SGMT 6000R

Ebube Anizor, Dibya Baruah Kai Chu, Huayi Niu

Purchase of Opel-Vauxhall and Transition into Car Manufacturing

Introduction In the summer of 2009 Magna International, Canadas largest auto parts supplier submitted a bid to purchase a 55% interest in General Motors (GM) European division Opel-Vauxhall (Opel). Magnas bid is backed by Russian bank Sberbank who would own 35% equity; 35% would remain with GM and 10% with Opel employees.i While analysts generally agree that the acquisition aligns with Magnas long term strategy to forward integrate and diversify its position in the auto industry; many have posited that purchasing Opel and ostensibly becoming a consumer-facing business, strays from Magnas competitive strengths and is not advisable. In the context of a global auto industry in peril and Magnas strengths our objective is to not only analyze the appropriateness of the Opel purchase; but Magnas general move into auto manufacturing and make recommendations where needed.
Magna Background

Magna was founded in 1956 by current chairman Frank Stronach as a one man tool and die shop. After receiving its first parts contract for sun visor brackets from GM in 1960, Magna spent most of its first 30 years in operation diversifying its parts business to drive growth. During the 1990s Magna focussed on geographical expansion (following its customers as they grew globally) and differentiation via technological innovation driven by committed R&D. This past decade has marked Magnas evolution into once sacred manufacturer grounds as they have grown to not only assemble powertrains but manufacture complete vehicles for the likes of Chrysler and BMW. With 240

manufacturing operations and 80+ product development, engineering and sales centres throughout the worldii Magna develops and manufactures automotive systems, assemblies, modules and components, and engineers and assemble complete vehicles, primarily for OEMs. Amongst it clientele are over 70 major automobile brands iii with the majority of its revenue derived from the Detroit Three.iv

Opel-Vauxhall Background and Strategy

GM acquired Germany based Opel in 1929 and it has grown to become the companys largest European brand. Vauxhall is Opels sister company based in the UK; they market the same line of vehicles, albeit with different branding and local adjustments. GMs financial instability forced it into bankruptcy and triggered the sale of a large equity stake in its European division. Magna is the favoured bidder from a list that includes Italian car maker Fiat. In 2008, Opel enjoyed a 49% sales growth in Eastern Europe making it a stand-out in an otherwise dismal year for GM.v
Magnas Plan and Strategy for Opel

Details of Magnas bid includes plans to minimize job loss and plant closures, use idle plants to build cars for other manufactures and eventually increase production in Opels current facilities. This plan has made Magnas bid the favoured of the German government in light of looming fall elections. Opel is particularly attractive for Magna given its strong performance in the emerging Russian market; which it anticipates it can grow four-fold over the next few years. Additionally, Magna is attracted to the possibility of using the Opel platform to produce small and mid-size cars for the emerging middle class consumer in the BRICvi markets and eco-friendly cars for North American consumers. External Analysis: Automotive Manufacturing and Parts Industry The auto manufacturing and parts industries while separate share an intimate relationship that is best described as parent-child in nature. Meaning, the health of new car sales directly affects the health of the parts industry. So while the current slump in the North American auto industry can be attributed to many factors such as the high levels of personal debt, high fuel prices, and growing environmental concerns it nonetheless underscores the shared fate of the two industries. The implications of these trends have lead to job losses and bankruptcy of blue chip North American companies. This could lead to a greater ownership share of foreign firms in domestic car and auto parts companies. These

industries face persistent competition, high barriers to entry, revenue volatility, and government intervention. Following the typical industry life cycle, the auto industry should be near the end of the mature stage of its economic life cycle. This encompasses a slowing down in the rate of mergers and acquisitions, high market saturation of the products, little product innovation, and a growth rate slower than that of the general economy.vii However, due to the global recession and failure of car firms the auto industry may yet see an increase in acquisition activity. Furthermore government demands are forcing innovation in the industry; primarily in energy efficiency. See Appendix A: Internal Analysis.
Auto Manufacturing
Degree of Rivalry

