TTAC could have saved Congress a ton of time and billions of dollars if the politicos had just read these pages over the last few years. We’ve diagnosed the patients, begged them to seek help, outlined some cures, and prayed that our worst fears would never be realized. And yet, here we are – in the midst of the biggest industrial meltdown of all times for the US auto industry. So again, we’ll just try to neatly summarize the actions that Congress needs to take now. It’s not pretty, probably isn’t politically correct, and will piss off a whole bunch of people. We’re hoping to influence you – our audience – to spread the word to ensure that Congress makes the right moves. After all, this is a democracy. The press – which includes TTAC – can make a difference in getting to the truth, and that’s what Congress needs to know today.
The U.S. needs its own, viable automobile industry. Ignore the fact that there are foreign companies assembling vehicles in the South (mostly). Assembly is just one link in the entire chain of automotive production. The first chain starts with design and engineering, and that comes from both the automaker and its supply chain. More than ever, that’s really a high-tech skill, with more software, “smart parts” and intellectual property than ever before.
That skill set needs to stay here with Americans, not outsourced to foreigners. There will be a new future in personal transportation. One that depends on new powertrains, energy sources and design. And the U.S. cannot afford to fall behind. It would be the same as watching foreign-made movies without our Hollywood.
Having said that, it’s not “Big Three” or bust. There shouldn’t be a mindset that says Congress needs to make an “all or none” decision. Each company needs to be measured on its own merits, in the same way that Bear Stearns was “rescued” while Lehman was fed to the wolves. And our analysis recommends a different “bail out” formula for each– not a “one-size-fits-all” solution.
For starters, if Cerberus Capital doesn’t care to provide Chrysler with the capital it needs, the automaker should just disappear. Cerberus is a private equity group with extremely deep pockets. When it purchased Chrysler from Daimler, owner Steven Feinberg claimed his company was in it for the long term. It was a blatant lie. But Mr. Feinberg should live or die by his word. If Cerberus wants to save the company, it should be on its own nickel, not ours. Chrysler has no business sidling-up to the public trough. None.
But worse, Chrysler’s resurrection plan contains nothing more than a bunch of promises, none of which can be realized. There are no “future” products of merit– just redesigns of a bunch of lousy vehicles in its already weak product portfolio. its new Phoenix engine family can’t make bad design and cheap interiors sell better. Why would anyone think that Chrysler’s immediate future is going to be any different that its immediate past? This company was gutted by Daimler and Cerberus, leaving it with no ability to engineer future products without alliances or partnerships. But again, it should be up to Cerberus to make the call, not the taxpayers.
GM gave Congress another “muddle through” plan, an attempt to preserve as much of the kingdom as possible. It’s ridiculous to believe that getting rid of HUMMER, Saab, and Saturn will allow its executive team to better focus on the remaining brands and products. GM never spent a shred of effort on Saturn or Saab for the past 15 years. And Pontiac as a “niche” brand? Talk about a distraction.
But the hubris of GM to even suggest that the Volt and hydrogen fuel cell technology will work at any time in the near future stretches the limits of credulity to breaking point. How dare they suggest that “Flex Fuel” vehicles will make a difference in sales, especially if the ethanol subsidies go away (as Prez-elect Obama has stated)? No one cared before, and they won’t in the future. Making more hybrid vehicles– 15 models by 2012-– when the current GM hybrids barely sell today, makes no sense. GM’s plan is a sham.
GM’s comeback depends entirely on its ability to preserve its market share AND recapitalize the balance sheet through a massive debt exchange. And the UAW has to make some key concessions too, especially on the VEBA and JOBS Bank. GM’s Congressional submission is a “bet on the come” that this will all happen. GM wants the so-called “Oversight Board” to do the dirty work of forcing the cram-downs. That’s not their job– but it puts the onus on the Government, not management, to make the hard decisions. If GM CEO Rick Wagoner and the Board of Directors had a set, they’d be telling these parties exactly what they need to do– or else.
Congress should tell GM to go away and come back with a real plan. A plan that outlines exactly what happens to HUMMER, Saab, and Saturn and when. It’s not enough to say “strategic review,” kill Pontiac and be done with it.
As for the financial side, GM should not come back to Congress unless and until it has signed agreements from its lenders and the UAW. Real, live contract terms. A pro forma balance sheet that independent business brains can analyze to see if it make sense. Only then Congress can and should determine whether GM is worthy of financial assistance.
The big pill: whether Congress can trust Rick Wagoner and the current BoD with public money. To which the obvious answer is no. GM needs new executive leadership; the current plan proves beyond a shadow of doubt that this is the case. As it stands now, GM’s leadership still doesn’t understand that the company needs a thorough overhaul. The plan presented doesn’t even get GM where the company should have been a few years ago. It’s more of the same: promises without guidelines, goalposts or accountability.
