Magna's Opel Stake Could Threaten Its Customers

Observers say the auto parts maker is setting itself up for a clash of titans if other automakers view the company’s new majority stake in GM’s Opel unit as a conflict of interest.

TORONTO (CP) -- Magna International Inc. will enter the automotive market in a new way by snagging a majority stake in General Motors' Opel unit in Germany, but observers say the company is setting itself up for a clash of titans if other automakers view the deal as a conflict of interest.

The company has traditionally focused on manufacturing auto parts, and built its business by forging relationships with carmakers around the world, including GM, Ford and Chrysler as well as Volkswagen and BMW.

This deal could be considered by some of them as purely predatory, and a threat to an already fragile industry.

"Carmakers usually don't like to buy things from their competitors," auto industry analyst Jim Gillette from CSM Worldwide consultants said in an interview Monday.

"Magna could run into some difficulty continuing to sell its automotive parts to other carmakers if they say, 'You're just going to take my designs, my plans, or my technology, and use it on your own brand.'"

Competitors might also sour on founder Frank Stronach's ambitions to build his own vehicle manufacturing capacity in Canada.

In a Monday interview, Stronach told the CBC that he wants to start manufacturing automobiles in North America, though he didn't offer a timeline for his plans.

"The agreement right now with GM prevents us from producing in the United States," he said, noting that he's hoping to have a discussion with GM to loosen that restriction.

"We are quite confident that we can work out something which makes economic sense."

Magna, headquartered north of Toronto, has manufacturing space in factories in Ontario and Atlantic Canada, as well as Syracuse, N.Y., where Canada's largest auto parts maker shut down operations to cope with declining demand from its Detroit Three customers.

The company, which employs 74,000 people in more than two dozen countries, announced plans to nab Opel on the weekend, and the German company was put under the care of a trustee Saturday.

Part of Opel's allure is its strong potential presence in Russia, which could soon become Europe's biggest car market.

Austrian-born Stronach has long championed Magna's move into Russia, where he sees an opportunity to decrease the company's dependence on the North American market.

The company has been bruised by stalling auto sales on this side of the Atlantic where the Detroit Three customers -- GM, Ford and Chrysler -- which are closing plants and drastically slashing their output.

As as response, Magna has been looking to other customers like Volkswagen, BMW and Toyota and expanding its assembly division.

Gillette warned that diversifying to Russia doesn't guarantee success.

"I think this is an extremely risky factor," he said. "I consider the Russian market to be highly volatile and variable."

Two years ago, Stronach sold a stake in Magna to Russian billionaire Oleg Deripaska in hopes that the partners would develop cars for the Russian market.

Deripaska was forced to back out of the US$1.54 billion deal last fall, cashing his 20 million Magna shares, as the credit crunch tore through Russia's economy.

BMO Capital Markets analyst Peter Sklar expressed his concern with the transaction in a note to investors.

"Magna will be utilizing a fair amount of its capital, a highly valuable resource that may be required as it consolidates the weakened autoparts supply base," he wrote, noting that he believes the transaction will "generate considerable losses."

"Magna could overreach with the acquisition of Opel, struggle with it for many years, and ultimately be required to invest additional capital at future points in time."

However, Bill Pochiluk, president of industry adviser AutomotiveCompass, presented a more optimistic picture of Magna's investment, emphasizing the company's ability to drive successful operations

"They don't let problems fester for long. Magna is very action oriented," he said.

For "the winners going forward, differentiation is really going to be driven substantially by innovation and new technology, and this is where Magna excels."

Magna shares slipped 49 cents to close at $35.71 on the Toronto Stock Exchange.

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