Rivalry in the global automotive industry is intense. Long term trends have signified that the automotive industry is no longer the playground of the Detroit Three. The fallout of the global recession has revealed the tenuous ground that these former giants have indeed been occupying. However, the financial crisis has only served to intensify competition as Japanese carmakers Honda, Toyota and Nissan, have gained noticeable ground in the North American market and automakers from the developing nations attempt to globalize themselves and carve out their share of the market.
Buyer Power

The automotive industry is comprised of powerful end consumers who are generally able to dictate their terms to the manufactures. Consumers wield the greatest power in this relationship due to the fairly standardized nature of vehicles and the low switching costs associated with selecting from among competing brands. While arguably this consumer power is mitigated by the high consumer to producer ratios;viii buyer power is quite strong as evidenced by years of margin-cutting measures offered to consumers including cashbacks, employee pricing, and 0% financing. For auto suppliers
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this is of concern as OEM have passed on the cost of these sales measures to the supply chain.
Supplier Power

Suppliers are extremely susceptible to the demands and requirements of the automobile manufacturer and hold relatively little power. Automotive suppliers are quite fragmented and many tier one and

two ixcompanies supply standardized parts to automakers. Because car manufacturers are relatively few in number (the five largest automotive companies in North America have majority market shares) many suppliers rely on one or two automakers to buy a majority of their products. If an automaker switched suppliers or became financially distressed it could be devastating to supplier viability.
Threat of Substitutes

The threat of substitutes is fairly mild. While a number of other forms of transportation can be a substituted for a car, none of them offer the fusion of convenience, independence, and value afforded by automobiles. Although the switching costs associated with using modes of transportation such as a bus, train, or subway are low monetarily they are incomparable in terms of personal convenience.x
Barriers to Entry

The barriers to enter the automotive industry in developed markets are substantially high. This is primarily because the capital required to meet the specialized manufacturing needs and establish capacity to achieve minimum efficient scale is prohibitive. The most efficient method for prospective entrants to enter new markets or the industry as a whole is via strategic partnerships, acquisitions, or mergers. Barriers to entry in developing markets while less daunting nonetheless include the need for local knowledge and expertise and support from governments in addition to capital investment

Auto Parts
Degree of Rivalry

Rivalry is intense amongst the few firms with the scale to compete on a global basis. The pool of competitors is also increasing as parts suppliers in lower cost jurisdictions throughout the globe enter the market to support their burgeoning auto manufacturing industry.
Threat of Substitutes

Some OEMs supply parts for their own vehicles, albeit this is for a small segment of the market. For instance Toyota and Honda all backward integrate for key components like fuel cell technology. xi Domestically, as recently 2005 Ford purchased struggling parts maker Visteon to ensure the supply of integral parts. xii
Barriers to Entry

Tier one suppliers (such as Magna) by definition occupy the higher end of the value chain and are directly suppliers to the OEM. These suppliers assemble complex components and in some cases engineer and manufacture complete vehicles; as such barriers to entry are higher than the related tier two and three suppliers who generally provide commodity parts. Similar to the auto industry these barriers are due to capital investment but also extend to high R&D and relationship building costs. Internal Analysis: Magna Strategy and Competitive Advantages
Corporate and Business Level Strategy

Magnas corporate strategy has long hinged on growing by acquisition and partnerships, diversification, global expansion, forward integration and innovation. This strategy has served to not only increase its value to its broad clientele, but also hedge against weakness in any market segment or region. Of note in this analysis are the distinct aspects that offer Magna a competitive advantage.
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Acquisitions and Alliances

Strategically, Magna focuses on key acquisitions and partnerships to expand its business and to increase its earnings.xiii Recognizing its heavy dependence on the North American market and the ailing Detroit Three; Magna lists of acquisitions since 2006 have seen it expand geographically into growing economies in Asia, Central America and Eastern Europe and expand customer-wise with acquisitions to supply Porsche, Hyundai and Kia. These acquisitions and ventures also mark a diversification of capabilities into new areas such as electronic vehicles and systems. Taken as a whole these moves bring complementary technologies, support geographic expansion and leverage existing assets.xiv The shift to emerging markets reduces labour costs to help Magna better compete globally.
Diversified Product Portfolio

