Will GM Pay Big to Close This Factory?

Opel headquarters in Rüsselsheim, Germany. Photo credit: General Motors Co.

It's a done deal. General Motors' money-losing German subsidiary Opel has approved the closure of one of its German factories - the first German auto factory to close since the end of World War II.

Opel said on Wednesday that its supervisory board, which includes four senior GM executives, had voted to approve GM's plan to close the factory in Bochum, which has been in operation for 50 years, at the end of 2014.

This is a big victory for GM's effort to turn around Opel, which has lost $18 billion since 1999.

But as rival Ford recently discovered with its own European factory closings, it's a victory that may come at a very steep cost.

Why closing a factory in Western Europe can be an expensive move
Ford, like GM, posted a huge loss in Europe last year. New-car sales in the region fell to a 17-year low in 2012, and nearly all of the automakers doing business in the region were hit hard.

Unlike GM, Ford had been making money in the region recently - so putting together a turnaround plan was a relatively straightforward exercise. Ford said it would close three factories, focus on retail sales over fleet sales to maximize margins, and bring a bunch of new products to the region to capture additional business.

But Ford found out the hard way that factory closings in Western Europe are rarely cheap, especially when powerful labor unions are involved. Ford disclosed last month that its plan to close a plant in Genk, Belgium, would cost it at least $750 million.

That's a huge sum to close a factory. What's it for? Severance payments.

Yes, the 4,000 auto workers at Genk are set to get severance payments that will average at least $187,500 each. That's a nice bonus to tide you over while you job hunt, isn't it?

To American eyes, at least, it's quite lavish. And if the union leaders at GM's Bochum plant have anything to say about it - and they will - GM's payouts are likely to be even more lavish.

Opel labor leader has threatened an all-out war
GM's Opel has four factories in Germany, and their workers are represented by a powerful union, IG Metall. After months of haggling, GM and the union came up with a compromise plan that involved waiting until the end of 2016 to close Bochum.

That plan was approved by workers at three of the four factories last month - but not by those at Bochum, who thought they could squeeze GM for a better deal. But GM was done playing around: The company immediately announced that negotiations were over and Bochum would close next year.

I said at the time that this could end up being an expensive closure for GM. Ranier Einenkel, chief of the Bochum factory's works council, has threatened a huge legal battle to hold up the closure and push for big severance payments, in hopes of making Bochum's closure "the most expensive plant closure of all times."

He has even threatened to destroy Opel's public image and thus drive the company into the ground.

Of course, some of that is labor leader bombast. But it's clear that Bochum's union local has the power to give GM a very expensive headache. Short of throwing its Opel subsidiary into bankruptcy - an option that has surely occurred to GM CEO Dan Akerson more than once, but that would come with headaches of its own - is there anything GM can do other than settle quickly and cough up a severance package that could approach a billion dollars?

It doesn't seem likely. Keep a close eye on this one.

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The article Will GM Pay Big to Close This Factory? originally appeared on Fool.com.

Motley Fool contributor John Rosevear owns shares of General Motors and Ford. Follow him on Twitter at @jrosevear. The Motley Fool owns shares of Ford. Motley Fool newsletter services recommend Ford and General Motors. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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