What Will Fix GM Won't Fix Chrysler
Now that President Barack Obama and his task force on the automotive industry have engaged directly with General Motors (GM) and Chrysler to discuss whether they will receive further loans, the federal authorities need a much broader gauge than just "financial viability" to evaluate the health of the two companies. They need to understand where each company stands in terms of its long-term business strategy, not just its finances, and they also need to carefully consider the different ownership structures.
Seen in this broader context, GM has made dramatic strides in transforming its manufacturing process by borrowing lean production techniques from Toyota Motor (TM), starting in the mid-1980s. For all intents and purposes, the quality and productivity gaps between a Chevrolet Malibu made in Kansas City, Kan., and a Toyota Camry made in Georgetown, Ky., have disappeared. Thanks to sweeping agreements with the United Auto Workers, GM's cost structure also was approaching that of Toyota's Georgetown plant, even before the most recent round of cutbacks and givebacks. Because of tough agreements with the UAW starting in 2007, GM was on track to strip out $5,000 from the cost of each of its vehicles by 2010.
GM also has revitalized its design capability, first with the new Cadillac "art and science" look in the late 1990s and then with the Chevrolet Malibu, Camaro, and Volt, and other vehicles. The old saw that "GM does not know how to design cars that Americans want" is many years out of date.
GM Much Healthier Than Chrysler
While maintaining a full design effort, the company also has invested $1 billion in the new lithium-ion battery that will power the Volt when it appears late next year. That's critical if the U.S. is to earn a piece of a new "green" industry, which AllianceBernstein (AB) estimates could reach $150 billion a year in sales by 2030. GM's Chief Executive G. Richard Wagoner Jr. also has led the automaker into a much more global posture, building up an important stake in the Chinese market, for example, which is now rivaling the depressed U.S. market in size.
In short, GM was on the verge of emerging as a leaner, more innovative, and more competitive company by 2010—until the financial crisis hit and paralyzed the economy. It's not at all surprising that GM's losses expanded in the fourth quarter of 2008. The entire global economy was in the process of falling off a cliff.
Chrysler, however, is probably damaged beyond repair even if its financial losses are not as sweeping as GM's. It may have had a chance during the 10 years that Daimler (DAI) owned it, but when the Germans left a couple of years ago, they took key engineering and design talent with them, depriving Chrysler of an adequate product portfolio. Daimler has since placed a zero value on the 19.9% stake it retained in the company.
Under the 80.1% ownership of private equity firm Cerberus Capital Management, Chrysler has been more aggressive than GM in cutting models and plants because it has been managing for short-term financial objectives, presumably at the behest of its owners who are looking to "exit" from their investment. But Chrysler has not been managing for long-term competitiveness and has, in fact, cut some of the muscle it would need to survive. The company, for example, has closed its advanced design studio and did not introduce a single model at the Detroit auto show last month. It does not have a full product line, particularly now that it is killing the once-promising PT Cruiser. And its quality levels are behind that of GM and Ford Motor (F).
New Capital from Cerberus?
The recent sale of a 35% stake in Chrysler to Fiat in exchange for new lower-cost models, in some 18 months, is largely pie in the sky. It is a rather transparent bid to attract more U.S. government loans since Chrysler can't possibly survive 18 months on its own. Cerberus gave away a third of the ownership of Chrysler to Fiat (FIA) for no cash, again suggesting that the net value of Chrysler is close to zero.
GM's and Chrysler's different ownership structures are a legitimate issue. GM is public and that affords a certain measure of transparency to the feds. But Chrysler is owned by a private equity group and does not have to disclose financial details. Obama should be asking the deep-pocketed Cerberus for detailed information about whether the firm can put up more capital to help transform Chrysler or is merely waiting to recoup its investment. The public statements by Cerberus that it cannot increase its investment because of agreements with its investors just doesn't stand up to scrutiny. If private equity firms see an opportunity to make money, the record shows that they tend to grab it.
Unless Cerberus steps up with new capital, the government almost certainly should be coaxing Chrysler into a faster merger with another company. Failing that, an orderly liquidation of Chrysler may be the right course of action. It should be done in a way that doesn't destroy a couple of Chrysler's key brands, including Jeep, and it should be done in a way that does not wreck Chrysler's supplier base, which also serves GM and Ford. If there is an overwhelming need to reduce capacity in the U.S. market, as many pundits suggest, it's clear that Chrysler's capacity is an albatross.
In short, the Obama team should not get caught up in the argument that they must apply a uniform policy toward GM and Chrysler. The crucial test is which company has a chance to emerge from this most difficult period as a viable automaker—and which one does not.