Magna offers one of the broadest portfolios amongst its competitors; enabling it to pitch for nearly all components in a new vehicle and giving it access to a wide range of segments.xv This results in a high dollar-content per vehicle concentration which increases its power as a supplier. The broad portfolio also defensively shields Magna from fluctuations in demand for particular product categories and its wide capabilities serve as a means of countering low costs suppliers who are limited in product scope.
Research and Development

As an engrained tenet of Magnas corporate constitution a minimum of 7% of before tax profits must be assigned to R&D.xvi This policy cannot be changed without shareholder assent and thus marks the centrality of innovation to Magnas strategy; even if performance is weak in any particular year. Magnas heavy investments in electric and hybrid technologies are starting to produce dividends.
Corporate Structure

Magna is decidedly a decentralized organization. Each of its divisions is given particular profitability targets and tasked with meeting those objectives with little corporate involvement. This naturally creates a very entrepreneurial atmosphere throughout the company and is arguable a contributing
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factor to their financial success over the past couple decades.xvii This structure is difficult to casually duplicate by competitors or even be imposed by Magna itself depending on the nature of its own partnerships and acquisitions. As such it should be a key consideration in evaluating strategic options.
High Employee Productivity

One key indication of the effectiveness of the corporate structure is Magnas noticeably stronger revenue per employee when compared to its biggest competitors (see Appendix A: Value Chain). This success can be attributed to the incentives offered for strong performance. Strong productivity is especially beneficial in down times when staffing must be reduced but flexible production maintained.
Labour Relations

Magna represents a unique model of worker representation that draws a stark contrast between its small to medium-sized, mostly non-union, plants and the union-focussed models of worker representation that are fundamental to both its competitors and customers. Of note is Magnas no strike - no lockout agreement that it negotiated with the CAW. The arrangement is enviable amongst customers and competitors and is not likely duplicable. The ability to provide prospective clients with a guarantee that production will not be halted due to labour unrest is an obvious advantage. Strategic Options Taken in the context of the decline of the auto and parts industry and Magnas clear desire (i.e. Frank Stronachs) to forward integrate and become an auto manufacturer its gesture towards Opel is understandable. One could even laud Magnas bold move as a strategic measure to manage uncertainty in the industry. In looking at strategic options, this and other paths are analyzed with recommendations put forth that best suit both the economic environment and Magnas strengths.
Option 1: Continue Acquisition of Opel and Path towards Car Manufacturing

Magna can remain an auto parts supplier but continue with its acquisition of Opel and look to acquire complementary manufacturers with access to global markets. Magna can then diversify its business
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by building small and mid size vehicles for emerging markets and in-turn introduce a fleet of energy efficient vehicles to North American consumers. Additionally, with Opels underutilized assets Magna now owns a platform in which it can use to produce vehicles for other manufacturers.
Advantages

The acquisition gives Magna access to the growing Russian market and its fleet of fuel efficient cars can be repurposed to meet anticipated demand and growing regulations in North America.

As a manufacturer cost synergies are created as Magna essentially becomes its own supplier. Magna can offset declining revenue from the drop in new car sales. This diversification hedges against the inherent risks of operating in the subordinate parts sector of the auto industry.

Disadvantages

Becoming an auto manufacturer places Magna in competition with its clients. Given the intimate relationship that suppliers have with OEMs (i.e. knowledge sharing) there are obvious concerns. Magna will need to decide what business it operates in and consequently what customers it is willing to lose and compete against at least on a regional basis.

Magna lacks the experience and resources to both gauge the desires of the end consumer, design cars accordingly and market vehicles that meet the demand. This is an essential skill that many have argued has been missing in giants like the Detroit Three and is not trivial to acquire.

The nature of the Opel acquisition (e.g. 10% employee equity) and European jurisdiction creates barriers for Magna importing its entrepreneurial culture and favourable labour relations to Opel.

