Upheaval in the Auto Industry

My daughter called me this morning upset because President Obama’s administration, and the President himself, had forced Rick Waggoner to resign as Chairman of General Motors, and is forcing Chrysler to combine in some way with Fiat, as conditions of funding the bailout requests of the two companies.

It is easy to see her point – how can the federal government dare make decisions normally left to Boards of Directors. Do they even have the right?

It is also easy to see the other side of the question – the side I come down on.

Banks with loans to failing companies often refuse additional loans, or cancel existing ones, until the company shows evidence it can repay them. Often banks will tell Directors to hire a turnaround team to fix the problems. With the prospect of failure in sight, most companies do as the banks request. This seems exactly the situation with GM and Chrysler.

As I read in the papers, neither GM or Chrysler has developed a suitable business plan for fixing their troubles.

Now is the time.

Now they are saying to either make the changes or accept the consequences. The administration has ignited a fire under the managements both companies.

"The only thing we have to fear...."

“This is pre-eminently the time to speak the truth, the whole truth, frankly and boldly. Nor need we shrink from honestly facing conditions in our country today. This great nation will endure as it has endured, will revive and will prosper.”

“So first of all let me assert my firm belief that the only thing we have to fear. . .is fear itself. . . nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance.”

Taken from President Franklin Roosevelt’s first inaugural speech, in 1933, these words might well be spoken by Barack Obama next Tuesday, January 20^th, Inauguration Day, 2009.

President Obama will then face the worst economic conditions since those faced by President Roosevelt.

He must bring to his presidency a clear vision of what he wants done with bailout and stimulus, and then have the leadership strength to accomplish it.

For the benefit of our country, and politics aside, best of luck to him.

Bailout or Failure?

It is Wednesday evening and so far, there is no bailout program for the auto industry. Although a bailout is not the greatest idea, compared to certain other options, it is by far the lesser of two evils when considering the consequences of the failure of at least two of the three American auto makers.

Without an immediate bailout, GM and Chrysler will no doubt file for bankruptcy in the next sixty days. Executives of the companies have said bankruptcy would be q disaster because customers would not buy their cars. That does not make complete sense, though. If the manufacturers maintained their warranty programs throughout bankruptcy, and dealer service departments continued to operate, it seems people would buy the vehicles. The bigger problem of revenue generation is the lack of the right vehicles for the market, not a bankruptcy.

As earlier written on this blog, it still seems that bankruptcy of GM, with post petition financing guaranteed by the government; a line of credit for Ford guaranteed by the government; and the breakup of Chrysler makes the most sense.

If in bankruptcy, GM can quickly deal with the problems of high labor costs, high legacy costs, too many dealers and debt overload. They can shed models and factories and dealers, and renegotiate their debt, and in two years exit bankruptcy as a smoothly operating company with the beginning of a competitive model lineup. Many thousand dealers will be out of business, with great dislocation to customers and employees – unfortunately that is the consequence of the Big 3’s poor management through the years.

Although Ford is stronger than GM, they also may need to go through a Chapter 11 proceeding in order to achieve all their goals in the time available. Union reaction will have great importance in determining the issue.

The next few days will decide the fate of the companies, their employees, their customers and the many other stakeholders. Too bad I will not be the “Car Czar.”

GM and Bankruptcy

Executives of General Motors Corporation are saying GM cannot survive a bankruptcy, and needs government money to continue operation.

The second part of their statement is certainly true. In the latest report, GM is asking for $4 billion to keep operating through December and another $4 billion for January. With more to come.

The first part of the statement, about not surviving a bankruptcy, seems wrong. There are many, many cases of companies going into bankruptcy, emerging and regaining successful operations. Two come to mind – the Dana Corporation, and automotive and truck parts and accessories manufacturer; and Harnischfeger Corporation, a mining and heavy equipment manufacturer. Both now are successful, generally thriving companies.

Think about the airlines – most have been, are in, or are going into bankruptcy. People still fly on them. Usually there is an interruption for a few days, and then service is as normal as airline service is.

Then there are the the retailers. Kmart and Winn Dixie stores have been through bankruptcy, along with many others. Each is better off after the event than before. Customers continue to do business with them.

GM executives say people will not buy GM vehicles if the company is in bankruptcy. What is new about people not buying GM cars? People are not buying GM cars now because they are the wrong ones, and of lower than desirable quality.

Bankruptcy will give GM the tools to deal with the killer problems they face as they go forward. It will allow reworking legacy costs, labor costs and an unwieldy dealer organization. Yes, enormous problems are involved in restructuring those items. They can be overcome.

Car buyers would no doubt rather buy cars from a revitalized, restructured GM that from the one that exists now, propped up by massive infusions of our (taxpayers’) money.

Let the government infuse the money into GM after bankruptcy. Everyone except some GM executives will get more bang for the buck.

Bailout Anyone? Get in Line

Whoee!

