The US Auto Hospice

Posted March 31, 2009

Today the White House issued its assessment of the GM and Chrysler turnaround plans. To summarize:

Chrysler has 30 days to live. It is being given palliative care only and physicians are under medical directive to not revive the patient. Fiat, it's slightly less dead companion, will either marry Chrysler or let it slip into liquidation, at which point the patient's healthy organs will be harvested for donation. Now would be the time for family members to stop by and say their farewells.

GM is terminally ill – but we prefer to say that it needs serious rehabilitation. GM is receiving end of life care at a very expensive hospice because frankly, we hate to see this old guy go.

GM is huge and complicated, so forget about everything outside core US and Canadian operations. Forget Opel, half of GMAC, the Defense unit, a bunch of small subsidiaries and overseas operations in Brazil, India, South Africa, Korea (Daewoo), Europe, and China. These operations will either stand alone or be sold off separately, depending on the fate of the North American operations.

The White House issued an impressive and crisp summary of the patient's condition. The diagnosis surprised nobody: the old guy is like a hard-drinking chain smoker in his 80's; he has been deteriorating for decades. He now sits drooling and incontinent — mumbling about competitiveness and Volts. But it's over — he cannot recover. From the report:

GM has been losing market share slowly to its competitors for decades. In 1980, GM's US market share was 45%; in 1990, GM's US share was 36%, in 2000, its share was 29%. In 2008, its share was 22%. In short, GM has been losing 0.7% per year for the last 30 years.

Fundamentally, the lingering consumer perception is that GM makes lower-quality cars (despite meaningful improvements in the last few years), which in turn leads to greater discounting, which harms GM's price realizations and depresses profitability. These lower price points are an important impediment to enhanced GM profitability and need to be reversed over time in order for GM to bring its margins into line with its best-in-class peers

GM earns a disproportionate share of its profits from high-margin trucks and SUVs and is thus vulnerable to energy cost-driven shifts in consumer demand. For example, of its top 20 profit contributors in 2008, only nine were cars.

GM is at least one generation behind Toyota on advanced, "green" powertrain development. In an attempt to leapfrog Toyota, GM has devoted significant resources to the Chevy Volt. While the Volt holds promise, it is currently projected to be much more expensive than its gasoline-fueled peers and will likely need substantial reductions in manufacturing cost in order to become commercially viable

Absent the successful introduction of a number of new-generation nameplates, as described in the Company's plan, GM's product portfolio is more vulnerable to CAFE standard increases than the portfolios of many of its competitors (although GM is in compliance today with current standards). Many of its products fail to meet the minimum threshold on fuel economy and rank in the bottom quartile of fuel economy achievement.

As GM moves through its forecast period, its cash needs associated with legacy liabilities grow, reaching approximately $6 billion per year in 2013 and 2014. To meet this cash outflow, GM needs to sell 900,000 additional cars per year, creating a difficult burden that leaves it fighting to maximize volume rather than return on investment.

The situation is long beyond dire, but the US Auto Hospice wants to take 60 days try a powerful new experimental medicine called a federally backed debtor-in-possession bankruptcy. The DIP just means that the company keeps operating — and guzzling cash — during the treatment. The feds will ensure that the car warranties get honored and provide a bunch of dough to sweeten the deal. How much? Well, they didn't say. But GM got $13.4 billion in December and is seeking another $16.6 billion that it qualified for in February. The feds also made $5 billion available to suppliers and offered government backing of warranties plus 60 days of working capital (call it another $3-4 billion) today. At best, GM emerges a dramatically smaller company with taxpayers out $30-$35 billion plus pension and health care obligations — where the real money gets spent.

GM will now file for bankruptcy — something that would have made a lot more sense a year ago but was resisted by CEO Rick Wagoner, among others. Bondholders will get back pennies in stock for their $27 billion in unsecured debt and the UAW will likewise give until well past hurting. It seems likely that both labor and capital will find it easier to have these changes forced on them — there is nothing to be gained in making these kinds of concessions voluntarily.

Thus bankruptcy judge will have about 30 days to reset every claim on this massive business. He or she will restructure every labor contract, retiree commitment, bond, real estate lease, and dealer franchise agreement. Everybody will take some fresh new shares of stock in return for a big haircut. The federal government, having fired the CEO, will now wipe out the shareholders, pass out new shares to workers, dealers, and lenders, create a new board of directors, and hire new managers. Talk about lemon socialism.

The feds also have to pick a product line. This takes a careful analysis of car platforms — something GM has
been doing for decades. You end up with something like Chevy, Buick, and Cadillac nameplates. Chevy would make trucks, vans, and a couple of fuel efficient cars. Buicks could just replay footage of today's presidential endorsement, when Obama proclaimed Buick as America's most reliable car.
(Problem: nobody buys cars on reliability any more. Saying that a new car is reliable is like saying that a new laptop has
wireless — customers expect it.)

