General Motors Co could shift more vehicle production to its European factories in a cost-cutting deal with its German union that could avert a damaging standoff and keep Opel out of bankruptcy, people familiar with the discussions said.

A potential agreement under discussion would include GM transferring some Chevrolet production from South Korea to Opel in Europe, people close to the leadership of German union IG Metall said. In exchange, GM would get a free hand to push ahead with the cost-cutting it says it needs to save the brand.

Restoring Opel to profitability would remove a major drag on the U.S. automaker's operations and address one of the biggest uncertainties left untouched by the Obama administration's taxpayer-funded bailout in 2009.

GM wants to outline a clear strategy for Opel by the end of March, said one source familiar with the thinking of GM Chief Executive Dan Akerson.

The former private-equity executive and Navy veteran has pushed GM's management for faster results in Europe even as GM boasts strong profits in the world's two largest auto markets: China and the United States.

They really need to get it turned around and profitable and they haven't really been able to do that yet, IHS Automotive analyst Rebecca Lindland said.

The outline of a deal to save Opel has been taking shape over the past two months, but details of what concessions the union might offer remain unclear.

One possibility would be reopening the labor contract with IG Metall, now set to expire at the end of 2014, in exchange for the new production commitments. GM also could be freer to cut Opel labor costs outside Germany, at factories in Poland, Spain and England.

In December, Akerson floated the idea that more cost-cutting at Opel could be accompanied by shifting production from Asia to make European plants more efficient.

SHIFTING CRUZE

We're looking at how can we enhance revenue, how can we manage our costs better, what does our manufacturing footprint look like, can we shift more production into Europe, possibly from Asia. There are a lot of variables in the mix, Akerson said in a December 1 interview with Reuters.

GM declined to comment on the details of its talks with the German union.

We are not going to comment on speculation, but management, the works council and the supervisory board of Adam Opel AG are all in agreement that Opel has to become profitable, even in times of tough economic headwinds, GM spokesman Jay Cooney said.

We are jointly discussing our strategy and will keep our employees and the public informed .

In a statement, GM Korea said: Our operations are flexible and are running at a healthy capacity at the moment. There is nothing to say beyond that.

Moves to shift production could ignite protests from a militant labor union at GM Korea, which launched its first strike in three years last year.

Choi Jong-hak, a spokesman for GM Korea's labor union, warned the union would wage a war if GM shifts output to Europe.

He said GM had already been shifting some production from South Korea to emerging markets with cheaper labor, causing serious job insecurity.

Opel got its start in 1862 in a cowshed in the western German town of Ruesselsheim making sewing machines, and it started building cars in 1899.

GM purchased control of Opel three decades later and by 1972 it outranked Volkswagen AG as Germany's largest automaker.

But Opel suffered quality problems that damaged its brand image in the 1990s. A contentious restructuring negotiated with IG Metall in 2010 fell short of the savings needed to keep the unit profitable when the European market began sliding late last year.

The German union's strategy is to maximize the use of Opel plants, convince GM to export Opel cars to more markets outside Europe and avoid job cuts, said the sources, who added the sides agree on a majority of the issues.

One idea would be shifting production of the high-volume Chevy Cruze small car to Gliwice, Poland, and then swapping production from that Opel plant to others in Western Europe, according to the sources, who asked not to be identified discussing union strategy.

The result of a production shift would be to increase the capacity use at Opel plants and bring down the per-vehicle cost of manufacturing.

GM has said Chevy is its global mainstream brand and it has no intention of expanding Opel's distribution, but both sides agree there needs to be more sharing of vehicle platforms and parts to further drive down costs. For example, the Opel Astra and Insignia cars do not share enough parts.

Another part of the proposal under discussion would bring output of the seven-passenger Chevy Orlando crossover to the Bochum, Germany, plant, the sources said. Bochum has long been considered the Opel plant most likely to be closed.

GM exported about 250,000 vehicles to Europe from South Korea last year. Akerson in August said GM's what-should-we-do list included plans to build Chevy vehicles in Europe.

HIGH STAKES

The only way you can control currency risk over the long run is to have a strategy of local production, Lindland said. The best way to hedge is build where you sell.

Akerson's December comment to Reuters generated buzz among IG Metall officials, who set to work crafting a proposed resolution to a problem that has dogged GM since it exited bankruptcy, union officials said.

