Last week, Ford exceeded Wall Street’s expectations by reporting a profit. A profit! As in, the American automaker took in more money than they spent! Pundits unfamiliar with the fact that Ford carries around so much debt it makes Atlas' planetary burden seem like a small backpack, oblivious to the missing ten foot pole marks on Ford dealers' inventory, hailed the news as a sign that the only Way Fordward is up. You know you need to worry when the CEO himself feels obliged to warn stockholders and camp followers that billion dollar losses lie directly ahead. And indeed they do. 

In Q2, Ford reported a $750m profit– a full billion dollars better than last year's second quarter results. Globally, FoMoCo’s finances ended ahead by $750m. Locally, the automaker’s NorAm unit fell into a $279m hole. While it bested the previous year’s $317m negative number, the improvement reflects drastic domestic cost cutting and company sell offs, not increasing sales. 

In July, Focus and Mustang sales slipped into double digit declines. The transmogrified Taurus did little better than it did as a Five Hundred (down 22%). The hecho en Mexico sedans lost their estrella status (Fusion -31.3%, Milan -36.2% and MKZ -11.5%). The cross-border crossovers found almost 4k less “Dave” like drivers than the month previous. And the F-Series looks set to decline some 200k units by year’s end. Despite incentives and zero percent financing, Ford's U.S. sales are slumping across the board: down 19 percent.

Given that The Big 2.8 are now fighting each other for less than 50 percent of the U.S. market, anyone who thinks Ford is poised for a profitable comeback is certifiably delusional. They just don’t have the goods. This paucity of product is a problem both now and, more worryingly, for the foreseeable future.

According to Merrill Lynch’s annual “Car Wars” study, The Blue Oval Boys are destined to place dead last in projected product replacement rates. Merrill’s analysts reckon Ford’s “Showroom of the Future” will be the oldest lineup in the entire U.S. car biz from 2008 to 2011.

The industry average total lineup replacement refresh rate currently hovers around 67 percent. Dearborn’s developers displace a mere 57 percent of moribund metal. FoMoCo just isn’t spending the money needed to compete in today’s fast-changing, endlessly evolving automotive climate.

As the F-150 proves, Ford knows how to refresh their vehicles. As the upcoming Fairlane demonstrates, they also “get” new models. It’s just that “Ford does not have the financial or managerial resources to keep plowing time and money into all its brands.” 

This piece of wisdom arrives courtesy Jonathan Steinmetz. Morgan Stanley’s automotive analyst is part of the growing consensus that Ford wants needs to sell Jaguar and Land Rover by the time the kiddies head back to school, while Volvo should be under someone else’s supervision by Christmas break. 

A shortlist of bidders has already begun poking and prodding the (un)balance sheets of the British PAG contingent, while Volvo is under “strategic review.” Mulally will try to protect Ford’s mechanical umbilical cord to the Volvo, but these are desperate days. Bottom line: FoMoCo is looking to unload all three beneficiaries of its ill-advised, mismanaged expansionist ambitions for about $16b.

Ford needs the money. Much of the automaker's $37.4b bank balance is already allocated. The Glass House Gang are spending $1.5b per year just to service their astronomical debt. While cheaper than ever before, the Way Fordward turnaround plan will still chip away an estimated $15b to $16b before its fiscal finale. That leaves Ford with just over $20b to keep their motors runnin’. Unfortunately all that and then some may be needed to fund the UAW’s September settlement.

The mavens at Morgan Stanley figure Ford currently carries a $30.9b (and growing) retiree health care burden. One of the key points in the current collective bargaining talks: excise that encumbrance by placing it into a union controlled trust fund (a.k.a. VEBA). It’s a “solution” that won’t come cheap: a one-time $25b cash and stock hit ought to do it. Short term pain for long term gain, no doubt. But any such payout would make things tighter than a duck’s ass in Dearborn.

If and when all these deals drop, if and when seven dissolute brands become four more tightly focused divisions and a UAW health care settlement goes down, FoMoCo could be sitting on as little as $10b at the start of 2008. As GM board member Jerry York pointed out back when The General was scraping the bottom of its barrel, that’s hardly enough money to keep the lights on. Ford would be living a day-to-day, hand-to-mouth existence.

That’s assuming the company generates quarterly results close to the plus side of the general ledger. As Ford CEO Alan Mullaly warned when Q2’s numbers were released, that prospect is highly unlikely. 

Ford is now in the toughest quarter; facing rising commodity prices, a weak housing market, higher borrowing costs and unreliable pump price fluctuations. Refreshed F-150 or no, Ford’s aging lineup will be hard pressed to hang tough, never mind return Ford to its days of thunder. In fact, FoMoCo’s second quarter profits are merely a blip on the life monitor of a terminally ill patient.

The contract negotiations between the Detroit automakers and The United Autoworkers Union (UAW) continue apace. The employers are adamant: they need union concessions to survive. BIG concessions. Citing a $25/hour labor cost differential between their operations and those of the transplants, The Big 2.8 claim their salvation depends on taking food from union workers' table negotiating large pay and benefit cuts. But would such concession from the carmakers' "partners" actually bail them out of hot water? 

First, the majority of that disparity comes down to The Big 2.8's retiree overhang. Including workers' spouses, Chrysler pays health care and pensions to 78,435 non-active UAW beneficiaries. Ford pays out to 123,007 off-line union dependents. And GM signs checks to 338,902 non-working union members. Take those numbers out of the equation and the actual direct labor costs between domestic and transplant automakers are roughly comparable.

Second, when it comes to union concessions, what's the big deal? For the sake of argument, let's say the UAW negotiators lose their collective [bargaining] minds and agree to a $20/hour cut. GM has approximately 80K active UAW workers on its payroll. Cutting $20/hour from their union personnel costs will save them $1.6m/hour. Now, let's take that out to a year, based on a 40-hour work week (2,080 hrs/year). In theory, GM would save $3.3b/year. 

Let's also assume GM sets up a union-controlled VEBA for UAW retiree health care. That little item would run anywhere from $30b to $40b. While a UAW VEBA would only require a one-time payment of cash and stock, it would take The General at least ten years to recoup the cost from the resulting savings.

Ford? Same boat. FoMoCo's in hock up to and including their Blue Oval, facing a mountain of long-term debt. Any savings The Blue Oval Boys realize from cutting UAW salaries/benefits might cover their interest payments. Chrysler must fry the same fish.

Detroit must look for more fundamental solutions. The Big 2.8's existing union contracts and a woeful lack of flexible manufacturing capacity make it cheaper to keep a factory turning out cars (and let them pile up on storage lots) than it is to suspend production (and let supply decrease to match diminished demand). The results: excess inventory, fire sales,and continued brand degradation. Union negotiations need to focus on facilitating efficient operations, rather than simply cutting costs.

Meanwhile, the crucial adjustments must come from management. They can try to lay blame wherever they want, but the union didn't approve the lackluster designs that have been rolling out of Detroit for years. The union's not responsible for badge-engineered product planning. The union didn't fill the executive suites with yes men (and women) who will kiss whatever they have to kiss to keep their jobs. And the union had nothing to do with putting beancounters in charge instead of engineers.

