggests is that a Greek threat to default within the euro is not be credible if the ECB is ready to stop extending liquidity. The next government could wish to renegotiate some aspects of the programme but it will still need it, until it completes the largest part of its adjustment.



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    The EU official lineno renegotiation of the programme, no exit at any price – is however not credible either. For if the price it puts on exit is infinite, the EU cannot deter Greece from making use of its leverage. To strengthen its hand, it has to be ready to contemplate a forced exit. But it can only do that if equipping itself to limit potential damages.


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    This means beefing-up firewalls and speeding-up preparations for banking union and the issuance of common bonds. Here, it is Berlin that lacks consistency. Signals that it is not ready to pay any price to keep Greece within the euro are only credible if accompanied by willingness to consider bold moves to preserve the common currency.



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    A lesson from the Cold War is that ultimately, rational behaviour proved to be the best insurance against disaster. Today also, both partners have a common interest in behaving in cool blood. They have to set red lines credibly and unambiguously, as well as to indicate where there is room for discussion. This can only happen after June 17, when a new coalition emerges from the election and forms a government in Athens. In the meantime, we are bound to live dangerously.