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U turn for GM on Opel

WASHINGTON, Nov 4 – The stunning reversal by General Motors on the sale of its European division reflects renewed confidence in the US auto giant\’s global strategy and the need for small-car technology, analysts said.

Tuesday\’s U-turn on the planned sale of Opel/Vauxhall stunned political leaders and others in Germany and the rest of Europe, but many analysts said it was the right move for GM if it wants to remain a leader in the global auto sector.

"Keeping Opel was the right thing for GM\’s global enterprise to do," said auto analyst Aaron Bragman at the consultancy IHS Global Insight.

"Opel is a critical piece of GM\’s global empire, providing as it has the platforms for a number of the company\’s global vehicles. Losing Opel, and a significant chunk of the European market, was a desperation strategy that GM apparently feels it is secure enough now not to need."

Other analysts noted that GM needs the European division not only for its large market but for its expertise in small-car technology that is important for the US market as well.

"Selling Opel never made sense to me, other than the fact that it was a cash drain for GM," said Edmunds.com chief executive Jeremy Anwyl.

"Europe is a major market; how can you be a global automaker without a significant presence there? A critical asset of Opel for GM is its small-car expertise. With the likelihood of increasing fuel prices, expertise in small cars has to be key for the car industry moving forward, and GM can\’t abandon the experience it has picked up in Europe."

GM, which was struggling with a bankruptcy reorganization backed by the US and Canadian governments, had initially agreed to sell a 55 percent stake in Opel/Vauxhall to a consortium headed by Canada-based auto parts maker Magna and its Russian banking partner Sberbank.

But now, the GM board "has decided to retain Opel and will initiate a restructuring of its European operations in earnest," a statement said.

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GM explained the abrupt U-turn by underscoring "an improving business environment for GM over the past few months, and the importance of Opel/Vauxhall to GM\’s global strategy."

Analysts expect the economic crisis to foster highly selective alliances to share technology for electric cars and the geographical reach of distribution networks.

US rival Chrysler made a similar choice when it agreed to a takeover by Italy\’s Fiat.

Stefan Bratzel, professor at the University of Applied Sciences in the town of Bergisch Gladbach in Germany, noted that GM needs a European division.

"To create a competitor in Europe, and in an important Russian market, made no sense for GM," he said.

Juergen Pieper, analyst for Metzler Bank, said GM\’s situation has shifted now that it has come out of bankruptcy with US government support, and sees a rebounding automobile marketplace.

"GM is acting more like a normal company and is starting to look towards the future," he said.

"Opel is technologically one of the better parts of the group, so the strategic importance of Opel is just enormous."

Terrence Guay, professor of international business at Penn State University, said GM still faces risks with the new decision.

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"GM has more experience in selling cars than Magna has, but they\’ve had some problems, obviously," he said.

"It\’s a gamble, but either way it was going to be a risk for GM. The calculation has changed slightly in the last six months."

One major question for GM is how to come up with the cash — an estimated three billion euros (4.4 billion dollars) — needed to restructure European operations, and which factories to shut down in the new plan.

Guay said he believes that "more of the layoffs will go back to Germany," since GM ended the deal backed by the German government that helped save jobs in that country.

"The least-efficient factories are based in Germany," he said.

Still, he said that GM "will need financing support from the European governments. The question is how helpful Germany will be."

Bergman said that the source of GM funds for restructuring "is still something of a mystery," because the money from the US government cannot be used for overseas operations.

"Some creative accounting may need to be done at GM if it is to reorganize its European operations," he added.

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