Bottom line: labor costs have zero impact on what cars consumers decide to buy. You could argue that an extra grand here and there– taken out of direct costs and plowed back into new vehicles– would make The Big 2.8's vehicles more competitive. Given the failure of heavily discounted domestic product to strike back against the Toyotas of the world, you could make an equally compelling case that lowering the domestics' production costs wouldn't have any impact on the end result and, thus, U.S. consumers' choices.

While Mulally's Ford seems to "get it." GM under Wagoner singularly fails to recognize this simple fact. And Chrysler is now even more of a question mark. Lest we forget, the automakers have been digging themselves into this very deep hole for a very long time. Decades of hit-or-miss product planning, questionable quality, emphasis on quarterly profits instead of long-term results and obscene executive bonuses have all yielded a lineup that can't cut the mustard.

There's only one way to "save" Detroit. American automakers and their unions must set aside their adversarial relationship and find a way to build the world's best cars– price no object. That's right: they must stop focusing on margins and start focusing on market share. Making a small profit on a smaller and smaller slice of the U.S. market will do nothing more than prolong The Big 2.8's agonizing journey on the road to oblivion. They need to recapture the high ground, destroy the transplants' mindspace advantages, restore America's carmaking reputation and THEN think about profits. 

Is there enough time? Probably not. At this point, committing all remaining resources to building the world's best automobiles at any cost is a death or glory strategy that has more than a whiff of the grave to it. But thinking that Detroit's future depends largely on reducing labor costs is the worst kind of self-delusion: the kind without any chance of working. 

As president and CEO of the Alliance of Automobile Manufacturers, representing BMW, DaimlerChrysler, Ford, General Motors, Mazda, Mitsubishi, Porsche, Toyota and Volkswagen, I can speak firsthand about the radical transformation that has been taking place within this global industry. For starters, let me be especially clear on this particular item: automakers support increasing Corporate Average Fuel Economy (CAFE) standards. In fact, today’s auto industry is currently advocating for the largest CAFE increase in U.S. history.

The Alliance supports an unprecedented 30 percent to 40 percent CAFE increase over the next 15 years. We believe it’s time to end the debate. We urge Congress to act now, so we can continue with the hard work needed to further our efforts to improve fuel economy. To find the basis for an argument that the auto industry feels otherwise, one would have to dig pretty deep into the archives.

You’d have to go back further than July 3 of this year. That’s the date the Associated Press first reported that we supported the Hill-Terry Bill (H.R. 2927), which calls for that historic CAFE average increase to 32mpg to 35mpg. This aggressive, but responsible bill currently has more than 120 cosponsors just two weeks after its introduction.

You’d have to go back further than March – that’s when the CEOs of four of our member companies testified before a House Energy and Commerce Subcommittee and pledged to support tough laws to combat global warming. True to our word, we have openly and aggressively supported CAFE legislation that serves both the environment and consumers.

You’d have to go back further than the late 1990s, when we were hard at work designing and engineering the 60 models of Alternative Fuel Automobiles (AFAs) on sale today – a 500 percent increase over the number of models available in 2000. AFAs run on power other than petroleum, and just a few years ago many consumers didn’t know what hybrids, biodiesels and E85 vehicles were.  Today they’re buying them in record numbers.

In fact, to find the basis of Mr. Webber’s arguments [see; below], you would have to stretch all the way back to archives of the 1970s – when many of today’s auto industry leaders were still in college. The fact of the matter is that many of the people featured in those old black and white television clips and the now-yellowed newspaper clippings detailing the debates of the 1970s are no longer even in the auto manufacturing business.

Today’s auto industry is a new industry. Today’s automakers are committed to producing vehicles that use less fuel and meet our consumers’ diverse needs; whether our consumers run a small business and need a pick-up truck, have a large family and want, say, a minivan, or whether they want a small two-door coupe for themselves. Our job is to serve them all.

Transforming an entire industry and adapting to dramatic new CAFE standards takes planning. That’s why lead time is so important. Keep in mind that the cars and light trucks our engineers are working on today won’t be on sales floors until 2014 or later.

That’s how long it takes to coordinate the 3,000 different parts that go into a single vehicle. Or to enhance and refine the approximately 50 prototypes that lead to the production of just a single model.  It’s hard to anticipate consumer trends that far out.

But anticipating consumer trends is essential to CAFE because one of the program’s least-understood aspects is that it’s based on vehicles sold, not vehicles produced. And American consumers for five straight years have chosen light trucks over passenger cars.

To remain viable for our employees, communities and customers, auto companies have to make decisions years in advance based on cold, hard business facts. We cannot turn a blind eye to the laws of economy that apply to virtually every free-market industry in the world: customers rule. 

The cost of new technology cannot exceed what consumers are willing to pay. Sometimes cars that are designed well, built well, test well, marketed well and priced well, still – despite our best efforts – do not sell well.  And when that happens, it’s the auto manufacturers alone that have to absorb the losses and make tough decisions.

For now, the decision we as an industry have made is this: we are transforming automobiles and the fuels that power them. We want consumers, including Mr. Webber, to be are aware of is this. Our companies have evolved as much as our products have. This industry has suppliers in every single state, and our products draw upon technology developed around the world.

Mr. Webber’s column asks why opposition to higher fuel economy makes sense. On behalf of this industry, let me say that it doesn’t make sense. That’s why we’re not doing it. We support increased CAFE standards and stand ready to continue the hard work of getting the job done.  

[This article was written in response to a USA Today editorial "What are the Dinosaurs of Detroit thinking?" by Alan M. Webber. USA Today declined to run this rebuttal.]

TTAC has not been shy about its scepticism regarding the owner satisfaction and quality surveys produced by JD Power, and the commercial links to the industry that they monitor. We have also pointed out that Consumer Reports' "secret sauce" (i.e. their analytical formulae) have certain limitations. Until now, we've overlooked another source of auto manufacturers' braggin' rights: the Intellichoice awards. While you'll hear Intellichoice mentioned in the same breath as JD Power in more than a few automotive advertisements, Intellichoice's awards don't get nearly the same scrutiny. It's time to correct this oversight.

Intellichoice offers awards in five broad categories: Motorist Choice, Best Deals of the Month, Best Overall Value, Smartchoice (with six subcategories) and Best Certified Pre-Owned Programs. They subdivide each of these categories by vehicle type, e.g. car, crossover, near luxury and convertible. Many of these categories are subdivided even further. I counted no less than 240 permutations, and I could have missed a few.

If that wasn't confusing enough, cars jump from class to class depending on the award. The Toyota Yaris was named "Best Overall Value – Subcompact Class." But when it comes to the "Low Ownership Costs" award, the Yaris lives in the "Compact" category. The Chevrolet HHR is the "Small Wagon" winner for "Low Maintenance Costs" but "Compact Crossover SUV" winner in the "Motorist Choice Awards." For the same award, the Lexus IS is the "Aspirational Luxury Car" but it's in the "Near Luxury Class" as the "Best Overall Value of the Year."