Unlike the other two Detroit companies, Ford has executed on its plan. While Ford has stabilized its market share, and we have seen its future in America when we look to Ford Europe, the $9b question remains: will U.S. consumers will buy into smaller Ford vehicles at higher price points?
Congress should extend a lifeline to Ford. The company has demonstrated executive leadership competency to make necessary reforms, a comprehensive product plan and achievable fuel efficiency gains with existing technologies. As we’ve said before, there are no guarantees that this plan will work. But that’s a business and timing risk, not a bunch of empty promises.
In summary, Chrysler needs to look to its owners for money. GM needs a real plan and Ford needs careful oversight and a firm time limit. But above all, Congress needs to realize the difference between intervention and enabling.
“Congress needs to make sure that consumers can get car loans – otherwise its just big hat, no cattle.”
No kidding. Car sales should have rebounded big-time once the summer’s fuel price-gouging settled down, but the crater just got deeper. You can’t sell cars to people with no credit.
Interesting. The banner ad above this piece is for the Hummer H3…..TTAC’s editorial integrity in flashing its independence from it’s advertisers is on full display. As is GM’s cluelessness in advertising on a site where few of the readers are likely to even consider a Hummer.
The irony is extremely rich….
Ken,
First my take on the points you’ve made: yep, yep, yep, yep, yep, etc., etc.
Now for my take on Congress adopting ANY of your points: nope. Congress is too lazy and too clueless to enact anything this meaningful. They will just dole out taxpayer money and start to work on their 2010 re-election campaigns.
Tex
Hilarious and appropriate post image.
Agreed on all accounts. Maybe this can be TTAC’s “Spread the Word” article.
They are paying attention. They are proposing American Leyland. Political engineering and design:
http://www.counterpunch.org/weissman12032008.html
In general, I agree, except for the last couple of sentences. I cannot for the life of me understand why we would want more indebtedness on the part of the public – isn’t that one of the reasons we got where we did? I’d suggest that the Big 3 focus on how they would be profitable with a reduced overall market (say, along the lines of this year’s total sales).
Sadly, however, I believe that the politics will play out such that we construct an American Leyland, with the interesting twist that some significant fraction of the money will be used to purchase or develop factories and markets overseas…
-S5
Ken,
I think you don’t understand OUR Congress. It exists solely to spend our tax money and the fact that GM management and BoD are complete and utter nincompoops shall not deter Congress from spending, wasting tax dollars. What is obvious to fifth grader (complete incompetence and greed of GM management) will take 5-6 years for illustrious congress to figure out. Then they will change management, and give it another 5-6 years. Unless members of Congressional committee will die of natural causes or will not be re-elected (my bet is on forces of nature).
Ford really does deserve a fair shot at success, even though they’ve abandoned Mazda, which may prove to be a really bad idea.
After all, Mazda has won itself a huge reputation for reliability and quality recently, unlike Volvo.
One American auto manufacturer about the size of Ford would probably balance world wide production capacity at least for the next few years.
Assembly is just one link in the entire chain of automotive production. The first chain starts with design and engineering
THIS^^^^is what the majority of people on the coasts as well as the ass-masters on Capitol Hill don’t seem to understand. Richard Shelby seems to think that the Hyundai plant in his home state of Alabama just builds cars out of thin air with no regard to the planning, R/D, and engineering needed to go into making that plant operable.
Have said for a while that Mullaly needs to show Ford is in a different league from the other two.
Perhaps the difference in his request (“we may not need this”) vs. the desperate panic from the others will do it.
Can congress see that they are not all one lump?
Hope so, but not gonna bet on it.
Bunter
GM, Ford and Chrysler are quickly moving design and engineering to South Korea and India. Saving them will not save those jobs. The transplants have started to open engineering sites in the US and have had design centers here for a while.
Without Chapter 11 the big-3 have no money to spend on design and engineering. They will get rid of all of those non-union employees, keeping only the debt, dealerships and UAW employees that they are legally bound to.
I don’t know that Ford reducing its stake in Mazda to 13.4% constitutes “abandonment”. Seemed like a fairly reasonable thing to do in the face of a cash shortfall. As far as design and engineering go, don’t several of the Asian automakers operate design studios and facilities in the US?
The first chain starts with design and engineering
Problem is, there’s almost no R&D left in America.
GM’s R&D centers are Germany and Korea, Chrysler got rid of almost any R&D and even Ford is looking more into Europe for their future developments.
But even beyond that, if you look at who builds the machines that go into American plants, then you won’t see many American companies that are capable of building those.
