Bob Nardelli’s guest column

No, it isn’t really. 

However, I heard and read a lot of talk about how the automakers said nothing substantial to Congress, and about how they had no plans, and no humility. 

Bob Nardelli, at least, seemed to have his hands on a lot of facts. 

Here is what he actually said on November 18, at least according to Chrysler’s release, to the Senate Committee on Banking, Housing, and Urban Affairs. 

 

Mr. Chairman, members of the Committee, I appreciate this opportunity to address the current economic and financial crisis, the impact it is having on the automotive industry, and the need for immediate action. 

During the 15 months I’ve been part of Chrysler, and since we’ve emerged as the first privately held American auto company in 50 years, I’ve been proud to work with a team of dedicated men and women determined to restore this 83-year old, iconic American brand to its rightful place in the automotive industry. 

We are asking for assistance for one reason: to address the devastating automotive industry recession caused by our nations’ financial meltdown, and the current lack of consumer credit, which has resulted in the critical lack of liquidity within our industry. 

With credit markets frozen, our customers – average working Americans – do not have access to competitive financing to purchase or lease vehicles…our dealers do not have access to market competitive funding to place wholesale orders for new vehicles…resulting in the constriction of cash inflows to auto manufacturers. At the same time, Chrysler has billions of dollars in cash payment obligations every month to pay wages, to pay suppliers, to fund health care and pensions, all in the range of $4 to $5 billion per month. 

This crisis has already driven U.S. sales to a 25-year low. In 2008 alone, our volume domestically has dropped from 17 million units to 11 million – a 38 percent decline. That volume drop is more than the total U.S. sales of Ford and Chrysler combined. 

Therefore without immediate bridge financing support, Chrysler’s liquidity could fall below the level necessary to sustain operations in the ordinary course. This would put at risk health care coverage for retirees, which is part of Chrysler’s nearly $20 billion total health care obligation, $2 billion in annual pension payments to our retirees and surviving spouses, approximately $7 billion in current payables, $35 billion in future annual supplier business, and 56,600 direct Chrysler employees earning $6 billion in wages. 

Independent research firms have quantified the fallout of a domestic auto maker bankruptcy to the overall economy, and the impact is devastating: 2.3 – 3 million in lost jobs, $275-$400 billion in lost wages, and $100-$150 billion in lost government revenue. 

But this is not a good option for Chrysler, and more importantly, for the auto industry or the broader economy – for the following reasons: 

1. We believe that retail sales would be impacted materially as a result of declining consumer confidence, and we will be forced to heavily discount existing inventory to move our product. 

2. Given our common supplier base - at Chrysler, 96 of our top 100 suppliers are common to Ford and GM - the bankruptcy of any one domestic automaker would place enormous pressure on the supply chain and, consequently, that company’s competitors. 

3. Our factories would likely be idled for a significant period of time while we renegotiate contracts with each of our thousands of individual suppliers. 

4. Restructuring and reorganization costs and expenses will be materially higher in connection with a Chapter 11 process: supplier and dealer support and marketing costs will increase, general economic dislocation will follow and significant fees and expenses will be paid to an army of bankruptcy professionals. 

5. The overall amount and cost of financing the restructuring will be significantly higher in a Chapter 11 process than the working capital bridge we are requesting here today. 

6. And finally, we cannot be confident that we will able to successfully emerge from bankruptcy. 

That’s why as an industry we are requesting a $25 billion working capital bridge to survive this liquidity crisis. However, both our private equity owner and I believe that while the immediate bridge financing is critical, the long-term solution to the industry’s problems and challenges requires industry consolidation and cost rationalization to eliminate excess industry capacity and redundant costs. 

I would expect Congress to insist that the American taxpayer be protected. We are willing to provide full financial transparency, and welcome the government as a stakeholder – including as an equity holder. We are fully prepared to comply with the current conditions and policies already put in place as mandated by the government, under the recently enacted Emergency Economic Stabilization Act. 

Our private equity owner, Cerberus Capital Management, L.P., has made it clear that it will forgo any benefit from the upside that would, in part, be created from any government assistance that Chrysler LLC may obtain. The principal of Cerberus Capital has stated that he will enter into legally binding agreements requiring the contribution to the government of the General Partner’s future profits interest related to Chrysler LLC which he might receive if any are ever earned. 

Immediately on the separating from Daimler in August 2007, and being new to the automotive industry, I recognized the need to question and sometimes challenge the status quo, and seek significant opportunities to improve performance throughout the business. We began an aggressive restructuring and transformation of our business as an independent American auto company. 