Intellichoice also categorizes certain cars differently from everyone else. Did you know that the Nissan Altima is a "Premium Mid-Size Car" and the Porsche Boxster is a "Luxury Convertible"?  Apparently, the Honda Accord is a "Compact" ("Lowest Maintenance Cost") and the Lexus SC 430 is a "Premium Sports Car"– except when it's a "Luxury Convertible" ("Lowest Repair Costs").

Another mystery: why do certain vehicles receive awards when the exact same model with a different body style (i.e. coupe vs. sedan) doesn't make the grade?  Intellichoice names the aforementioned Toyota Yaris named "Best Value – Subcompact Class" is only the hatchback model; the four-door wasn't included. Several pickup truck awards were given to the crew cab and extended cab models while the standard cabs stood on the sidelines.

After looking at Intellichoice's wide selection of seemingly arbitrary accolades, you can't help but feel that the gongs fall into the same category as kindergarten sports awards. Both processes seem aimed at preserving the delicate self esteem of a bunch of five-year-olds. Last year, almost every company that sells a car or truck in the U.S. received at least one Intellichoice award. Even floundering Isuzu was awarded "Lowest Maintenance Cost" in the "Small Pickup" category. 

This "something for everyone" mindset extends to a few of this website's Ten Worst Automobiles Today (TWAT) winners. The dead van walking Chevy Uplander won "Best Overall Value" in the "Cargo Van" category. It's almost-as-bad corporate cousin, the Buick Rendezvous, won an Intellichoice award for "Lowest Maintenance Costs" in the "Midsize Crossover" class. And the TWAT-worthy Aveo5 won in the "Subcompact Class" of the same category. 

It's obvious that a lot of awards given out by various magazines and newspapers are influenced (if not totally driven) by the pursuit of the almighty advertising dollar.  But even though there are links to get free quotes on vehicles, and links to finance and insurance companies, Intellichoice's website doesn't offer any direct links to automakers' sites or car ads. There's no indication of any outside influences that would entice the organization to devise such convoluted awards and then hand them out like candy.

That is, until you realize Intellichoice.com is owned by Primedia, the same company that brings us Motor Trend and Automobile magazines. While each of these magazines has their own (dubious) annual awards for a variety of vehicles, neither of them approach Intellichoice in number or complexity of awards. But both of them enjoy plenty of lucrative automobile manufacturer advertising revenue. These same manufacturers also drop big bucks for advertisements in other Primedia's other magazines.

Running a web site as timely and data rich as Intellichoice is an expensive business. Not to belabor the point, but the money to run their site comes from Primedia, which gets the majority of its revenue from advertisements. You don't bite the hand that's feeding you. Intellichoice has to keep Primedia's advertising clients happy. And if that means coming up with a few hundred awards to give out (some on a monthly basis), then so be it. 

And there's the fundamental problem. Just as an award for "Most Improved Left-Handed Pattycake Player" only resonates with the recipient's mother, the awards handed out by Intellichoice mean nothing to anyone but the manufacturers. Considering the low profile of most of these awards, you have to wonder if they mean anything at all.

In the second financial quarter, General Motors made $891m. The General's camp followers have been delighted with the slim not to say two percent profit. Meanwhile, GM North America (GMNA) lost $39m. The General has been almost universally commended for their U.S. division's performance, as it compares with a $3.95b loss in ’06. Supposedly, the move “close to profitability” indicates the rot has stopped, as a prelude to recovery. But lessening losses is not the same as making money, especially when you need money.

Make no mistake: GMNA needs LOTS of money. It needs tens of billions of dollars to eliminate the mountain of debt and obligations incurred in the downsizing process. Union buyouts, plant closures, ongoing payments to former parts maker Delphi, the upcoming Wall Street-requisite United Auto Workers pay-off– by the CFO's own admission, GM's cash conflagration is set to continue.

GMNA ain’t making it. Literally and figuratively. At best, GM CEO Rick Wagoner’s $9b in operational cuts have brought the automaker's U.S. expenditures in line with its reduced income. That’s fine, if you assume that income will increase from here on out and expenditure won’t. Both of which are false assumptions.

Next financial quarter, GMNA will shell-out $4b in capital expenditures. Annual plant closures and scheduled production cutbacks will also take their toll on their bottom line. More critically, if the two-month sales drop (July down 19%) is any indication, The General will continue to shed market share in a contracting market. Do the math. GMNA is about to make less money selling fewer vehicles.

After this false dawn, what then? Rabid Rick has two choices. He can slice more capacity from the system, continuing GM's death spiral. Or he can cut prices to move the moribund metal, further eroding his employer’s profit margins. Which are already crumbling under direct assault from Toyota and the transplants.

On Saturday, GM announced zero percent financing for up to 60 months on crew cab and extended cab Silverado pickup trucks. The move wipes some $2500 – $3000 off GM's pickup truck margins, halving their per truck profits. This after reigning-in Silverado production by 10 percent. Will there be another 'round of profit purloining discounts? Seems so. 

Once again, still, GMNA’s future depends on selling a lot of something that makes a lot of money; something other than what they’re already trying to sell. Now that GM’s new pickup trucks have failed to generate the anticipated turnaround bucks, GMNA must pin its hopes on the new Pontiac G8, Cadillac CTS, Saturn Astra and Chevrolet Malibu.

The General is only planning on importing, at best, 30k to 50k Aussie-built G8s for beleaguered Pontiac/GMC/Buick dealers. Cadillac sold 24k lame duck CTS sedans this year (vs. 73k refreshed 3-Series). Even if Caddy's new, spizzarkle-prowed model doubles its current sales total, it won't be enough to keep GMNA afloat. The Saturn Astra arrives from Europe at a loss. Which leaves the hopes of a company resting squarely on the shoulders of the new Chevrolet Malibu.

So far this year, GM sold 60k Malibus (many discounted to fleets). In the same period, Toyota sold 212k Camrys and Honda flogged 180k Accords (hardly any of which sailed with the fleets). If GM thinks it’s going to slay the competition with the new Malibu– whose form and function are not a million miles away from the slow-selling Saturn Aura– it’s sorely mistaken. Even if the Malibu is significantly better than the Camry and Accord (also set for a refresh), conquest sales will be like pulling teeth. The demand for an Camcord alternative doesn’t exist.

All of which leaves GM where it is now: depending on sales abroad to generate enough cash for the corporate mothership to stay afloat. That said, while 58 percent of GM’s Q2 unit volume originated oversea, these sales only accounted for 38 percent of the company's total revenues. GMNA's recovery remains mission critical. Besides, what happens if GM’s foreign operations go sour? Amid all the jubilation over GM’s overseas success, there are signs of struggle and danger.

According to GM’s numbers, their Asia Pacific market share is decreasing in an expanding market. GM Brazil has hit a production capacity wall. Shanghai Automotive’s hook-up with countryman Nanjing Motors reaffirms suggestions that The People’s Republic of China wants the lion’s share of their domestic market for themselves. The currency situation is volatile. And last but not least, Toyota's lean, mean, lean production machine is beginning to turn its attention to these ripe pickings– which could turn moldy in an international economic downturn.