Harald Lieske, a works council chairman at Opel's German plant in Eisenach, said Akerson's suggestion generated a lot of excitement over here. When Akerson says something, it's for a reason and it's my experience that it happens.

The stakes are high for both sides.

GM will report its second consecutive full-year loss in Europe when it releases fourth-quarter results in February. The sustained losses at Opel, which employs about 40,000 people, have become a major concern for GM investors, and led GM in its 2010 annual report to warn that a failed restructuring of Opel could prompt a local bankruptcy filing.

Union officials, on the other hand, want to head off a hard-line restructuring of the kind GM's U.S. operations went through in 2009, when the automaker dropped four brands, cut 21,000 jobs and closed 14 American plants.

The relationship with GM's Detroit office has been acrimonious in the past as many Opel employees believe GM has held the German brand back.

Their frustration bubbled over in 2009, when they laid a coffin at the feet of a statue of the brand's founder Adam Opel to mark what they considered the death of Opel after the sale to a consortium led by supplier Magna International Inc was killed.

It's not a tenable situation. We can't lose money in perpetuity, Akerson told reporters at the Detroit auto show this week.

That desire for progress led GM in November to speed up Opel's turnaround by naming its vice chairman, Steve Girsky, chairman of Opel's board. He was joined on the board by two other senior GM executives.

The appointments came after Akerson was blindsided by the depth of losses at Opel and officials had said the turnaround was on track in Europe. Girsky on Tuesday reiterated that Opel is not for sale.

FIRST HALF CRITICAL

Opel's problems have led some analysts to suggest a bankruptcy filing in Europe covering just Opel or a reopening of IG Metall's labor deal could be options. The contract bars job cuts and plant closures.

But GM desperately needs to cut costs at Opel against the backdrop of a European debt crisis that has caused slumping demand, particularly in Southern Europe.

Akerson was one of two GM board members who voted to sell Opel in 2009, an option the automaker, then run by Ed Whitacre, rejected. GM's decision to keep Opel angered the government of German Chancellor Angela Merkel, which had thrown its weight behind a deal to transfer Opel to new owners as a way to protect jobs.

But Akerson may have a window to take on Opel now since Berlin is preoccupied with Europe's financial crisis and IG Metall has a new, more pragmatic leader, Wolfgang Schaefer-Klug, representing Opel workers. The previous union leader, Klaus Franz, had ruled out any job cuts or plant closures under the current labor deal.

I think GM will try to take advantage of the vacuum after the departure, an Opel board member who asked not to be identified said, referring to the leadership change at the Opel union. The next six months will tell.

GM has set aggressive targets for Opel. Opel Chief Executive Karl-Friedrich Stracke in December laid out his vision for a 1 billion-euro ($1.27 billion) profit by 2016 and a market share of 8.5 percent in Europe, emphasizing the needed cuts to improve profits.

We must focus our entire strength into lowering structural costs next year, he said in a company newsletter. We must abolish unnecessary processes and get rid of every form of bureaucracy. Stracke scrapped plans to attend the Detroit auto show this week.

On Tuesday at the show, Akerson said he was unsure how a bankruptcy would work for Opel.

In Europe, I don't think they have a Chapter 11 option. I know it's not the same set-up as here. That being said, we're working hard in Europe. We're going to try to scale our production with the market opportunity.

The usually loquacious Girsky was tight-lipped at the auto show, saying he could not discuss Opel. At an industry conference later on Tuesday, he joked that he asked Akerson if he could sit on another company's board and ended up being named chairman of Opel.

That's not exactly what I had in mind, Girsky said, eliciting laughter from the crowd of industry executives. Seriously, he then added. I'm excited to be part of the team there. It's a lot of work to do. I think the team is up to the task.

Girsky, who has close ties to GM's largest union, declined to comment on Wednesday on discussions in Germany. He began his career covering the auto industry as an analyst and worked as an adviser to the United Auto Workers union during GM's slide toward bankruptcy. He was named to GM's board by the UAW before taking an executive position.

GM shares closed 5.3 percent higher at $24.47 on Wednesday on the New York Stock Exchange.

(Additional reporting by Deepa Seetharaman in Detroit and Hyunjoo Jin in Seoul, Editing by Matthew Lewis, Jonathan Hopfner and Vinu Pilakkott)