During the first 60 days, we approved more than 400 line item design changes, representing an investment of half a billion dollars in improvements to our products’ reliability, durability, fit and finish, and consumer appeal. We offered our customers a lifetime powertrain warranty to build their confidence. Due to a focused product quality improvement effort during the past year, we’ve seen our warranty claim rates drop by 29 percent and the improvement trend continues. 

We made tough decisions to reduce operating costs and adjusted production schedules immediately. We prioritized every product investment with a strong emphasis on improving energy security and environmental sustainability by introducing advanced powertrain technologies, while at the same time we discontinued four vehicle models. We also identified over $1 billion in non-earning assets to sell and we’re more than 75 percent toward achieving that goal. 

Since 2007, Chrysler has reduced 1.2 million units of capacity, which represents over 30 percent of our previous installed capacity, and which resulted in the elimination 12 production shifts. Over the past 10 months alone, we’ve reduced our fixed costs by $2.2 billion, and unfortunately, by the end of the year, we will have furloughed over 32,000 employees. That is the most gut-wrenching part of this job, to see the effect on the lives of good men and women who lose their jobs through no fault of their own, but because of the actions the Company is forced to take in these difficult times. 

We have increased our manufacturing productivity to equal Toyota as America’s most productive automaker in terms of hours of assembly per vehicle, and our recently negotiated labor agreement was an important step in making our cost structure more competitive with transplants by 2010. 

To further enhance our product portfolio, support growth and improve our cost structure, we continue to aggressively pursue strategic alliances and partnerships with other companies. I believe more restructuring and consolidation is required for the industry to be viable in the long-run. We would welcome the opportunity to have an open discussion with the new Administration and Congress on a collaborative approach to restructuring that would ensure any Government resources invested in the industry are used efficiently and help achieve important national public policy objectives. 

It is equally important that the lack of liquidity to provide loans and leases to customers and financing to dealers is addressed immediately. It is imperative that our affiliated financial companies receive access to competitive liquidity and financing capacity. They must in order to provide credit to our customers - average working Americans - and support wholesale orders from our dealers. 

Historically, over 90 percent of all new vehicles were purchased or leased with financing assistance, and the lack of readily available financing has simply frozen sales. A perfect example of this consumer credit crisis is that 20 percent of our revenue disappeared overnight when our finance company was unable to offer leases. These sales literally vanished. 

At Chrysler, 75 percent of our dealers rely on Chrysler Financial to finance their business, and 50 percent of all customers finance their vehicle purchases through the Chrysler Financial. Normally, these loans and leases are securitized and sold in the secondary market to generate fresh liquidity and financing capacity. 

Today, there is virtually no secondary market, and therefore, no way to raise capital. Money is not available for dealers to finance their wholesale orders, invest in their facilities, and hire and train employees. Competitive loans for the average working American – our customers – are virtually nonexistent. This has directly and dramatically depressed vehicle sales, putting at risk not only auto manufacturers but also the widespread network of suppliers, vendors. In Chrysler’s case, 3,200 entrepreneurs…small businesses owners called dealers, and the approximately 140,000 people they employ in every state across the country. The National Automobile Dealers Association estimates more than 700 of them will go out of business by year end. If we don’t secure a bridge loan, all 13,600 dealers are at risk. 

There are 4.5 million people depending on this industry, and without assistance, nearly three million of them could lose their jobs in the next 12 months, according to a research memorandum published November 4, 2008, by the Center for Automotive Research. Failing to act now will hurt many American families and undermine our country’s economic recovery, far outweighing the costs related to supporting an industry that touches every district in every state of the nation. 

The crippling of the industry would have severe and debilitating ramifications for the industrial base of the United States, would undermine our nation’s ability to respond to military challenges and would threaten our national security. Chrysler has long contributed to our national defense. Our Jeep® was an indispensable part of our nation’s efforts in World War II and Korea. 

Immediate financial assistance will serve the country and the economy directly in two key ways. First, the lifeblood of the U.S. economy will continue to flow. The industry will be able to continue to pay at its current levels $22 billion in annual wages to our employees, $13 billion in annual pensions to our retirees and surviving spouses, and meet our current commitment of $102 billion in healthcare costs to employees. We will continue to pay $156 billion annually to our suppliers and work to keep them strong by providing significant additional financial relief for distressed suppliers fighting to stay in business. 

