Chrysler and the White House report

One of the interesting things about the government report on Chrysler is how it has been received. Those who oppose aid to automakers slammed it for not demanding that Chrysler and GM immediately be put into bankruptcy, but most of the critiques I’ve read have been from Chrysler supporters. They had some choice words for Obama which ignore one fact:

Obama is still going to make massive loans to automakers and their suppliers to keep them afloat. $8 billion has been promised to Chrysler alone – if they link up with Fiat.

Any criticism of the committee based on whether its members come from certain states, drive certain cars or don’t drive at all, etc., is irrelevant to the true questions: were they on target? were they fair? and are their recommendations likely to result in a vibrant, successful American auto industry at minimal taxpayer cost and minimal government involvement?

Now, the report was correct in assuming that an independent Chrysler would probably not maintain its market share. Dealers are having a very hard time with the credit problems and Chrysler is disproportionately hit by that. Honda, Toyota, and even Ford have relatively solvent loan agencies. Chrysler and GM do not, and their customers are having to go across the street to the friendly Ford and Toyota dealers to get their cars, if they want them.

I believe that the committee did not use Consumer Reports as their sole arbiter of quality because they seriously believe that magazine is the last word in quality rankings. I believe they used Consumer Reports because that magazine is trusted and respected by more Americans than any other source, and I believe that is because Americans are, for reasons I never understand, taught limited-use subjects like calculus instead of research methods and statistics. In short, they were explaining that Chrysler would not be able to overcome its reputation for poor quality for several years at least, even if their quality suddenly shot up to be the best in the world. If no Chrysler developed a fault in the next year, it would not affect the public perception one little bit.

The committee’s decision on Fiat was exactly the same as Cerberus’ decision. That was a foregone conclusion. I personally have said much the same thing – Chrysler needs Fiat. Fortunately, Fiat needs Chrysler, too. Not as much, admittedly, but Fiat, unlike Mercedes, would share fully and use Chrysler’s V6 engines and large-car platforms without hesitation.

I’m still trying to figure out why Chrysler has to get its bond holders to give up much of their debt. The biggest bond holders are places like Citibank, which, faced with losses from Chrysler, will immediately go begging to the Treasury, and will get nice huge loans at 0-1% interest. Chrysler, on the other hand, will pay 5% interest. I don’t see the rationale here.

I also think the committee is not giving the companies credit for the future. Chrysler, in particular, has reversed the tide; the 2009 Ram would have been a killer had the economy not nobbled it. The revised Patriot is getting rave reviews; the Challenger always has and recently won a comparison against the Mustang and Camaro. The Journey is outselling the Flex. The 200C promises to be a killer. The Phoenix is coming soon, as are working electric cars – not pricey, impractical show pieces, but real cars for real people.

In short, Chrysler’s future is bright if they can get past 2009 and the first half of 2010, even with all the other problems they have. I think they could stand alone – but I also think a link with Fiat will help dramatically speed their recovery from Daimler.

The final misperception from the report is, I believe, that Obama and the committee are both overstating their case. They almost certainly want the executive ranks to be cleansed of the greedy egomaniacs and yes-men that have come home to roost at GM and the Eaton-and-then-Daimler-controlled Chrysler. They are demanding that the UAW and CAW be demoted to conditions at or below the Japanese transplants, which is not fair or, in the long run, desirable; but while they have not said it in so many words, I believe they want the executives to get the point that unlimited salaries, perks, and bonuses are not welcome.

Yes, I’m looking at you, Mulally. You, the guy who’s pretending Ford isn’t going to need loans though the balance sheets sing a different song, and you’ve demanded $9 billion in credit that you claim you won’t use.

Unlike many others, I don’t think Wagoner should have been retained, by the way. He didn’t get it. His reactions to the economy were slow and he had eight years to prepare for the possibility of higher gas prices. Yes, he hired Bob Lutz. Fritz Henderson, on the other hand, flies commercial airlines voluntarily – because, as he said, each flight on the corporate jet costs as much as a UAW job for a full year. Each flight avoided is a job saved. That’s not a bad attitude in these times. Wagoner fiddled while GM burned; he was late to make any cuts, and then his cuts were relatively minor; he, like Mulally, resisted any reduction in perks and bonuses for the overpaid management; and, in short, he did not show himself worthy of leading GM in troubled times. The government has not taken over GM. It has shown due diligence and demanded that the company be led by someone who can push it into the 21st Century.

