The human cost of GM's failure

There was an interesting discussion/argument about whether or not to bail out GM on CNBC this morning. There were a number of different elements to the discussion: Cerberus Capital, the company that owns Chrysler and Chrysler Finance, as well as a majority interest in GMAC, is trying to position itself to get financial bailout money from the U.S. Treasury. GM is trying to get additional loans from the U.S. Government in order to close its acquisition of Chrysler. But hovering over both these issues was the bigger question: Should GM be allowed to fail? After all, it's been mismanaged for decades. We live in a capitalistic, free market society where companies have no right to survival, and no company should be "too big to fail."

The only panelist who seemed to have any interest in the impact of such a decision on the lives of people was Phil LeBeau, CNBC's beat reporter covering the auto and airline industries. LeBeau repeatedly stated that GM going under would be tantamount to exploding a nuclear bomb in the U.S. Midwest. He pointed out that not only would all of GM's workers lose their jobs, but the entire infrastructure of Tier 3, 4 and 5 parts suppliers that are largely or completely dependent on GM or its bigger suppliers would also go under, and with them would go their employees' jobs. Many of the retailers who supply these workers with goods and services would soon follow, along with their jobs. The cities and towns that depend on property, sales and income taxes would be stressed to the limit as their tax bases dry up while demand for their services increases. (If anyone would like to get a foretaste of what would happen, I invite them to visit the steel towns of Western Pennsylvania, where I grew up. The model of progressive economic collapse started in the early 1980s as steel mill after steel mill closed. Today, over 20 years after the steel industry failed, very little has improved.)

I was shocked that none of the other panelists even seemed to understand LeBeau's argument--it's not just GM, it's the entire economy of large portions of the Midwest, and peoples' lives, that are at stake. Perhaps it's time for CNBC to have fewer reporters in New York, and more reporters in the field, where the real economy lives.

Nissan/Renault wants a piece of Chrysler

According to Autoblog from a story in the Detroit News, Nissan/Renault has offered to purchase 20% of Chrysler from Cerberus. The deal would keep Chrysler intact as a separate entity, but bring more Nissan and Renault products into the U.S. through Chrysler (a version of the Dodge Ram is already scheduled to become the next Nissan Titan, and a Nissan platform is scheduled to become the basis for a new Chrysler small car.)

The problem is that Cerberus apparently doesn't want to get rid of 20% of Chrysler, it wants to get rid of 100%, and neither Nissan nor Renault have the money to buy the company outright. So, unless Cerberus decides that it wants to stay in the car business, it's increasingly looking likely that the deal will be with GM or no one.

Cerberus: Using GMAC to get GM to buy Chrysler?

The negotiations between GM and Cerberus Capital for GM to trade its remaining share of GMAC to Cerberus for Chrysler have apparently picked up steam. One big reason is that GMAC is all but shutting off credit to GM's dealers and customers, leading GM to launch a promotion encouraging dealers to finance cars through companies other than GMAC. Some observers believe that Cerberus is trying to "cut off GM's air supply" by withholding credit, and that without that credit, GM could burn through its remaining cash by the end of this year.

GM's Board of Directors was decidedly cool to the Chrysler deal when it was first proposed, so Cerberus may see this as the only way to get the deal done. If Cerberus is so desperate to get rid of Chrysler that it's willing to hold a gun to the head of GM, things at Chrysler must be even worse than the company has revealed so far. However, it's unlikely to work out well for anyone, even for Cerberus. A merger of GM and Chrysler simply makes no sense, especially in this economy, and the $10 billion operating savings that are being quoted haven't been explained by anyone, and have to be seen as vapor. If GM is forced to take Chrysler, it will have a strong incentive to steer future financing to other banks, thus leaving GMAC without an outlet for future business.

I for one hope that cooler heads prevail. One rumor is that Renault could buy Jeep back from Chrysler (Renault sold Jeep to Chrysler years ago as part of its sale of American Motors), so those jobs wouldn't be lost. Some of Chrysler's more modern plants could be sold to other manufacturers. But, a shotgun wedding between GM and Chrysler could result in far more long-term carnage than would result from a straightforward liquidation of Chrysler.