And the suppliers? Well, to be honest I don’t know the situation there. There are still three American companies among the top 10:
Delphi on 5, Johnson Controls on 7 and Lear on 9.
Of course size alone isn’t the best indicator and we all know that Delphi isn’t really healthy either. But I can’t say anything on Johnson Controls and Lear. Maybe someone else can fill us in on how much potential there is?
Excellent editorial Ken. I also read all three of the plans and agree with your assessment – Chrysler is just “gimme money” (what do you expect from Wall Street?”. GM doesn’t still get it (doesn’t anyone there read this site?). Ford knows it’s up that creek, but it does seem to have some sort of paddle, maybe held together with sticky tape, but they’re working it.
I think the plan from GM says a lot about their mentality – they truely believe “we’re too big to fail”. They highlighted the knock-on effect of them not getting the money. They basically said – forget Chapter 11, it won’t work for a car company, so if we go it’s straight to Chapter 7 and “a plague of all your houses”.
Ford at least looks like it’s fighting to survive. They see that the old model doesn’t work any more so they’ve bet the farm on getting through to when the new models get in. They are the American car company, at least as I understand America “if we go down, we go down fighting”. GM is more like one of those people who wear those special vests in places like Iraq “I’m gonna take you all out with me”. Crysler, perhaps best not to talk about.
My vote – they’ll get the money and that will jst buy ChryCo & GM a few more months and maybe by then Ford will be able to demonstrate the difference between having a plan and having a begging letter. Else it’ll be American Leyland.
American Leyland, is some ways, makes more sense than the bailout. GM’s market cap (that is, the cost to buy every share of stock) is currently about 3 billion dollars. Ford’s is about 6.8 billion. Chrysler is privately owned and therefore doesn’t have a market cap, although Daimler currently values the 20% they still own as completely worthless. Even if they are worth more than zero, they have to be worth less than GM-so let’s say two billion. So, for less than a third of the 34 billion dollar bailout, the government could buy 100% of the stock in all three companies. Or the government could let Ford survive on it’s own and buy the other two for five billion.
Of course, the bailout is, at least in theory, merely a loan. But the 34 billion dollar number is also a theory. It doesn’t count the 25 billion already approved, nor does it count any supplemental loans that will be needed six months from now. Plus, if the companies go out of business anyways, that loan never gets repaid, now does it?
GM’s market cap (that is, the cost to buy every share of stock) is currently about 3 billion dollars.
How about the UAW buying GM with their pension fund? Seriously.
GM’s plan needs to be much more drastic.
Be cost competitive with Toyota by 2012? Why not by next quarter?
GM is producing a lot of vehicles like the Chevy Cobalt and Trailblazer, that nobody wants to buy. So the government is going to give GM billions to keep piling up these lemons?
Makes no sense.
How about the following plan:
They need to stop producing vehicles that aren’t selling. You do that by idling the factories. Suppliers need to be idled as well. The government should pick up the tab and health benefits for the idled workers.
After that we can start talking about the future and how the government can help with R&D for new, better vehicles.
If Mulally brings Ford back from the edge and into firm profits, I want him to run for president of the U.S. in 8 years. Of course, he’ll be like 74 then.
findude wrote:
“GM’s market cap (that is, the cost to buy every share of stock) is currently about 3 billion dollars.
How about the UAW buying GM with their pension fund? Seriously.”
Yeah right. The UAW members know just how corrupt and lazy of an organization they’ve got, they wouldn’t WANT to work for a company run by themselves. It’d be like an alcoholic owning a bar.
The government should pick up the tab and health benefits for the idled workers.
So move the jobs bank from the UAW to the Fed? No dice. Do it for the auto industry and soon every industry with layoffs will be demanding the same treatment.
How about the UAW buying GM with their pension fund? Seriously.
Because buying the shares doesn’t put money in to GM’s coffers. GM already sold the shares and got the money. All this does is move money around outside of GM, sort of like how buying a used GM car doesn’t help GM.
What it can do is give the buyer the right to votes. They can then replace the BoD and install new management. But at this point a new BoD and management won’t have anything to work with.
Cash is the life blood of business. Bottom line, GM needs to find a way to stop the hemorrhaging AND find new cash. Or they die.
They have found the new cash…. taxpayers. But they have not found a way to stop the hemorrhaging. So they will die.
Wow… Ken, A learned treatment of the issues. Followed by a moderately intellectual disussion.
Who took my TTAC, and when can I have it back?
@tom: “GM’s R&D centers are Germany and Korea”
GM’s ONLY R&D center is in Warren MI. They have satellite operations in India, and are developing some in China.