In short, GM’s overseas profits are not guaranteed; whereas ongoing and increasing U.S. losses are a sure bet. On balance, the automaker isn’t. Even if GM worldwide continues to deliver enough cash to subsidize GMNA, we’re heading towards the point where GM’s Board of Bystanders must contemplate declaring GMNA bankrupt to save the corporate mothership. 

There comes a time in many a life when an individual must prove to the world they are no longer the student, they have become the master. The transition usually arrives on the field of battle, whether it’s a real battlefield, competitive sports, academia, entertainment or business. In the case of Toyota, their moment of ascension arrived when their products outsold General Motors’ in the first quarter of 2007. Toyota bested The General by a score of 2,348,000 to 2,260,000. Toyota is the new numero uno. But it still has much to learn, if it is to avoid following its old, corpulent mentor's footsteps off the high tower of greatness.

Before Toyota became the heavy weight sumo champion of the world, their corporate samurai wanted to be just like Ford, and then GM. After all, the Americans in general, and General Motors in specific, were the automotive industry. The General dominated the world’s largest automotive market– to the point where the U.S. federal government tried to break up the behemoth by hiving-off Chevrolet. Its products were spread throughout the world, capturing customers in every corner of the globe.

Toyota came to America as representing (for many) a former military aggressor, the enemy. Starting with the Toyopet, they peddled funny little cars that were the subject of scorn, derision and dismissal. Undaunted, Toyota refined its products and process (which allowed for faster model changes). Toyota’s tighter panel gaps, better engines and conservative design helped it establish a beachhead. But it was reliability that set them apart and secured their success.

Enthusiasts may label Toyota’s products “soulless appliances,” but the automaker’s mass appeal lies in this anodyne dependability. While GM, Ford and Chrysler concentrated on style and power, Toyota focused its energies on quality and, thus, reliability. The focus catapulted them to the top.

Flash forward to 2006. Toyota was ranked fourth in JD Power and Associates’ Initial Quality Study (IQS), with only 106 problems per 100 vehicles. Lexus has historically been the number one brand according to JD and the gang. In 2007, just as Toyota sold more cars than everybody else, the company initial quality ranking dropped from fourth to seventh, behind such historically horrid brands as Jaguar and Lincoln. Lexus was knocked from its perch at the top of the IQS mountain by Porsche.

What of the newest addition to the ToMoCo household? Scion has never cracked the IQS top 10. In fact, in 2004, a year after the brand was introduced into the U.S., Scion was ranked thirty-fourth, one slot above Porsche. As stated, Porsche turned it around. So why hasn’t Toyota taken care of the newest addition to his family? 

Scion is a spooky echo of GM’s Saturn. Both brands birthed when their corporate motherships were flush with cash. Both brands were heralded as changing how consumers would buy vehicles, with fresh vehicle design, friendly dealers and no haggle pricing.

Saturn has lost is its way, but what about Scion?  For a few years, all seemed to be going well, much like Satrun's early days. Scion released cool, unconventional, entry-level vehicles that were highly customizable. Then came the first redesigns.

Gone are the cheeky, interesting shapes of the first-generation xA and xB. In their place: blander, fatter vehicles that seem tailored to an older generation. As TTAC’s Paul Niedermeyer reported, Toyota seems to have learned some not-so-good tricks from GM, managing to ignore and dilute a successful brand’s direction with lazy, “bigger is better” design. 

In Scion, ToMoCo also seems to have unlearned one of its better tricks: maintaining model names. Toyota has one of the most loyal consumer bases in the automotive industry (again, due to its rep for build quality). Keeping the same core model names has played a large part in generating and directing this brand loyalty, as most Toyotaphiles simply trade in their old Camrys or Corollas for completely new ones. 

Scion has dropped the xA moniker in favor of its all new replacement, the xD. Ignoring the fact that the American psyche is all about getting an "A" (when was the last time you were rewarded for bringing home a D?), Toyota has hampered consumer loyalty to the xA and Scion by dumping a decent model and its moniker for an inferior bloatmobile.

Toyota says its taken dramatic steps to sort out its quality issues. As it’s what they do best, we should see some movement soon. But the company is just beginning to learn that doing just one thing better than anyone else puts you in a vulnerable position. The competition can catch up. Unless they learn the lessons of their vanquished enemies, they will be condemned to repeat them. It looks as if that process is already in motion.

I've been wary of GM's alt propulsion press vehicles since ’04, when The General faked a hybrid test drive with Autoweek, slapping a cod cover on a pushrod powerplant. So I approached USA Today scribe James Healey’s review of the hybrid Tahoe with no small amount of skepticism. "GM says the electric-only mode could take you to 32 mph under ideal conditions. But the test showed that accelerating in traffic means electric-only lasts only up to about 10 mph." Oops. "Tahoe's gasoline engine shuddered as it fired up and began contributing power. Expect the shakes to be gone in regular production models, says Mark Cieslak, chief engineer for GM's full-size trucks." Doh! But wait! There's more!

"The transmission got hung up on full-throttle shifts, holding the engine at 5,500 rpm too long, followed by a falloff in power, before up-shifting. Also gone by production, Cieslak promises." And yet USA Today's headline proclaims "Tahoe Hybrid is a Real Treat" and "Chevy SUV is nicer than gas model." Yes, once again, GM's spinmeisters have convinced a too-credulous journo to devour a tray of puffed-up, half-baked goods.

It’s been a while since GM trotted-out this “look at the shiny object” PR strategy. In every case I can remember– from the new Tahoe’s debut to the United Auto Workers (UAW) “historic health care giveback”– distraction preceded disaster. As GM is set to reveal its second quarter financial results on Tuesday, and the automaker has just experienced a horrific June, and July ain’t gonna be much better, I can only conclude that no one at RenCen will be singing “Happy Days are Here Again” anytime soon. If ever.

Note the desperation that’s infecting GM. It’s not a sense of urgency, as Mary Ann Keller famously requested when eliminative products hit the fan back in ’05. It’s a sense of bewilderment and befuddlement, leading to irrational behavior. The on-again, off-again, on-again, off-again plan to launch a range large rear wheel-drive cars illustrates GM’s growing propensity for contradictory chaos. 

As does the decision to add hundreds of engineers to the Volt electric car project; a car whose very existence depends on battery technology that doesn’t yet exist, whose arrival has been promised for 2010 (at the last annual stockholders meeting, of course). Import a German compact for Saturn, even though it can’t make a dime? Sure! Stick a diesel into a Cadillac? Why not! Hybridize poorly packaged, gas-guzzling SUVs? Duh! Who’s gonna resurrect the electric car? We are!

Clearly, the vast commercial enterprise that is GM is doing everything it can to find a way out of its North American cash crisis. Clearly, that’s the problem. There is no master plan. There never has been. Instead creating and implementing an overarching vision of a new GM and working towards it, CEO Rick Wagoner has launched a relentless cost-cutting fatwa. Which is a bit like the captain of rudderless, sinking ship concentrating on jettisoning as much ballast as possible.