Option 2: Remain a Focussed Auto Parts Supplier

Magna can continue to strengthen its position as a diversified parts supplier offering high value chain capabilities such as powertain assembly and full vehicle manufacturing. This option entails

establishing co-development arrangements with OEMs (e.g. Ford deal to produce electrical vehicle for 2010) to release efficient vehicles that leverage Magnas R&D investments in green technology.
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Advantages

Magnas strong cash position allows it to stay focussed, withstand declining revenues and outlast or possibly acquire weakened tier one competitors and other complementary assets.

Magna can become more integral to the long term health of the Detroit Three and strengthen its position as supplier and partner to these and other OEMs should the industry recover.

The uncertainty of entering a shaky and highly competitive auto industry is avoided along with the long term risk of alienating parts of Magnas client base via competition.

Disadvantages

Remaining solely in the parts industry will not provide security against failing auto manufacturers should consumer demand remain low (particular in North America).

By not expanding into auto or other manufacturing industries Magna may remain a stagnant player in a industry that is becoming more competitive as rival companies in countries like India begin to gain strength via cost efficiencies and local expertise.

Option 3: Backwards Integrate Into Supply Chain

Magna can backwards integration into the supply chain by acquiring tier two suppliers (in North America or globally) that are strategic to its long term success in the powertrain, full assembly and alternative energy businesses. To offset the investment required for such a strategy Magna can work via co-opetition with other competitors. Such partnerships would obviously only occur if the acquired firms were not previously of any competitive advantage to Magna or any cooperative firms.
Advantages

In the current economic conditions there is a probability that some of Magnas own suppliers will become insolvent and disrupt the supply of parts critical to Magnas assemblies and components. Backwards integration can mitigate this risk and save Magna from costly

disruptions that can lead to delays, litigation and erosion of its reputation.
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Cost savings could occur via achieving scale economies and greater revenue can be extracted from the integration of new businesses that are at least mildly profitable.

Magnas increased size will mitigate OEM power and price pressures.

Disadvantages

Risky in a time when cash reserves are precious and required for strategy execution. Magna will have to divert its focus away from more lucrative activities further down supply chain that have been integral to its strategy over the past couple of decades.

Other Options

Other options such as applying Magnas capabilities to diversify into other manufacturing industries such as defence were considered. However given the specialized tooling investments required for tier one suppliers in particular and the length of payback, these options were not pursued in any depth. Some tier two suppliers have diversified; however the costs for retooling have not been prohibitive.xviii Recommendation and Implementation
Criteria

In evaluating the options before Magna the following criteria were used to recommend a course of action that balances current and future growth. The recommendations must mitigate lost revenue from drop in sales of new cars, allow for corporate culture to remain or be infused, not threaten or compete with current client base, and take advantage of Magnas global presence and emerging market trends.
Recommendation

The recommendation is that Magna remain a focussed auto supplier and backward integrates as outlined above in Option 2 and Option 3 respectively (see Appendix B: Option Comparisons). Magna is in the strongest financial position of its competitors and has the resources to withstand the industry shakedown. Its current course of high value technological innovation is paying
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off as exemplified with its partnership to release an electric vehicle with Ford over the next couple of years. This model can be extended to other manufacturers; growing Magnas power in the auto industry by enabling the survival of OEMs and not competing with them in an industry that is traditionally competitively intense and from a customer-facing perspective unfamiliar to Magna. The consequence of key suppliers failing not only disrupts Magnas production but potentially forces OEMs to backward integrate which would place Magna in the awkward position of being both a supplier and client to an OEM. Given the industry power dynamics this does not favour suppliers.
Implementation

While not comprehensive, some key elements in implementing the recommendations are provided.
Maintaining Supplier Focus

Magnas growing capabilities with electric and hybrid vehicles not only make them a viable partner for North American firms behind the curve in this area; but also for younger firms in emerging markets. While the current price premium on eco-friendly vehicles is cost prohibitive to consumers in these markets; the cost of these technologies will drop and firms like Tata in India, BAIC in China, or even the Korean manufacturers need the technology that Magna can provide.
Backwards Integration