The homebuilders want a bailout, with the government offering to guarantee low interest mortgages and a $22,000 tax reduction incentive for homebuyers. Outrageous.

Next ought to be a bailout for underemployed management consultants.

It makes just as much sense.

Who is on your "top ten" list of bailout targets.

Practical Suggestions for the Auto Industry

A monolith is a geological feature, such as a mountain, consisting of a single massive stone or rock

In some respects, the US auto industry is monolithic. The three major US vehicle manufactures, GM, Ford and Chrysler all face: a difficult credit crunch – both from the lack of credit available to its customers and to the companies; high fuel costs that have almost destroyed the market for expensive, profitable large vehicles; and the impact of the economic recession, low consumer confidence, and low consumer spending. Additionally, the companies have very similar business models.

However, that is where the monolith ends. When considering rescue (or bailout) of the industry –each company’s situation is quite different.

GM, for example, has an approximately 22% share of the US market, is using cash at a very rapid rate; is almost bankrupt; has an impossibly limited lineup of vehicles consumers want; has high labor costs and high legacy costs. Already obtained autoworkers union concessions will allow savings in long term, but the kproblem is not long term, it is now. GM quality is low compared to most imported vehicles and to Ford. From an outside perspective, Rick Wagoner, its CEO, seems almost detached from the reality of current conditions.

Ford, on the other hand, with market share of approximately 16%, has reported cash reserves to last it for six months to a year. although Ford may face bankruptcy, its situation is not as dire as that of GM. Ford has introduced small, fuel efficient, cars (Focus and Fiesta) that consumers seem to like. Ford quality is almost to the level of imports. Ford CEO Alan Mulally joined the company from a career outside the automotive industry, and appears willing to, and is changing, the business model. Were it not for the credit crunch and the recession, Ford could have reached profitability in the near future.

Chrysler (10% to 11% market share) is the anomaly in the industry. Ownership of the corporation is private, unlike public companies Ford and GM. Available analyses indicate Chrysler has no cutting-edge designs or potential big sellers in its Chrysler, Dodge or Jeep brands. There will be no company rescue from vehicle sales – what models they will sell in the future remains a mystery. Chrysler quality is low. The situation at Chrysler is grim.

So, what are the solutions?

Bankruptcy with management change seems the only reasonable solution for GM. Bankruptcy will allow relief from high labor cost, legacy costs and other contractual situations (dealerships.) The government can provide post-petition financing, allowing time for the reorganization. The cost to the government will be far lower than if it provided funds to rescue GM with its present management and business model. As to the problem of the lack of small, fuel-efficient cars, perhaps GM can buy basic models from other manufactures, create its own trim packages, and have something to sell during the time it will take to bring GM small cars onto the market. Some ideas from the two previous postings on this blog could help too.

For Ford, the government’s rescue makes sense. The company is poised for profitability. If credit becomes more available, Ford will sell vehicles. They will continue to revise their business model for greater profitability. All the government will need to do is keep Ford supported for the interim. Loans or loan guarantees seem best.

Chrysler is a lost cause. Reducing the size of the company to a much smaller one, with limited vehicle models and market share, could work. Breaking up the company by selling brands and the factories to build them is another thought. The private owners of Chrysler took an enormous risk when the bought the company. Had the economy not sagged (collapsed) they might have won the bet. Now it looks like they lost. Government intervention with Chrysler makes no sense.

Let me know what you think by sending your comments.

Note: The last two articles meant to elicit comments from readers, and succeeded in doing so. Some comments were serious, some in jest. For example, one email asked, “Do you really want your auto industry run by the same people who run Medicare and the Post Office?” Another said, “First priority will be to entice Steve Jobs to take on GM. Would you please ask him to reserve one of the first iCars for me?”

What do you think?

HAVE A GREAT THANKSGIVING!

More on A Different Thought about the Auto Industry Bailout

Response to yesterday’s post was quick, and plenty. Most comments came to my email address, but one was posted to the blog.

This follow-up article is a reply to the question asked, “How can we do it?”

As to the other part of the comment about political courage; among current leaders there is not enough to take action such as suggested here. Perhaps Barack Obama will have it….

Your comments are encouraged and all are welcome – pro and con.

To bailout, or not bailout, that is the question.

On the one hand, some say the loss of jobs in the industry and related fields would cripple an already weakened economy. The ripple effect would be enormous: auto parts makers and auto dealers are the obvious; the trickle down effect is not so obvious, but towns, families, retailers, etc. would suffer.

On the other hand, some say the foreign auto producers will step into the gap left by the demise of the American auto companies, and the effect of the demise will not be such a disaster. In addition, with millions of US cars on the market, parts and service requirements will continue for many years. All we would really lose, in the long term, are the profits that the car companies might generate and keep in this country. That may all be true, but no one mentions the timing. It will take years for auto production in this country to rebound, regardless of who is making the cars.

Lastly, is $25 billion dollars enough or will the car people come back for more? At the rate they are burning cash, probably the latter.

Therefore, here is a more complete new thought.