While Boeing’s ex-exec is busy reducing, refining and redefining Ford, Wagoner’s mob can’t get past the first part of that process– presuming they even want to. They seem to think that General Motors can get small at home, get big abroad, and act big everywhere, all at the same time. Hence GM’s semi-decision to concentrate on “world cars;” it appeals to the notion that they can solve their problems by continuing to rely on the sheer scope of their operations.

Once again, it must be said that Rick Wagoner has never set benchmarks for GM’s turnaround. There have been promises and plans aplenty, but no hard and fast publicly declared targets and deadlines. No map by which GM employees, suppliers, shareholders and stakeholders of every stripe could chart the company’s progress towards recovery– or lack thereof.

In other words, GM’s current management team has never been held accountable for its actions. This is, perhaps, the single largest failing of what was once the single largest automobile manufacturer in the world. That GM’s Board of Bystanders could keep Rick Wagoner in power through such an enormous slide in market share and profitability, that they let the company’s stock price determine Wagoner’s longevity, is a tragedy of epic proportions– that will ultimately be revealed.  

Meanwhile, on Tuesday, more bad news. General Motors Executive Director of Market and Industry Analysis Paul Ballew will take journos for a spin around the dance floor. He’ll talk about foreign expansion and tell the press not to pay any attention to the men behind the curtain. Men who will continue to run GM with self-deceiving incompetence, safe in the knowledge that that they can do so without personal consequence.

The press will treat GM’s failing management with no more disdain than Mr. Healey heaped upon the under-developed, incomplete Chevrolet Tahoe hybrid press vehicle. They’ll note Wagoner’s faults and once again describe his turnaround plan “a work in progress.” Only it isn’t.

Readers who’ve accompanied me on this long, strange trip– from my automotive awakening to this, the final installment of my Auto-Biography– may recall my earliest childhood memory: riding in a 1950’s VW Beetle in Austria. The bug was the automotive womb from which I sprang. I’ve carried the Volkswagen DNA ever since. Even as a freewheeling young adult, I was a loyal Volkswagonista. Eventually I strayed, looking for more space, speed, comfort and even prestige. But I’ve finally returned to my automotive happy place, reunited with my one true love. Read More >

On Tuesday, the junk bond market sneezed and General Motors caught a cold. Less poetically, the money men behind the buyout of GM’s Allison transmission unit postponed a junk bond offering designed to pay for same. According to market sources, when the “spread” (the extra yield investors demand to compensate for their risk) widened by about 100 basis points, Merrill Lynch, Citigroup and Lehman Brothers pulled the plug. GM spokeswoman Renee Rashid-Merem said the company wasn’t worried about the sale: “The buyout remains on track.” Maybe so, but GM can’t afford this kind of setback. Literally.

GM is now deep into contract negotiations with the United Auto Workers (UAW). By all accounts, The General’s generals need some kind of “game changing” deal with the UAW. In other words, GM must take CEO Rick Wagoner’s well-established “pay off to f-off” union template to the next level. If, for example, GM wants to dump their health care liabilities into a UAW-run VEBA, it will require tens of billions its U.S. operations are still not generating. 

It’s true: the chips are down. Without delving into the finer points of the fire raging through GM’s cash hoard, the automaker needs the $5.6b check from the Allison sale to finance its “turnaround.” Ipso facto. Whether or not The General’s advisors manage to off-load $3.1b in junk bonds to finance the Allison sale in a timely fashion, the fact that it’s happening at all tells us the company’s corporate masters are still mortgaging the farm to bet the farm on the farm. And the crops are still failing.

Confirmation came [again] on Monday, when we learned GM’s set to cut production of the vehicle Rick Wagoner hailed at launch as “the most important part of GM's strategy to turn our fortunes around.” GM’s Pontiac Production Center will soon be building 17 percent fewer Chevy Silverados.

More specifically, GM is reducing Pontiac’s pickup production by 3060 vehicles per month or 36,720 per year. If you [conservatively] figure GM clears $2k per truck, the move evaporates $73.4m in profit. And it still might not be enough; Silverado sales dipped 23.5 percent in June. Another month like that…

Is exactly what the financial whiz kids over at Barron’s are predicting. If so, by the time GM unveils its UAW window dressing in September, Wall Street’s confidence in the automaker’s prospects may be so low that another “historic union giveback” won’t make no never mind to the money men. The cost of GM’s borrowing, which is already onerous to the point of near-usury, will escalate even further, even faster. For a company already downing in a sea of debt, that’s not good.

What’s worse, GM’s faces a more general malaise in the leveraged loan and high-yield markets. Ironically enough (given GMAC’s role in the debacle), the sub-prime mortgage crisis has taken the sheen right off the sector. Cerberus is reportedly having problems financing its Chrysler takeover at the desired price. Despite Ford’s “surprise” results (attributable to asset sales and foreign ops), investor confidence in The Big 2.8 is fading. Same result: the cost of borrowing rises. 

Brad Rubin, senior auto sector trading specialist for BNP Paribas, recently stated that “Investors know both Ford Motor Co. and GM are going to have to tap the debt markets at some point, and unfortunately it's at much wider levels than what they've done before.”

GM already rolls over tens of billions of dollars in debt each year. As Slate’s Daniel Gross pointed out way back in ’05, if GM borrows $30b and the rate it pays for new debt rises 1 percent, the company has to stump-up $300m in additional interest costs. “And since interest has to be paid first, higher interest costs mean less money for important things like executive compensation, investment in new plants, marketing, and developing hybrid engines.”

Fast forward three years and you can add financing union givebacks to the list. And update GM’s debt rating to Fitch Ratings’ “negative," despite dodging the Delphi bullet (by paying off the unions, ‘natch). While the media talks about GM's union-related health care burden, pegging the cost at $1800 per car, if The General returns to the Wall Street well in a big way, its vehicles could soon be shouldering half as much again in interest payments.

GM’s debt is a ticking time bomb; the fuse is well and truly lit. In terms of ridding itself of the UXB, nothing much has changed: GM can only eliminate its gigantic debt burden by selling hundreds of thousands of high margin vehicles in the United States.

Yes, well, in response to fading market share and continued over-production, GM has just amped-up its financial incentives on languishing metal (including leftover 2006 models). Meanwhile, Toyota’s going great guns. Its new entry into the full-sized pickup truck market has triggered the predicted incentives war in GM's most profitable segment, in a declining market.

As a TTAC commentator recently pointed-out, GM is now like communist Russia, with Toyota as America spending them into oblivion. For those who believe that GM can emerge from this crisis– or Chapter 11– fitter, better and stronger, the parallel is instructive.

Last week, Chrysler announced they’d cancelled plans to build their super-sized 300, the Imperial sedan. Company Spinmeister David Elshoff cited new, more stringent EPA mileage and emissions regulations and added a moral spin: given the “current climate,” bringing the Imperial to production would have been "irresponsible." Regardless of the need to conform to political correctness and regulations yet to be enacted, the “poor man’s Phantom” had few friends in the punditry biz. (The word ugly featured prominently in their analysis.) And yet, deep-sixing the Imperial was a big mistake. 

