Has The President Overreached With GM & Chrysler?

I stopped what I was doing yesterday to follow the president’s news conference regarding the auto industry, particularly as related to General Motors and Chrysler, the two companies who have been at the center of the woes surrounding domestic production. I figured I needed to hear straight from Barack Obama what he had to say about the two automakers particularly since their fates are tied to whatever the federal government dictates to them.

GM CEO Rick Wagoner Resigns

Although the president announced that GM President/CEO Rick Wagoner had resigned on Monday morning, I knew over the weekend that he was already out. Indeed, one of Obama’s representatives asked for and received his resignation on Friday and by Sunday I saw that Automotive News had already shared that information with its readers.

Quite a few people have expressed dismay that the federal government has intervened in such a way with a public company, particularly by ousting the boss. Under normal circumstances I would have been appalled, but these conditions are far from normal.

Last fall, when the chairmen of Chrysler, Ford and General Motors appeared before Congress asking for federal support, I saw what was on the horizon: any funds received by the automakers would come with strings attached. After all, the money they would be getting would be from taxpayers, which is you and me.

Ford Management Must Be Grateful

Just as 2008 was drawing to a close and with the Bush administration three weeks away from ceding the White House to Barack Obama, loans for GM and Chrysler were approved while Ford’s request for a line of credit was denied. That denial was the best thing to happen to the Blue Oval as Ford has managed to stand to the side as all of the attention (mostly negative) has been focused on GM and Chrysler.

I have to think that there are a group of executives in Dearborn who are immensely grateful that George W. Bush ignored Ford’s request as that move has allowed the company to move forward without government oversight. Ford’s condition isn’t as dire at its domestic competitors, although if the market stays down for several more months, that could all change. Meanwhile, Ford is basking in the limelight as being the only solvent major U.S. automaker.

GM, Chrysler Buy Some Time

February 17th was the deadline for GM and Chrysler to get their restructuring plans to DC who promised to make a decision by March 31st regarding their respective fates. At yesterday’s news conference we learned that both companies have gained a little extra time, but with additional strings (more like ropes) attached.

Chrysler is expected to pursue its alliance with Fiat and must come to terms within thirty days to accomplish that feat. In the interim, Chrysler will receive some funding to stay alive and if the other parameters are met, then additional funding will come forth.

General Motors is expected to continue to negotiate with the United Auto Workers (UAW) to gain additional concessions while pressuring bondholders to do the same. The president remarked that GM (and Chrysler) had fallen short in their restructuring efforts and would be given sixty days to complete the process. Likely, several brands will be shuttered including Saturn and Hummer, possibly Saab and Pontiac too.

Restructure or Face Bankruptcy

Should either company fail to restructure, they’ll be forced into bankruptcy by the federal government. The president indicated that neither company would languish in that state for years, instead they’ll most likely be required to make rapid changes in a bid to quickly emerge leaner and smaller than before.

The United Auto Workers probably had a lot of say in how Obama proceeded on Monday, given the president’s strong union support in Election 2008. The United Auto Workers has made quite a few concessions of late, including the closure of the widely-panned JOBS program which gave workers full pay and benefits in lieu of layoffs. However, wage levels for union workers are still above what Toyota, Nissan and Honda pay their domestic workforce, a disadvantage the Big Three have pointed to for many years.

Guaranteeing Car Warranties

Besides UAW and GM bondholder concessions, the federal government has agreed to back new car warranties for GM and Chrysler, but not Ford.  What this means is that if either Chrysler or GM does go through bankruptcy, then the federal government will pay for repairs on these vehicles. That move is meant to instill confidence in the two companies, encouraging hesitant consumers to make a purchase.

I believe we’ve only seen a portion of what is coming forth for GM and Chrysler, with the next 30-60 day period telling us much. A case could be made that the federal government shares some of the blame for the auto industry’s woes especially given the safety, fuel economy and pollution mandates that have saddled each company for decades.

Restructure Chrysler and GM or Die

But, restructuring could be the best thing for both companies as without it, neither could possibly survive. I am not thrilled that GM could end up becoming Government Motors when all is said and done, given the tens of billions of taxpayer dollars pouring into the company. How far the Obama administration goes in dictating what products GM will build is not known right now, but I would hate to see that responsibility shift from the automaker to DC.

I have never been confident that Chrysler could continue to survive an an independent entity even when Cerberus Capital Management L.P. acquired an 80.1% share in the automaker in 2007 (Daimler AG holds the remaining 19.9%).  Thus, its alliance with Fiat is its only hope of survival, giving the company the opportunity to bolster its fleet with small cars while ceding 35% of it to the Italian automaker.

When all is said and done, the automotive landscape will likely be radically changed. If Ford can hang on, there is a good chance they’ll pass GM as the largest domestic producer of automobiles, with Toyota right behind them. The UAW will lose some of its bite, bondholders will see their investments shrink and as far as us beleaguered taxpayers go, we may or may not see a return on our investments.

Related Reading: Reluctantly, GM Chief Steps Down