Second, America’s auto companies are investing in innovation. Capital investment in new technologies, improved operations, and future product will be able to continue, including a combined $12 billion in annual spending for research and development. As an industry, we are moving full speed ahead to make the transition to advanced propulsion vehicles that will help support national energy security and environmental sustainability goals. 

Chrysler plans to emerge from the current downturn as a lean, agile company. We are, and will continue to be the quintessential American car company. Currently, 73 percent of our sales are in the U.S., 61 percent of our vehicles are produced in the United States, 74 percent of employees work in the U.S., 78 percent of our materials are purchased in the U.S. and 62 percent of our dealers are based in the U.S. 

Today, Chrysler has a very strong pipeline, with a product renaissance for 2010. In September we revealed our ENVI electric vehicle program, and announced that we will begin producing one of these electric-drive models for North American consumers in 2010. This underscores our commitment to deliver environmentally friendly, fuel-efficient vehicles to customers, and to meet this social responsibility faster and more broadly than any other manufacturer. 

Today we are asking you to help us bridge a chasm created by an unprecedented financial meltdown. We are also asking you to consider investing in a company that will deliver real results for the American taxpayer. 

I recognize that this is not an insignificant amount of money. However, we believe this request is the least costly alternative considering the options we face… with less impact on human capital, and would provide stimulus, as opposed to further depress the economy. 

Thank you very much. 

 

The Three Stooges of Detroit

The pathetic performance by the CEOs (Moe, Larry, and Shemp) was almost enough to make me change my mind about supporting aid for the automakers. They were that bad. Did their PR departments have any clue how to prepare them, or did they all just go off the reservation on their own?

Did Wagoner actually object to executive removal because anyone brought in wouldn’t know what they were doing? As opposed to what? An inbred suit that saw the stock go from $90 to under $3?

Could anyone do worse?

Did Mulally actually have the nerve to answer the pay-forfeiture question with ‘I think I’m okay where I am’? Oh really? Ford closed at $1.37, and you’re okay where you are? Seriously?

An entire industry is on the brink and this is what you fools bring to the table? Are you flippin’ kidding me?

Nardelli, at least, offered up his salary. Of course, he can afford to since even with the tanking market there’s probably enough of his Home Depot golden parachute left to live on. Still, he must be given credit for doing what Larry and Shemp wouldn’t, and from what I read they didn’t even have to beat it out of him.

Regarding the private jets….one word: Netjets. Fractional ownership in executive jets; all the convenience and a very small percentage of the cost. They should (ahem) consider it.

Down here in the muck a bunch of us are being asked to make sacrifices in order to save our jobs (buh bye raises and bonuses). It’s only fitting that those in the ivory towers join in the fun.

The life of a real auto worker

Today, the government agreed to bail out Citibank, putting in $45 billion and backing $300 billion in “high risk” loans. 

There was no discussion of whether the CEO flies around in a corporate jet, or whether he makes too much ($3.16 million in 2007 plus an agreement to provide him with a further $102 million in the future; and that’s for the new, “rescue man” CEO. The outgoing CEO got $41 million in 2007). 

Nobody asked the tellers to take a pay cut, either. That stands in stark contrast to the autoworker bailouts, where most columnist, bloggers, and politicians seem to agree that the UAW should either be crushed completely or agree to slash members’ pay to levels below nonunion workers at import plants. 

We posted the following back in 2004 or so. It seems the average American still has no idea what happens inside a car factory. By the way, it is getting somewhat outdated, since Chrysler is now trying hard to use the intelligence and wit of its workers to fix problems without management interference (that’s the team-based work system).

Think for a minute about the average “UAW autoworker”… What do you visualize? Perhaps some fat, lazy slob who is paid $25 an hour to torque four screws every two minutes? Most likely, since that terrifyingly unfair stereotype of the drunken, lazy bum who whines about everything has existed for decades. I’ll be the first to admit that these kind of workers do indeed exist, but they exist everywhere, not just in the auto industry. But the truth of the matter is that they are few and far between nowadays.

Truthfully, the vast majority of people that I have worked with are drastically different than that awful stereotype described above. We are a very dedicated force of hard workers who struggle endlessly to do the best job we can do. We face the constant onslaught of job cuts, outsourcing and plant closings, causing us to endure frequent layoffs and getting us yanked from plant to plant while losing our seniority. We fight an uphill battle to build the best quality vehicle we can against nonstop changes that impact our job. We are always seeing the workforce trimmed down and thus having more operations added to our job. The line speeds keep getting faster and faster, giving us less time to do even more work. Our jobs are constantly “time studied” to see how much more work they can add to each job in hopes of cutting a few hundred more jobs in the plant. The engineers who devise our operations never have to actually do them, and no “flunky” line worker is ever going to convince them that it’s messed up. So what if we tear out our tendons or endure stress fractures from trying to do some screwed up operation that some industrial engineer came up with? It’s not their problem now is it?

