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

The Carnage That Is Called Detroit

Yesterday was the deadline for General Motors and Chrysler to submit their respective recovery plans to Congress in a bid to show that they are making good faith efforts to move forward, with each company beating the 5 p.m. deadline handily.

By last night news of what was in each report began to surface, but I chose to go online to watch a missed episode of The Closer instead. Ever since the networks positioned The Closer and “24″ against each other I’ve decided to watch 24 on Monday evenings while viewing The Closer at a later date. I’m not into American Idol and I certainly did not feel like watching the news!

So this morning I immediately began to rifle through my hard copy of The Wall Street Journal to find out what GM and Chrysler proposed, an easy task since it was headline news for the business newspaper. No shock there.

Not much of what the WSJ relayed was a surprise either because I was previously made aware that Hummer, Saab and Saturn weren’t likely to survive while Pontiac would be scaled back to just one or two models. Going forward, GM seems most interested in preserving its core brands which they have identified as Cadillac and Chevrolet as well as Buick and GMC.

Chrysler won’t be cutting additional brands, at least for right now, but their operation is still in flux pending approval of a possible strategic alliance with Fiat. Fiat has promised to supply Chrysler with several smaller cars in exchange for gaining a 35% stake in Chrysler LLC, an alliance of equally struggling automakers.

GM presented their case with several scenarios mentioned including the possible bankruptcy of the company. Not liquidation bankruptcy as in Chapter 7, rather restructuring bankruptcy as in Chapter 11 of the U.S. bankrutpcy code.

Still, the automaker said that it might need as much as $100 billion if they were to go through the traditional bankruptcy process or the government could “save” tens of billions of dollars by opting for a less drastic approach. Oh, by the way, GM needs an additional $16.6 billion to keep going for the next several months as well as a $7.7 billion loan from the Department of Energy to help develop fuel efficient cars.

Chrysler also mentioned bankruptcy while indicating that a $5 billion loan would keep the company solvent for a bit longer. Both companies are planning to shut down several more factories, trim production levels and lay off tens of thousands of workers. This is without considering bankruptcy, mind you. Expect thousands of dealers and tens of thousands of dealer employees to lose their jobs too.

While General Motors and Chrysler fight for their lives, America’s #2 automaker, Ford, is watching by the sidelines. It hasn’t asked for a government loan, though its request for a line of credit was turned down late last year. Ford has a bit more cash to play with as the automaker has hocked its plants and has been drawing down other lines of credit at its disposal. However, should the economy worsen over the next few months, expect Ford to press the issue and gain government funding.

Reading all of this has left me thinking of one word when it comes to the U.S. auto industry — carnage. There isn’t a pretty way to shrink their businesses nor can pain be kept to a minimum. Everyone smells blood but there aren’t predators coming in for the kill. Instead, the U.S. taxpayer in the form of the federal government is playing ambulance driver, hoping that they can rescue a pair of seriously injured automakers before their very lives have been lost.

I expected that 2009 was going to be a difficult year, but now I believe it will be downright ugly. Ugly for the employees who will lose their jobs. Ugly for the automakers who will lose the last vestiges of their independence and prestige. But extremely ugly for the American taxpayer who will be left paying the medical bills whether the patients recover or not.