Should bankruptcy be the price of bailing out GM?

The Wall Street Journal ran an opinion piece this morning on bailing out GM (and potentially Ford and Chrysler/Cerberus as well) that suggests the price that each company should pay in order to get more government money: The board and senior management should be fired, shareholders should lose their remaining equity, and a Government-appointed receiver should take over. The receiver should tear up contracts with labor, suppliers and dealers, shut plants as needed, and do whatever is necessary in order to return the company to profitability.

That's the definition of Chapter 11 Bankruptcy. So, what the writer is saying is that the price of bailing out GM should be bankruptcy. That argument makes sense, but I question whether a receiver can clean up the mess at GM and turn it back into a viable competitor post-bankruptcy. Let's remember that Cerberus Capital brought in a management "dream team" to turn Chrysler around, and now they're desperately trying to sell the company, in whole or in part. Given the current economy, a move into Chapter 11 reorganization is likely to slide into Chapter 7 liquidation, which would be catastrophic for the U.S. economy.

Even without driving GM into Chapter 7, a receivership could cause other unintended consequences. For example, the Big Three manufacturers won an agreement to turn over responsibility for retiree health benefits to the United Auto Workers, starting in 2010. That will save GM $3 billion a year. However, if the trustee eliminates GM's contributions to the UAW's Voluntary Employee Beneficiary Association fund, the fund will no longer be able to support GM's retirees without taking benefits away from Ford's and Chrysler's retirees. Further, GM's costs will decrease, which will put the company in a much better competitive position vs. Ford and Chrysler. That could drive Ford and Cerberus/Chrysler into bankruptcy. We could end up with three car manufacturers in bankruptcy, not just one.

I think that the best solution is one that nurses GM through this recession, keeping the company going until consumer demand picks up, but with major operational concessions on the part of GM's management and the UAW. The company must replace its Board of Directors. GM needs its own Louis Gerstner, and a new team of senior managers who haven't been innundated with GM's groupthink. GM has got to become the world's best manufacturer of automobiles, not just the biggest, but they won't get there with either the management team or Board of Directors currently in place.

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.

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.)