Management exists for two purposes… to cut jobs and fire a worker whenever possible. Most of these managers have never worked a day of manual labor in their lives, and God only knows where they find some of them. They don’t care about anything except making their number for the day. God forbid the corporation actually used the skills and experience that their employees posess, because that might make them look bad. No, we’re simply human robots. We’re not allowed to have feelings, dignity or any kind of common sense. And personal problems?? Leave it at the door, buddy!

I think back to the days growing up with a father working in the auto industry. My mother didn’t have to work. We owned our home and cars outright and never had bill collectors calling to bother us. But it’s not like that today. To have anything to show for the gruelling work we suffer through means we have to be in debt up to our eyelids. We get squeezed from every direction by steadily increasing prices for products and services of rapidly declining quality. Durable goods used to be designed to last a lifetime; now, we’re lucky if they’re still in usable condition when they’re finally paid off. I used to think that having a job that paid $25 an hour with benefits pretty much meant you were set for life. Haha… I sure got a swift kick from reality there, huh? Nowdays, it’s hardly enough to raise a small family on without having a wife that works 40 hours a week as well.

…

Last, I have to say that there is one thing that I find to be incredibly demoralizing and insulting… that is when people say that autoworkers are “overpaid slobs” and even say such absurd things like we deserve to lose our jobs. Excuse me??? Some sleazebag CEO can rape a company for a year and bail out with a multimillion-dollar “severance package” yet I’m overpaid at $45k a year?? Some thug-wannabe can grab his privates and cuss into a microphone and make millions of dollars a year, yet I’m overpaid?? Some punk can make millions playing athlete in “pro wrestling” but I’m overpaid for doing an honest day’s labor??

I don’t know if you feel that way because you have no skills or work for $6 an hour or whether you’ve lost touch with reality and feel anyone without a Master’s degree and seven-figure annual salary is human garbage, but simply put… YOU’RE OUT TO LUNCH! My wages are barely enough to raise a family on in this day and age. I can’t honestly comprehend how anyone can raise a family on any less than that. Thank God for the medical benefits, or we’d be $90k in debt because of the heart attack I had while working on the line two years ago! I honestly pity those fellow human beings who are struggling and suffering in the non-union shops for less pay and benefits. I don’t know how they can survive, because I’ve been there before myself.

Before you start jumping to conclusions, let me just say that we don’t live an extravagant lifestyle by any stretch of the imagination. You’ll find no mall-rat materialism and expensive indulgences around this house, buddy! There’s definitely no Caviar in our refrigerator… We rent a modest apartment, we have no yacht, snowmobiles, or big screen TV, and we drive 12 year old vehicles. I don’t do drugs, I hardly ever drink, and I don’t hang out in strip clubs. Yet, we’re on the verge of bankruptcy just trying to live day to day… and you think autoworkers make too much. Until you have worked on the assembly line yourself, you have absolutely no right to tell me I’m overpaid. I have just as much right to earn a decent living wage as you do, regardless of what kind of work I do to earn it.

Words of wisdom from the Freep

You have to read this Freep opinion… and pass it around… I think it really adds a lot of perspective to the bailout talks.

http://www.freep.com/article/20081123/COL01/811230371/1210/BUSINESS

(Thanks, Ed Stockelbach.)

That said — personally, I’m in favor of throttling back the executive perks and compensation as far as we can get away with it. If nothing else, it’ll make it easier on all those working guys who have seen their pay and benefits cut along with their job security.

Combined heat and power

Don Holohan, steam heat expert, featured this article in his recent newsletter. Since few of you follow steam heat, I thought it was worth repeating here. It’s particularly relevant to city dwellers, given the new impetus for locally generated power (in New York, miniature power stations are apparently all the rage; apparently Venezuela has been trying less successfully to localize power generation, too) that reduces transmission loss. 

Getting steamed up about heat loss

By the way, this article has NOTHING to do with steam heat, which is pictured below. And for those of you “in the know,” that IS a mildly improperly piped installation (the pipe should come up another six inches before bending around). It’s been fixed.