I think the White House will continue to be harsher than called for, because they are trying to pummel some sense into the overpaid executives’ heads. I also think they’re trying to get the companies to give up things of sentimental value, like some factories or brands or nameplates (over at GM, at least. I don’t know what Chrysler can intelligently give up.) They are also trying to help the companies negotiate with debt holders… hence the constant threats of bankruptcy.

Let’s not forget that Obama has addressed a key customer concern by creating a warranty backup plan, so that people can buy a car without fear of the warranty becoming worthless. While the American people overwhelmingly want the automakers to go without a penny of government loans, Obama has stood up for them, bucking Congress and public opinion alike. He is providing more interim loans, he is not demanding that GM and Chrysler enter a disastrous merger, and he is not demanding the kind of insane conditions we’ve seen before. There is a likelihood that the White House or Treasury will soon deliver more loans than GM and Chrysler have asked for, since the committee believes the two automakers will need more.

Also, nowhere did Obama say that the government would run the automakers once the loans were granted. He wants the plans up front, as any reasonable investor would. But there’s no committee of commissars running GM and Chrysler under any program yet described; though major investments (the last figure I heard was over $25 billion) would, as one might expect, have to be cleared. That’s probably to prevent GM and Chrysler from merging without permission.

And if Obama seems to be harsh towards the automakers and the autoworkers, let us remember that most spokesmen for the “other party” – and many within his own party – believe GM and Chrysler should be left to die. Not Citibank, of course, or AIG. But Chrysler and GM, definitely. Obama is walking a fine line. No matter what he does, few will approve of his actions.

I do think the committee should have pulled its punches more. Its indictment of Chrysler was extremely harsh, and its appraisal of the company’s products could have been written by the less principled auto bloggers. That will have an impact on sales, and to unnecessarily impact the automakers’ sales is foolish at best.

I also found some of the findings absurd. Of course Chrysler spends less than GM on engineering; it’s called efficiency. They can’t lambast GM’s overspending and than yell at Chrysler for spending too little compared to GM. Well, they shouldn’t, anyway. Obviously they can, because they did. Some of their detailed remarks might have been inaccurate; I was under the impression Chrysler was fairly far ahead in flex manufacturing, but apparently others have surpassed them by a good margin when I wasn’t looking. That’s possible.

The demand for factory closures surprised me, but it shouldn’t have. It seems like money men are always assuming that if GM and Chrysler close factories, America’s capacity will go down. That’s only true for the amount of time it takes for Toyota, Honda, Volkswagen, and Hyundai to build new factories. Shrinking won’t work; it’s part of the reason Chrysler is in trouble today. Had Mercedes put more money in instead of constantly cutting the company down, they might still be profitable. Or at least, might have been profitable until now.

Chrysler is keeping its factories open for a reason: they expect new product. That means the 200C for Brampton, a new Dakota for Warren, better Ram sales for Warren and Mexico, and Fiats and Alfas for Toluca, Belvedere, and Sterling Heights. They have the new Phoenix coming, they’ve fixed most of the non-powertrain criticisms of their vehicles (with new engines fixing most of the rest), they have electric technologies in case gas prices spike again. Shutting down more factories – especially Brampton, which is on the verge of producing the killer 200C – would be insane.

The demand that Fiat not get its full stake until it shares its technology seemed prudent. I’m hoping they stop Fiat below 50% ownership. Ideally the 20% Daimler share would end up in the U.S. or with Fiat, because it would be best if Chrysler remained at least 50.1% American owned.

I’m hoping the committee can be convinced that short-sighted cuts are, well, short-sighted. But I’m also assuming it’s not quite as inane as that report, and the analyses of it, would indicate.

I’ve seen President Obama in press conferences. Remember, this nation went through eight full years without an unscripted press conference; and Obama took all questions. He answered them. Admittedly, he has a bad habit of saying “ummmmm” first, instead of remaining silent while he thinks; but he does appear to be pretty bright and, with some obvious gaps (like knowing where the car was invented), well informed. He’s also retaining the ultimate power of decision. I think we need to be cautiously optimistic.