To recap: aside from Jeep, Chrysler’s LX platform cars have been the automakers only functional success since the 300 debuted in ‘04. In the first half of 2007, the 300, Charger and Magnum sold a combined 145k units (including the endlessly scorned fleet sales). That's a pretty impressive accomplishment considering that the base cars are saddled with an overburdened 190hp 2.7-liter six cylinder engine connected to a four-speed slushbox. Or the not-entirely-unexpected fact that Chrysler has done nothing to build on the models’ success.

This neglect lies at the heart of Chrysler’s boom-and-bust problem. The cycle is simple: teetering on brink of disaster, Chrysler bets the farm on a new car. The finished product is a good idea, adequately executed with bang-up-to-the-minute looks and acceptable functionality. The press goes wild. Chrysler lets its Savior sit and rot while competitors catch up and move forward. The company once again peers into the precipice of penury and prepares for yet another four-wheeled Hail Mary.     

So here we are, with a three-year old Chrysler 300 and Co. Their interiors are still unacceptably bland and rubbery. The Insurance Institute for Highway Safety (IIHS) still describes their side impact rating with a curt “internal organ injuries likely.” More disconcerting (from a marketing standpoint, not your liver’s), Chrysler doesn’t have a clue where the 300 and its platform siblings go next.

Ask Porsche or Jaguar; evolution is a bitch. Move too far away from a model’s original design and you alienate your base. Stand pat and at some point everyone who wants one, has one. Either way, after the initial surge, conquest sales are a constant uphill struggle. When you’re talking about a car with an iconic design and a tightly gathered brand proposition— 911, MINI, Beetle, Mustang, 300, Charger, Magnum— the struggle is even harder.

The Imperial was a bold attempt to extricate Chrysler from this predicament. Although stretching the brand to include a $50k stretched 300 may seem a bit of a stretch, Chrysler was once an upscale brand. A reasonably priced Imperial would have been just the thing to move the company upward and forward. Much as BMW’s 7-Series casts warm fuzzies on the “lesser” 5-Series, the Imperial could have served as a step-up for 300 drivers.

If Chrysler had decided to put the Imperial’s hypothetical budget into developing their existing LX cars— new engines, interiors, gizmos, suspension components, etc.—you could make a good case for ditching the XXXL LX. If Chrysler were spending the development bucks on rescuing the lame and lamentable Sebring, you could also—

Actually, no. Chrysler doesn't have a prayer of going toe-to-toe with Toyota. Test drive a four-cylinder Sebring and a four-cylinder Camry back-to-back, witness the utter devastation and then you too can see why Bob Lee, Chrysler’s head of powertrain development, called the Sebring an “embarrassing miss.” Besides, why reinvent the wheel? The LX cars were a hit. Stylish, big rear-wheel-drive cars differentiate Chrysler from Toyondissan. Connect the dots.  

And if EPA regulations are becoming more restrictive, pulling the plug on the Imperial is not the answer. (In fact, it’s a particular craven solution.) How about lightening the load and/or fitting it with more fuel efficient engines, including Chrysler’s well-regarded three liter Euro-diesel. And anyway, given the volume of Chrysler 300s and Dodge Chargers, fuel economy need not be a selling point.

Let’s get real: people buying cars equipped with Hemi engines clearly aren’t gas pump sensitive souls. So what if these are not volume-leader automobiles? If the LX triplets were better products, higher margins could offset their lower sales numbers.

By killing the Imperial, Chrysler is yet again demonstrating a void where its automotive acumen should be. Stylish, big, powerful and distinctive ought to be the buzzwords on their dry-erase board. If you must, cross off “big.” But the other attributes should be treated like pre-safari inoculations.

When Chrysler sticks to this approach– the Charger, 300C, Magnum, Jeep Wrangler– it sees green. When it deviates– the Sebring, Avenger, Aspen, Compass– salesmen have to feed their kids toothpaste sandwiches. With the Imperial, Chrysler had a shot at selling a vehicle in the winning category. As far as stockholders and stakeholders are concerned, not building the Imperial was irresponsible. What was Chrysler thinking when they cancelled it? They weren’t.    

The love of all things Jeep ranks high in the automotive pantheon of passion. Porschephiles, ‘Vettistas, Hemiheads, Scuderia– they ain’t got nothin’ on Jeepaholia (Hi, my name is Brad and I love Jeeps.) Jeep devotees are a hardy breed, born to be wild. Other than domestic and commuter runs, they ALWAYS take the road untraveled; sneering at mud, chuckling at chuckholes, belly laughing at boulders. Hummers, Land Cruisers, 4Runners and other four wheel-drive pretenders to the throne are equally capable in certain situations, but they lack Jeep’s visceral appeal. So what is it about the brand that keeps the faithful faithful?

It’s in the genes. When Willys and Ford produced the first Jeeps for the military in WWII, the go-anywhere, do-anything vehicles earned millions of soldiers’ unlimited respect. Some 600k Jeeps proved their worth in the harshest possible environments, from Malaysia’s steamiest jungles to Norway's frozen wastes.  When American G.I.s returned stateside, more than a few had developed a taste for those tough little trucks with the Go-Devil engines. An iconic brand was born.

Jeep purists will tell you that the only “real” Jeep is a CJ. Don’t believe them. Today’s Wrangler is every bit as trail-capable as the CJs of yore, and it sits at the brand’s heart. By the same token, pay no heed to those who suggest that anything other a Wrangler is not a “real” Jeep. While Jeep DNA says outdoors like an Armani suit says espresso bar, Jeeps have not always been trail-ready. In its storied past, Jeep has made pickups, sedans, proto-SUVs and station wagons. Ever since hostilities ceased, the company has stretched the brand’s original remit like Turkish taffy.  

In that not-so-great tradition, Jeep’s current brain trust have recently moved the brand away from its mud-spattered proletarian roots. Given that the public thinks Jeep = Off Road, it’s amazing that Jeep’s Detroit masters have felt so free to swim against a powerful, profitable and powerfully profitable current. 

In 1992, the suits torpedoed the Jeep Comanche, a utilitarian little pickup truck that kept the brand in touch with its working class pedigree. Meanwhile, they gave the bloated Commander the green light. While the Commander was probably a focus group knockout (what do you guys think about a Jeep with a third row?), the realization of this marketing “dream” was too slow and thirsty for urban work, too uncomfortable to comply with the Geneva Convention, and too ugly for Medusa.

Jeep’s handlers also killed the original Cherokee and replaced it with the Liberty, answering a question no one asked. Saying that, the U.S. market responded positively; the Jeep Liberty hit the “cute ute” sweet spot, luring many women into the Jeep fold. (The four-door Wrangler is an attempt to woo back disenfranchised Cherokee fanboys back into the fold.) 

Jeep Inc. then launched the twin brand-engineered demon spawn of the Dodge Caliber. The Patriot and the Compass were a hit and miss affair (literally). While the Patriot reeks of Jeepness, the Compass does not. The Powers That Be also passed on the Rescue concept (a Wrangler-on-steroids over a RAM 2500 frame/drivetrain) and the Gladiator (the long-anticipated Comanche replacement).