Rationalizing all GM products into a smaller, profitable business is a Rubic's Cube when you can forecast demand. Add a vicious recession, Congressmen lobbying for their local assembly plants, activists rallying behind favored nameplates (sweet Jesus, don't kill our Corvettes!), bondholders beating your brains out and the politics of this grow ugly fast. There is little chance that either GM managers or White House appointees and their BMW-driving consultants manage to get this right.

By summer, the UAW will be talking suicide strike, bondholders and dealers will be in the streets, and the state of Michigan will be trashed for a decade as tens of thousands of people are forced to abandon the state. This is probably not avoidable, it is not at all pretty, and for all of the admirable tough-talk from the Auto Industry Task Force, it is not politically sustainable. Obama will spend taxpayer capital because the alternative to a full scale liquidation of GM requires that he spend more political capital than he can possibly build or borrow. Translation: Barack Obama owns General Motors.

At best, we have a fast and painful pre-packaged bankruptcy process. The feds draw up all the papers, a bankruptcy judge signs them, and GM emerges smaller but with a competitive cost structure and a clean balance sheet. Sweet! Grandpa has a hair transplant, a suntan, and a triple dose of Viagra. What else could he possibly need?

A lot. GM still needs cars that people want to drive. It needs leaders who can rebuild a multibillion dollar global business from the ground up. I still like Jerry York as a GM turnaround guy — but he would be insane to take the job. Mitt Romney was the first guy I saw suggest that the feds back car warranties. He is from Michigan and a real turnaround guy. He's a lot better at fixing companies than he is at politics — sign him up. And we need a way to compete. GM needs designs and product technologies that can give it an advantage in the marketplace. It needs loads of process innovations, brand assets, and creative marketing. And it especially needs dealers and workers who care deeply about GM's success.

In short, GM needs the things it spent three decades killing and has lost the ability to develop. Gramps, as they say at the Auto Hospice, may "need a foreign partner" just as bad as uncle Chrysler did. Surely the Koreans and the Japanese will each take 2-3 plants. Maybe Ford wants one or two. And don't forget the Chinese. They have way too many dollars on their hands, they need distribution, and they LOVE their black Buicks. Chery is young, but it is starting to impress.

To most Americans, GM doesn't matter. Three decades ago, GM shuttered a plant here in Silicon Valley. Toyota reopened it and it has flourished, more or less, ever since. It did not cost taxpayers a dime and the UAW didn't even change shop stewards.

The history of government attempts to rescue dying car companies is not encouraging. Recall the tale of British Leyland — like GM, an amalgamation of many car makers. In the 1970s, Leyland owned 36% of the UK market when it ran into trouble (its cars never actually ran all that well). The Labor Government nationalized the company and invested several billion pounds in it. Today it is gone. The British still make and drive fine cars — but they wasted a huge amount of their tax money propping up a dying car giant until its final breath. Labor could not save Leyland, but they did resurrect the Tories. Leyland became the central story line for the rise of Margaret Thatcher – a risk that Obama should not ignore.

Best case, in five years, Americans will build outstanding, fuel efficient cars in 3-4 dozen production plants. These cars will be designed, manufactured, financed, serviced, and driven by Americans. The companies that make them will even be largely owned by Americans if you think that capital knows or cares what country it comes from. But the senior executives of these companies will mostly be German, Japanese, and Korean.

And you won't care. Except that you might look back and wonder if the $50-$75 billion bucks that the Auto Hospice looks ready to spend is really the best way to help the 123,000 people that GM employs in North America or the perhaps half million that would be directly affected by GM's liquidation. That money would buy a lot of transition assistance — and not everybody will need it (after all, the transplants are going to need auto workers and dealers at some point). Obama should remember the lesson of Leyland: every dollar to GM is a dime to the Republican Party.

Punch line: the US Auto Hospice cannot, should not, and will not "save" GM. We should of course offer significant help to regions and families affected by the demise of two auto companies. It may even be politically wise to spare no visible effort to save grandpa before kissing his forehead for the last time. But GM simply does not matter enough to the economy or to the American people to justify tens of billions on life support.

In the end, our metaphors will either guide or mislead us. Obama, especially, needs to keep his political symbols straight. He declares that the US auto industry represents a vibrant American middle class — something that has not been true in his adult lifetime. Obama served up a telling aphorism today when he summoned the vision of America's spirit in crisis — and tied it to sodden, self-serving, irresponsible companies, by claiming that it "sent those first mass-produced cars rolling off the assembly
lines; that built an arsenal of democracy that propelled America to
victory in the Second World War; and that powered our economic prowess
in the first American century."

Whew. Evidently grandpa GM still inspires iconic visions of big business, big unions, big cars, cheap gas, and — let's admit it — our personal as well as our national coming of age. It may have been your father's Oldmobile, but it was a helluva
lot of fun and explains no small part of our occassional urge to "save" GM. Face it, in high school, nobody ever got laid in a
Toyota.