Magna has noted that troubles in its own supplier base are an opportunity to pick up more business. Currently Magnas biggest supplier in Mexico and Wescast Industries, a large supplier of exhaust manifolds, are in financial trouble and may be good acquisition targets.1 The challenge will be in finding a competitor that shares a similar mindset during tough times. Lear, a top competitor, has recently filed for bankruptcy; so potential partners are limited. Nonetheless creative partnering; even with OEMs may be a viable option and one Magna has traditionally been comfortable with.

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Appendix A: Internal and External Analyses

Industry Analysis: Five Forces (Auto Manufacturing)

Industry Analysis: Five Forces (Auto Parts)

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Internal Analysis: Value Chain

Firm Infrastructure

HRM

Each division is like own business unit run independently Globally diversified via subsidiaries and partnerships Parts diversified via subsidiaries and partnerships Business diversification in parts and assembly

Frank Stronach.major personality and driving force No-strike arrangements with the union Mostly non-union plants Aim is to increase employee ownership High employee productivity Future: current R&D in hybrid/electric vehicles Strong revenue per employee is a sign of strong productivity and operational efficiency. In 2008 Magna is $318,816.4 vs. $169.631.3 (Lear) and $271,871.4 (Johnson)xix

Technological Development

Operations

SWOT Analysis

Strength Strong growth by acquisition Multiple product portfolio Efficient management and employee Opportunities Increasing demand for electric vehicles Growth potential in Emerging market Financial distress of Automakers like GM etc
Source: Data Monitor - Magna SWOT Analysis

Weakness Dependence on few customers Performance is poor Legal Proceedings Threat Weakening of global automotive industry Global recession Intense competition and pricing pressure

Appendix B: Option Comparisons The criteria are ranked from 1 through 3 across the three options. Not compete with clients was given double weighting because the risk in entering auto industry and failing while at the same time alienating current clients must be given due consideration. The highest ranking is the most desirable.
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Option 1: BecomeOption 2: Remain Car Manufacturer Auto Supplier only Mitigate Lost Revenue 3 1 (1) Support Corporate 1 3 Culture and Strengths(1) Not Compete with 2 4 Clients(2) Global Reach(1) 2 3 Total 8 11

Option 3: Backwards Integrate 2 2

6 1 11

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i ii

Magna International,. http://en.wikipedia.org/wiki/Magna_International About Magna, http://www.magna.com/magna/en/about/ Our Customers, http://www.magna.com/magna/en/about/customers/default.aspx Detroit Three = General Motors, Ford and Chrysler 2007 Sales Highlights, http://www.gm.com/europe/corporate/sales/european/opel-vauxhall/ BRIC = Brazil, Russia, India and China Expected Declines in the US Auto Industry. http://findarticles.com/p/articles/mi_m0ITW/is_5_91/ai_n31393042/ Donald, Bradley et. al. Automotive Industry Analysis,http://www.srl.gatech.edu/Members/bbradley/me6753.industryanalysis.teamA.pdf

iii iv v vi vii

viii ix x

Tier 1 = sells directly to OEM, Tier 2 supplies to Tier s 1uppliers Automotive Industry Analysis Gian et al. Fuel cells for cars - a competitive analysishttp://www.ivt.ethz.ch/vpl/publications/reports/ab239.pdf..

xiCarle, xii xiii xiv xv xvi xvii xviii xix

Automotive Industry Analysis Magna International: SWOT Analysis. Datamonitor. Magna International: SWOT Analysis. Magna International: SWOT Analysis. Magna Constitution. http://www.magna.com/magna/en/employee/foremployees/corporate/default.aspx Magna 2008 Annual Report. http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9NDY3fENoaWxkSUQ9LTF8VHlwZT0z&t=1 Detroit Auto Suppliers Look To Other Industries. http://www.npr.org/templates/story/story.php?storyId=103368045

Magna International: SWOT Analysis.