The Wrangler-based Gladiator was a slam dunk. The pickup would have reconnected Jeep with its working class base and given Chrysler/Jeep dealers a nice little truck to sell. Even better, the Gladiator would have seven-slotted into the underserved small pickup niche, where the outdated Ford Ranger reigns supreme.

As a brand, even Jeep’s wins cause angst. The four-door Wrangler is a huge hit– which the company can’t produce quickly enough to meet demand. Things are so backed-up in Mopar-land that Jeep has stopped taking orders for ’07 Wranglers, and won’t begin accepting deposits for ’08s until summer’s end. Jeep seriously misjudged demand for both the four-door models and both flavors of the Rubicon. Oops.

Surveying the brand’s recent track record, it’s clear Jeep still represents a “back to basics” meme which resonates deeply and uniquely with a large segment of the car buying populace. Fans of the brand understand– and expect– a Jeep to be a simple, uncluttered and dependable machine with a can-do spirit. Granted, the bar on “simple and uncluttered” has been raised a bit since Willys’ glory days, and dependable no longer means you can fix it yourself on the fly, but the Jeep brand still stands for something authentically American.

Not to put too fine a point on it, Wranglers are to SUVs what minimalism is to art, and what Stickley is to furniture. To remain an iconic brand, Jeep must keep their eye on the ball, and that ball is clearly marked “Trail-Rated.” Jeep’s new owners should rid themselves of the Bloatmobile (Commander) and the Tonka-Toy (Compass) and build the brand around respectfully extending the real icon – the Jeep Wrangler. Now that, anyone can understand.

When you’re young, free and single, buying a new car is easy. You match the maximum amount of available cash/credit to the maximum amount of cool you can afford and sign your life away. When you’re married, buying a new car is a pain in the ass, right from the git-go. Which car do we sell? Who gets the new car? Who gets the old car? How practical should it be? How stylish? Whose style? How much car can WE afford? Post-nuptial new car negotiations can present anything from a small bump in the marital road to a VERY expensive write-off.

Not to stereotype, but many a husband wants more car than the couple can afford (without sacrificing that big screen TV), while plenty of wives wants a cute car with less power than a lawn mower (without sacrificing new carpets and curtains). In other words, men are from Mopar, women are from… some planet where the color of a car is more important than the vehicle underneath the paint job.

Unless you’re a perfectly compatible couple, such deliberations ultimately boil down to a simple power struggle— one of many that all couples face over years/months of marriage.

Usually, couples hammer out some kind of compromise. The guy gets the car he wants, or the woman gets the car she wants, and then one, the other or both live with simmering resentment.

Thankfully, the rise of the two income family has removed a great deal of the animus from the process– which is a bit like saying nuclear weapons have made the world a safer place. But then couples argue over money more than anything else. Cars are a couple’s second largest purchase after their home. Do the math. And then duck.

As the years roll by, a couple’s vehicular needs change: from two-seaters to five-seaters to minivans to college cars back to sedans to two seaters. But the power struggle remains. As a grizzled veteran of two world wars marriages (let’s just call the exit from the first an “honorable discharge”), I’ve experienced a fair amount of car-centric combat discord. If there’s one piece of advice I can give men facing this strife it’s this: surrender.

Let’s be honest: what guy wouldn’t like to go out and buy a new car paying scant attention to such trivial matters as cash flow? Upside-down on your current car? Heck, just go out and get a “refi” and use the equity in your house to buy that shiny-new object of your innermost automotive desire. I don’t know about you, but my spending habits are based on the simple idea that there’s no tomorrow.

Meanwhile, my [second] wife saves money like a four-handed, amphetamine-crazed squirrel preparing for The Mother of All Winters. With all my nuts safely stashed (so to speak), income stays put, while outgo is as rare as a Tiffany lamp in Wal-Mart.

After many a skirmish, I’ve come to appreciate the resolute focus my “spousal unit” has placed upon saving for the future. It took a long time, but I now understand why she thinks fast cars are a needless extravagance. Or, if you prefer, I look at homeless people of a certain age and wonder which Ferrari they used to own before cocaine turned to whiskey turned to malt liquor.

I repeat: listen to the Mrs. Cars are depreciating assets. There’s absolutely no sense in the act of taking cash out of an appreciating asset (your humble abode) to burn on something that will devalue over time (new kitchen counter tops don’t count, apparently).

It may be a quick burn, say, like the value of a Chrysler Sebring. Or, it may be a slower burn, like a Honda-something. Unless you’re buying stratospherically-priced “investment grade” sheet metal, the value of your whip will prove Newton’s theory of gravity– without the “going up” bit.

That’s not to say there is no joy in Mudville. If you both agree there’s room for a new toy in the budget, providing there actually is, life can be sweet. You can go out and enjoy the fruits of your (joint) labor. OK, you’ll probably be so old by then that you no longer have the eyesight and hand-eye coordination to fully enjoy your fire-breathing SRT-8mobile or MX-5 whippet. But financially speaking, you won’t be the loser you look like.

Of course, all this advice is predicated on the assumption that you’re not amongst those fortunate pistonheads who can afford to indulge their automotive appetites without the slightest regard to the money they’re pissing away on an endless succession of four-wheeled paramours. If that’s the case, go ahead, laugh. But here’s a message from those of us whose financial safety demands we let our better halves curb our enthusiasm: you go boy! You go!

Twenty years ago, I was a well-heeled young exec. One day, I decided to indulge in a four-wheeled “weekend toy.” Instead of a Dino or XK-E, I dropped $500 on a 1966 Ford F-100 pickup. Sure, I’d harbored fantasies about Ferraris and Jags for years. But I didn’t want to be saddled with an expensive toy that offered temporary or unreliable escape. My dream has always been about real freedom. The freedom to wake up in the morning, sniff the air and go… berry picking! Lumber hauling! The simple, rugged, frugal Ford represented my ideal life. And I knew it would get me there. Read More >

"We anticipate [that the U.S.] will still be the most profitable market in the decade ahead. It's really key not to be excessively dependent on the U.S., but you still need to be successful in the U.S." It’s no surprise that GM Chief Sales Analyst Paul Ballew sent mixed messages to the financial community when revealing GM’s Q2 sales results. Not to put too fine a point on it, the automaker’s U.S. market share continues to evaporate while its overseas operations continue to expand. The General’s growing foreign sales aren’t enough to compensate for the company’s North American sinkhole, but it gave GM’s spinmeister something to spin. Such is the way of things at GM these days.

That said, this just in: according to Mr. Ballew, GM should begin seeing a recovery in U.S. in 2008. As far as I can tell, no reporter or analyst asked GM’s mouthpiece what events or non-events are covered by the word “should,” what exactly the word “recovery” means, when in 2008 this recovery will arrive or how this sudden rise from GM’s fall from grace will be achieved. Oh, and didn’t GM say they were already in recovery?