Rather than loan or invest billions in Ford, GM and Chrysler, why not quickly nationalize them, removing management, installing new people, new energy, new thinking, a new model for doing business, and possibly even new pay rates and health insurance and retirement plans, and get on with the job. Bring in a Bill Gates or Steve Jobs, or one of hundreds more innovative thinkers to lead the charge. Use the $25 billion to create new, trim, companies rather than propping up old stale ones. Along that line, fire the entire core of lobbyist, especially those who fight against higher fuel efficiency standards.

That sounds very easy. Obviously, it is not. Here is a blueprint that might work if given a chance.

Consider the GM situation. GM stock is hovering slightly above $3.00 a share, and the capitalization of GM is somewhere near $3 billion. For the plan, have the company create a new class of voting stock and let the government buy $5 billion to $10 billion worth. The funds go to GM for immediate use. At the same time, voting the new shares, completely replace the GM Board of Directors. Get new people; with no auto industry experience; with creative minds; not willing to work the old, failed model; and let them go to work. Replace the current executive staff without bonuses. Let the lawyers begin!

Bring the best and the brightest to the Board and the executive ranks to lead the company. Develop a new model for doing business. Perhaps the DELL model of building to order, having dealers only to provide a few demo cars, take orders, and supply parts and service. Without saying, “It won’t work,” say, “It is a good idea, let’s make it work.” If not that though, what others ideas are there? Remember, the old model failed.

Here is another thought: Rather than manufacturing so much of the vehicle let others do so. Become a design and marketing organization. Buy engines from someone else – Honda, for example. Transmissions from another source. Fit the cars together in less than a year rather than taking two or three years to bring a new model to market. Alternatively, buy immediately salable cars from other manufacturers, customized to be the GM model. That is certainly not a new idea. Think about the Isuzu Rodeo and the Honda Passport of a few years ago. Honda sold Passports by the thousands. It was not a Honda vehicle though; Isuzu built a Rodeo, changed the trim and interior, sold it to Honda and then Honda sold it as a Passport. There are other examples.

Get vehicles with fuel-efficient engines on the market in a hurry. Give GM and/or its dealers something to sell.

Fuel-efficient small cars, and hybrids, have proven themselves as sellers in the market. There are more than a million of Toyota’s Prius on our roads. Rather than taking two or more years to do the research, design and testing, buy the technology. Now is the time for action – not development and design.

Get vehicles selling and cash flowing. Then, when operations are stable, start investing in research, development and design. At this moment, what difference does it make who manufactures the major assemblies? Later build a goliath of an industry and be a technological leader. There is no time now.

With no lobbyist fighting to keep fuel efficiency requirements low, the government can move forward with stringent regulation to reduce carbon emissions. In spite of what the auto companies and the oil companies have said, global warming is real. Let the bailed out auto industry be the leader in reducing carbon emissions, not the fighter against reduction.

There are many creative geniuses in our country. Let them “have at” the auto industry. Forget the words, “We have never done it that way,” or “We tried it once and it did not work,” or, even worse, “It can’t be done.” A long time ago, people said that about landing on the moon.

Adopt the cry, “We know it will work and we can do it.”

How many years will it take to move the inertia of the auto industry to make it into something new, different, and PROFITABLE and FLOWING CASH?

Probably close to three years. On the other, without the bailout suggested here, the existing companies, working the old auto industry model, will take at least five years IF they can do it at all.

It is exciting to think about. It would be exciting to participate.

Your comments are invited.

A Different Thought about the Auto Industry Bailout

Shakespeare might have said, "To bailout, or not to bailout, that is the question."

On the one hand, many say the loss of jobs would cripple an already weakened economy. The ripple effect would be enormous: auto parts makers and auto dealers are the obvious; the trickle down effect is not so obvious, but towns, families, retailers, etc. would suffer.

On the other hand, many say the foreign auto producers will step into the gap left by the demise of the American auto companies, and the effect will not be such a disaster. In addition, with millions of US cars on the market, parts and service requirements will continue for many years. All we would really lose, in the long term, are the profits that the car companies might generate and keep in this country. Of course, the dislocation and relocation of factories and thousands of people would be harsh.

Lastly, is $25 billion dollars enough or will the car people be back for more? At the rate they are burning cash, probably the latter.

So here is a new thought.

Rather than loan or invest these billions in Ford, GM and Chrysler, why not quickly nationalize them, removing management, installing new people, new energy, new thinking, a new model for doing business, and possibly even new pay rates and insurance and retirement plans, and get on with the job. Bring in a Bill Gates or Steve Jobs, or one of hundreds more innovative thinkers to lead the charge. Use the $25 billion to create new, trim, companies rather than propping up old stale ones. Along that line, fire the entire core of lobbyist, especially those who fight against higher fuel efficiency standards.

On that last line of thinking, could the car company disaster be similar to the financial disaster have been caused by deregulation (i.e. low fuel efficiency standards?)

Your comments are invited.