Too many brands

When I was a kid, GM had five car brands. They were clearly defined and differentiated. GM's goal was to bring buyers into the fold with Chevrolet, and as they got older and their needs and tastes changed, keep them for the rest of their lives, moving from Chevy to Pontiac to Buick to Oldsmobile to Cadillac ("The Standard of the World".) Ford did the same thing, with Ford leading to Mercury and then to Lincoln, as did Chrysler, starting with Dodge, to Plymouth, Chrysler and then to Imperial. Since then, GM has added Saturn and shut down Oldsmobile, Imperial was first merged into Chrysler and then discontinued altogether, as was Plymouth.

Is Alfred P. Sloan's model, first developed at GM in the early 1920s, the right way to go in the 21st century? In my opinion, it's obsolete--too costly in an industry with worldwide competition. GM could probably do just fine with Chevrolet, Cadillac and possibly Saturn to act as the U.S. brand for Opel-designed cars. At Ford, Mercury is completely redundant, and Lincoln's product line is little more than dressed-up Fords. Drop Mercury and either differentiate the Lincoln product line much more or fold it into Ford. (The new MKS, for example, is based on the Volvo S80/Ford Taurus platform and could become the new Ford flagship, as the LTD once was.) There's tremendous overlap between Dodge and Chrysler, with the Chryslers having somewhat upmarket trim. Only one brand is needed.

By getting rid of multiple brands, the design, engineering and tooling costs involved with creating multiple variations of the same car can be saved. Advertising can be more effective, and costs can be reduced. Dealer networks can be made smaller and more efficient. Product inventories, both at factories and in the field, can be decreased.

The problem isn't limited to U.S. manufacturers. Toyota is rumored to be considering turning the Prius into a separate brand, with several different models. I think that's a mistake. Just as Scion is not attracting the young, hip buyers that Toyota intended, the buyers for a Prius brand aren't going to be significantly different than those who buy Toyotas. Toyota has succeeded handsomely with two brands, Toyota and Lexus. They don't need any more.

GM wants to buy Chrysler???

As reported in the New York Times yesterday, GM and Cerberus Capital Management (the private equity company that controls Chrysler and holds a majority share of GMAC) have been negotiating a deal in which GM would acquire Chrysler in return for the share of GMAC that it continues to hold. For GM, it would get GMAC's toxic subprime mortgages and car loans off of its books, and for Cerberus, it would get out of the car business. However, if this deal happens, it's likely to become the poster child for the adage "When two weak companies merge, you get a bigger weak company."

Other than limiting its downside exposure to the financial market, what would GM get out of this? Chrysler's product line is weak, especially passenger cars, and its product pipeline is almost nonexistent. Its strength is in trucks and SUVs, especially Jeep, but both those product areas have been especially hard-hit by gas prices. Chrysler's international position is far weaker than that of either GM or Ford. GM doesn't need Chrysler's dealers--it already has a bloated dealer structure that needs to be pruned. GM would pick up more plants, with more United Auto Workers contracts.

Even two months ago, this deal wouldn't have made sense, and it makes even less now. GM is having so much trouble turning itself around, why would it even consider taking on Chrysler? If there's any long-term logic to this deal, I don't see it.

Bad times if you're in the car business

According to Autoblog, for the first time in its history (and, some sources indicate, the first time since the 1980s), every car maker and brand had lower sales in the U.S. last month than in September 2007. Every one. The best performer, Audi, was down only 5.4% year over year, while the worst performer, Hummer, was down 54.8% (no surprise there). In terms of manufacturers, GM fared best, down 15.8% from last year, primarily on the strength of the company's "Employee Pricing for Everyone" program, while Nissan was worst, down 36.8%. Nissan, Ford, Chrysler and Toyota were all down more than 30%, demonstrating that the problem isn't limited to the Big Three.

Other than the GM Employee Pricing program, which helped Chevy, Saturn and GMC in particular, there doesn't seem to be a pattern to explain why one brand did better than another. Some people were still buying luxury cars, Mercedes-Benzes in particular; they were down 16.4%, while Lexus was down 36.1%, and BMW was down 29.5%. Why did Mercedes do so much better? I have no idea. Why was Subaru down only 11.9% while Mazda was down 35.6% and Toyota was down 31.8%? Again, I haven't a clue.

The point is that the car business is terrible right now, whether you're a manufacturer or a dealer. Most industry observers expect more promotions to be announced, and perhaps an extension of GM's Employee Discount program, in the next few days. It's a great time to buy a car, assuming you can get credit (which is one of the big reasons why everyone's sales are down.)