Yes, well, it’s no wonder GM’s backed away from that idea. Thanks to a spectacularly lousy June, this financial quarter, at the height of GM’s new product cadence, the automaker’s North America sales fell seven percent. Once again, GM blamed high gasoline prices, a weak housing market and a planned reduction in daily rental sales. So are we to assume that gas prices will decline, the housing market will jump to its feet and the company will abandon abandoning daily rental sales?

The last point raises an important question. It’s all well and good to bolster residual values by limiting fleets sales, but what will take the place of these job lots and raise GM NA out of its current torpor? The new Saturn Astra, whose production and importation costs obviate the possibility of profit? The new Chevrolet Yukon hybrid, an enigma wrapped in a riddle (what kind of fuel conscious buyer buys a huge, poorly packaged SUV)?

How about the new Chevrolet Malibu? Last year, the current fleet queen Malibu racked-up 153,846 sales. If GM is getting out of the fleet business, they’ll need to replace every Malibu removed from fleet duty with one purchased by a retail customer. In other words, Chevrolet will have to sell tens of thousands more Malibus to retail customers just to achieve existing volumes. 

The redesigned Cadillac CTS is also on the horizon. Last year, GM’s erstwhile luxury division unloaded 54,846 CTS sedans on its class-conscious customers. Even if Caddy doubles that total, it still wouldn’t generate anywhere near enough profit to rescue a company with eight brands selling 52 models.

Clearly, obviously, GM’s turnaround depends on the company shifting a lot more of everything. While there are some bright spots and heavy hitters in GM’s roster– the law of averages guarantees it– the overall picture is bleak. Other than reducing price, which kills profits and destroys brand equity, what can they do? 

Rick Wagoner’s mob doesn’t have an answer. Thankfully (for them), no one’s asking. All eyes are now upon GM’s negotiations with the United Auto Workers (UAW). Wall Street, stockholders and GM camp followers are all watching the proceedings like hawks, presuming that reducing labor costs to transplant parity is the key to GM’s survival. That logic only works if you assume that GM would use the money saved to make better cars. Is there anyone out there who really believes that?

At the risk of sounding cynical (perish the thought), any money saved is likely to disappear down GM’s corporate rat hole. For one thing, if GM bosses pay themselves huge bonuses when the company’s losing billions, imagine what they’ll do after concluding a “historic union giveback.”

Whether or not GM “reduces” its health care obligations by going into subterranean levels of debt (to set up a VEBA for the UAW as described by Frank Williams), whether or not the two sides emerge from negotiations with the status quo intact or destroyed, Chevy and Saturn will still be fighting a losing battle against Toyondissan, Cadillac will still be struggling for sales, Pontiac and Buick will still be deeply damaged brands, Hummer and Saab will still be expensive irrelevances and GMC will still be… there. 

Now that GM’s suffered a 24 percent sales drop in June against the transplants’ double digit sales increases, some analysts are beginning to understand the crux of GM’s problem: unloved, unwanted and uncompetitive product. If GM’s sales take another big hit in July while their competition moves upward, there will be even more pressure to do a deal with the UAW. And it will be even more irrelevant.

When it comes to the United Auto Workers (UAW) contract negotiations with The Big 2.8, employee and retiree health care is the 1000lbs. monkey on the automakers' backs. General Motors' health care obligations total $46b, Ford clocks in at $23b and Chrysler's looking at an $18b tab. And consider this: GM's 432k retirees pay roughly $750 per year out of their own pockets for medical care, while their former employer shells out $3.3b on their medical benefits. That's a Hell of a lot of bananas.

The Big 2.8's beancounters estimate that retiree medical coverage adds $1k to $1.5k to the price of every new car and truck they sell. In response, the UAW has been calling for a national health care policy. But even if Michael Moore's mantra passed into law tomorrow, it would take years for the new policy to have any effect on the automakers' bottom line. And right now is when the automakers need relief.

The Big 2.8 has to do something at the bargaining table; at the least, they must show both Wall Street and their stockholders they're not down for the count. So they've decided to go cold turkey and foist all their retiree health care obligations onto the UAW. 

There is precedent. In last year's contract with the United Steelworkers (USW) union, Goodyear agreed to transfer all their USW retiree medical obligations to a Voluntary Employees' Beneficiary Association (VEBA).

A VEBA is a trust fund set up specifically to pay eligible medical expenses. It's funded by employer contributions, payroll deductions and other sources (e.g. cashing-out unused leave upon retirement). The assets in the account are tax exempt, and they can be used to pay medical expenses directly or reimburse participants.

At the time the contract was signed, Goodyear's total health care obligation to their retirees stood at $1.2b. Goodyear will make a one-time $1b payment in cash and stock into the VEBA. After that, the company will have no further obligation to their retirees, current or future. They get to move a $1.2b liability off their balance sheet. In return, Goodyear's retirees get medical benefits that can't be touched should Goodyear file for bankruptcy.

If The Big 2.8 succeed in setting up a similar arrangement with the UAW, the initial payments would be high, but the long term savings would be impressive. If GM got the same deal as Goodyear– paying 83 cents on the dollar– they'd end up forking out a bit over $38b to rid themselves of a $46b debt. Ford would pay just over $19b, and Chrysler could shell out just under $15b. A lower rate would save even more money.

It's likely the UAW would agree to such a plan. Again, there's precedent. When the UAW signed its "historic health care giveback" with GM (upping members' contributions), the General set up a $3b company-controlled VEBA [partly] to cover members who couldn't afford the additional payments.

The UAW knows they've got to do something. At a union seminar earlier this month, UAW vice president Bob King acknowledged that Ford could easily be forced into bankruptcy. Assuming the UAW wants to help Ford avoid Chapter 11 (and believes it can), and assuming Ford could find the money to fund the plan, a union-controlled VEBA would certainly be viewed as "helpful."

And of course, if Ford gets a health care VEBA, GM and Chrysler will want one too. And that means the UAW could end up running one massive medical fund for all their automotive industry retirees. And, as the UAW has been recruiting members from other industries, it's logical to assume other employers would want to join the VEBA club.

The U.S. health care industry is one of the UAW's growing "partners." That's right: the UAW's organizing an industry they could soon be paying to support. In fact, under the VEBA scheme, the UAW would become their own customer. The prospect of the UAW entering into the health care management business creates some interesting "what ifs?"

If the union went looking for the lowest health care services rates possible (as most medical plans do), would they refuse to pay for care at a hospital where the charges are higher to cover the increased benefits paid to their UAW employees? Would they make their retirees use a non-union medical facility because it costs less? Would they call for a strike at a hospital where it could put their beneficiaries at risk of sub-standard care when the nurses and technicians walk out?

If the UAW balks at a health care VEBA, the automakers may file for Chapter 11. If the union agrees to a union-controlled VEBA and an automaker goes belly-up before the deal goes down, the union's stiffed. Even if everyone stays in business, a UAW health care VEBA will encounter the exact same inflationary pressures formerly experienced by the union's previous employers AND it will generate tremendous conflicts of interest. Regardless of what happens, someone is going to be unhappy with the outcome.