My own conditions for a bailout (update)

Nobody asked me for my opinion, but then, I didn’t ask Mitt Romney, Michael Moore, Rush Limbaugh, or any other big-mouths for their opinions, either. 

Incidentally, the auto industry economists DID clearly see economic troubles coming, at least six months before it did. Ford and Chrysler acted. GM did not.

So here are my conditions for loans or grants to the auto industry:

1. Executive pay has to be cut, if nothing else because we’re asking taxpayers and others to sacrifice. That means six figures. No more. Indeed, because I’m personally so frugal and can’t understand how someone who got over $20 million last year can possibly need money ever again, I’d set a peak of $500,000. That’s enough. Anyone who is dedicated will happily work for that. Anyone who isn’t dedicated can leave. Good riddance, and good luck finding a better-paying job.
2. Every executive getting a retention bonus at Chrysler has to give it up. They can do this voluntarily. If they don’t, let Chrysler’s lack of loans be on their head.
3. Rick Wagoner gets his walking papers. He has never presented a serious plan for GM’s recovery. 
4. GM’s board has to refresh at least half its members, since they clearly have not been paying attention.
5. Ford and Chrysler, you’ll notice, have not been singled out by me. That’s because Chrysler has been firing on all cylinders since Daimler left; they cut back drastically before they needed to, they’ve slashed warranty claims by around 30% in a single year, and they’re working hard to make their cars more desirable - and far more efficient, now making the most fuel-efficient minvan. Ford, over a year ago, started working on making its lineup more attractive, too, and has been working on gas mileage with notable success. The board of Ford was clearly not asleep as GM’s was.
6. The UAW has to make yet more concessions. I’m sorry, but it’s the only way the public will buy a bailout. I know the labor costs won’t amount to much, and everyone else is sacrificing in this economy. I’m looking at relatively minor cuts, though - $1 per hour and a higher medical deductible. I don’t want autoworkers to get minimum wage. It’s a very tough job - filled with noise, excessive heat, unpredictable hours, etc.  Finally, I know the job bank isn’t really still used, but the remnant has to be eliminated. The public hates it.
7. Yes, the automakers should agree to beat Federal efficiency standards. Not by much, but by more than a trivial margin. Like at least 1 mpg. Come on, it’s symbolic. Show you care.
8. All corporate jets have to be sold, period, end of story. It’s symbolic, again.
9. No expense accounts for anyone making over $250,000. Yes, I know they can cheat and have subordinates buy stuff for them. That’s why we have #10.
10. All expense accounts to be available to the public.
11. For Chrysler, the books have to be made available to the government. Yes, they’re a private company. If they take public loans, they give up their privacy.
12. No moving capacity offshore. If they want to build production, they can do it right here in North America.
13. China… I don’t know what to say about China. Better minds than mine will have to handle the conundrum of shifting to Chinese suppliers. Frankly I think our trade policy with regard to China is foolish and needs to be changed, and that’s a separate issue. It’s not free trade now; the conditions they impose on our exports are far different from our conditions on their exports.
14. No mergers! If they want to do that, they can give back the money and THEN merge. We don’t need to waste our tax dollars on lawyers, consultants, and investment bankers. If they find synergies, fine, let them work together like they have in the past. Nobody’s stopping Chrysler from licensing the Malibu or GM from licensing the Ram. Nobody is stopping Chrysler from buying GM transmissions or GM from buying Hemi engines. After all, Chrysler is building Nissan trucks, Nissan is building Chrysler cars… without ownership.
15. As the Wall Street Journal noted, there needs to be a lot of thought over where the government is positioned as a debtor. There does have to be compensation for risk. At the least, some equity should be handed over… not a huge amount like 10% of the company, but also not a trivial amount; and it should be written into the law that the government must sell this equity within six months of the loan being repaid.
16. The government has to get a seat on the board, just like a major investor would.
17. The loans should come out of the $350 billion earmarked for banks. The banks haven’t been using this money the way they should have been. This way it’ll just be eliminating the middleman.
18. Every automaker needs to present a detailed recovery plan, just like Lido did way back when. Jimmy Carter turned Chrysler down until they had a plan, and I see no reason why Congress should be any different.
19. (New since first posted) The loans would be ON TOP of, not INSTEAD of, the $25 billion already appropriated. I don’t like the White House’s usual games.
20. Along with the loans would come a new Federal law pre-empting all state laws on franchises, which would make it easier for GM, Ford, and Chrysler to drop unwanted brands - like Pontiac, Saturn, Mercury, and Chrysler - so they could focus on a smaller number of core brands.