GM does engineering work in the US, Canada, Germany, Sweden, Brazil, Mexico, Korea, India and China. The US is still by far the largest of those, and will be for some time if GMNA survives.
@Ken E.: “Making more hybrid vehicles– 15 models by 2012-– when the current GM hybrids barely sell today, makes no sense.”
The ONLY hybrid that “makes sense” is the Prius, It still commands over 50% of the hybrid market, even with the new players. Common wisdom says that the Prius was a triumph of technology, turns out it REALLY was a triumph of marketing, being right there with the product that was green, and more importantly showed the world that YOU were green, and without giant HYBRID tattooed all over your vehicle. The big 3 didn’t lose the technology battle, they were just a little behind and have now caught up. But the fact that they got spanked in the marketing battle…..THAT is embarassing.
Ken – in response to your opening sentence… the simple fact remains that your readers are rarely motivated enough to actually step out there and make an attempt to do something about the industry. If the “best and brightest” were actually passionate enough about cars to make some positive steps, then things within the Domestic auto industry may have gone differently.
Unfortunately (for the most part), you have a cluster of people who love to see their words float around on the Internet; but they are not motivated to take any action. Rather, they sit back and just “watch” because that’s much more novel and poses less risk. Which is a shame since it seems there is a large quantity of knowledge and motivation pent up in your audience. I think it’s disappointing the result of your efforts is just a bunch of “I told you so” statements. So the question remains, would you rather be right – or would you rather try to make a positive change?
Captain Tungsten :
December 3rd, 2008 at 9:17 pm
Common wisdom says that the Prius was a triumph of technology, turns out it REALLY was a triumph of marketing, being right there with the product that was green, and more importantly showed the world that YOU were green, and without giant HYBRID tattooed all over your vehicle. The big 3 didn’t lose the technology battle, they were just a little behind and have now caught up.
Oh really? So GM sells a midsized sedan, that seats five, that gets 48 MPG city, 45 highway? If they’ve caught up technology-wise, and the Prius is nothing special technology-wise, they must have such a product.
Oh wait, they don’t, because the Prius is, in fact, a technological showcase.
@holydonut:
I’m sure that many of use who don’t work in the auto industry would love to help. That’s why there is so much passion on this board discussing these issues. I for one have been hoping that someone, anyone really, at the D3 reads these threads and thinks, hey, this is a good idea that we need to try.
Reality is that in the case of GM and ChryCo, they are sick companies that will NEVER be profitable with their cost structure in current state. They lack the leadership and structure to become different companies. Shooting the messengers doesn’t solve their problems either.
double post
jkross22:
Well, from what I gather this site has been are around long enough to span times when all major OEMs and Tier 1 suppliers were hiring. Politics are more fickle – it seems much more time is required to enter positions of political influence… so I’m not sure what could have been accomplished in that arena since this site’s inception.
TTAC could have encouraged interested individuals who wanted to try to make a difference to actually get into the industry. Or, if the interest were to exist – there is enough intelligence on this site to act as an outside consultant.
We see many “thanks to you know who you are” people leaking news here. And I’m sure there are plenty more people already in the industry who visit the site passively. There could be an attempt to pass resumes along or to advertise external hiring positions.
The auto industry would have received a great benefit to having the progressive thinking that people could have brought to the table. If you had these types of people in the companies, then maybe some things could have turned out for the better.
Unfortunately, it seems that there is complacency in claiming to be a bunch of Cassandras. Rather than having contacts that they developed over time, you have a relentless claim that the auto industry and political arena never listens to the advice or to the message that their companies are in trouble.
I’m sure some believe that the automakers in Michigan were already so screwed in 2004 that it wasn’t worth anyone’s time to work at trying to fix it. So if that were the case, then it’s a bit silly to claim “… could have saved Congress a ton of time and billions of dollars if…” The Big 3 knew they had that outlet, and the Government has been more than happy to act as generous philanthropers with taxpayer money.
Interesting to note that an e-mail to my Senator yesterday gained a response by his staff asking for more information about fuel composition, Hybrid vehicle potential and the like.
I sent them a math model in ExCel that demonstrates that a 4800 pound vehicle should get 50+MPG as a Hybrid… My interest was in helping them to make an informed decision. The interest was in getting information that was NOT from a source with, ‘ a dog in the fight’.
It just, incidentally, demonstrates that the car companies should have even MORE pressure to develop competitive vehicles applied to them. The Senator already opposes any bailout, so this, I hope, will fuel his opposition.
The vacuum created by the car companies ‘collapse’ would be filled nearly overnight.
The true criminals in all of this is the Board of Directors that rubber stamp operations without the slightest clue or care of their decisions. This could be said of the Banking industry or any other group clamoring for a bailout.