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Morici: 10.20.08: Troubles at Chrysler |
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Written by LNC
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Monday, 20 October 2008 |
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GM is having trouble lining up the financing to acquire Chrysler—either by merging it into its operations or as a scaled down subsidiary.
Observers may blame the credit crisis and the present reluctance of banks to lend. While that makes GM’s task more difficult, it certainly is not the central reason why the acquisition should not go forward.
Simply, Chrysler has two good franchises that would compliment GM’s
product mix but those are hostage to an otherwise uncompetitive
corporate structure. GM can’t fix those problems easily.
Jeep and Chrysler minivans are great brands—car buyers like both above other competitors.
Although
these products are in shrinking market segments, these segments will
continue to be large and important. Properly managed, the Jeep and
Chrysler minivans could be the survivors that reap large profits.
Moreover, their brands and architecture could be extended into smaller
more efficient crossovers like the Nissan Rogue, which are sorely
needed now in the U.S. market.,
However, Chrysler products
suffer from poor quality—reliability issues and poor product
appointments to compensate for high labor costs and clumsy management.
Those issues might be better solved by a joint venture with a Japanese
manufacturer like Mazda or Toyota. I like Mazda best, because the Jeep
and minivans compliment its strengths in sedans very well and it could
get trucks from its other partner, Ford. Ford sells the most pickups on
the planet for a reason—the marketplace finds them the best!
The
recently negotiated UAW contract does not adequately reduce hourly
labor costs and/or remove the burden of legacy costs. It only
potentially moves most of those to other corners of the balance sheet.
If
GM acquired the Jeep and minivan franchises, GM would still have to pay
heavy severance bonuses to workers it laid off streamlining their
operations, similar payments would be required to shutter much of
Chrysler’s unattractive truck and car operations, and GM would still
have to fund the union health care fund for retired Chrysler employees. Those costs as simply more than the Jeep and minivan franchises are worth.
The
simple fact is that the best solution for Chrysler is Chapter 11 to
remove the burdens of the UAW contract and scale down the company to
something one half to two thirds its current size. That would serve
GM’s interests too—both Ford and GM would benefit from some capacity
and cars going off the market.
Suggestions are emerging that
Uncle Sam take a stake in the combined company. So rewarding two of the
worst run companies on the planet makes little sense to me.
It
would be better to formulate a comprehensive strategy for the industry
to encourage the build out of high efficiency vehicles.
Washington
should require much higher mileage standards for automobiles than the
35 miles per gallon target set for 2020, offer incentives for consumers
to trade in their gas guzzlers, and provide substantial product
development assistance to U.S.-based automakers and suppliers. The
latter includes Toyota and Honda, as well as the Detroit Three, battery
makers and other suppliers to accelerate the production of high-mileage
innovative cars.
The condition for assistance would be that
beneficiaries do their R&D and first large production runs in the
U.S., and share their patents at reasonable costs with one another. The
huge U.S. market would attract producers from around the world and
rejuvenate the U.S. auto supply chain.
Peter Morici is
a professor at the University of Maryland School of Business and former
Chief Economist at the U.S. International Trade Commission.
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The following, written by Professor Ralph Gomory of New York University's Stern School of Business and former President of the Alfred P. Sloan Foundation, appeared in the Huffington Post on December 16, 2008 and can be accessed here.
Autopia: A Tale of Two Bailouts
Many Americans are struggling to understand how our government makes decisions on corporate bailouts. When Wall Street companies spent years investing in mortgages that turned out, essentially, to be garbage, the government rushed to bail them out. But when the auto companies neared a similar fate, the government was prepared to stand by and let them perish.
To aid in understanding this situation, it is helpful to look at an example from a galaxy far, far away.
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