April 22nd, 2009 • by David Zatz
It’s time for Cerberus to start acting like patriots, instead of simply claiming patriotism. They need to give up on making a big profit from Chrysler – which is to say, they need to give up part of their stake in Chrysler Financial, and to dismiss any executive who will not limit their salary as demanded by the government as a condition for the $750 million loan. Chrysler Financial needs to come back for Chrysler itself to come back. Steve Feinberg has more money than any ten people can spend in a lifetime; he should be putting it where his mouth is, and bailing out his investors to compensate for the loss of equity. Or, perhaps, instead of giving away equity in Chrysler, they should be giving away some equity in Chrysler Financial to conform to government demands.
Had Cerberus’ leaders never played the patriot card when acquiring Chrysler, I would not hold them to a sacrificial standard. But real patriots don’t just play word games, they sacrifice. K.T. Keller voluntarily took a dollar per year, and at a time when profiteering would have been easy, he also held Chrysler’s profits to $1 per year.
Incidentally, while the executives at Chrysler Financial are being blamed for the loss of the $750 million loan, I wonder whether Cerberus chose not to demand that executives limit their pay, in order to sabotage the deal so that Cerberus would not look bad for refusing to give up their equity.
Chrysler executives – all of them – should be taking a serious pay cut, at least during the interim. Executives are paid multiple times what union workers are, and they can sacrifice more. I think everyone is tired of executives demanding pay cuts from everyone else, and then saying that “if we pay ourselves any less, we won’t be able to maintain morale.” The fact is, there has been absolutely no serious research done to show that pay is the key factor in getting the best people. Indeed, especially among CEOs, the opposite has been true — we’ve seen that the best-paid CEOs are often the worst performers. (When I say “pay,” by the way, I mean “total compensation package.” They like to play little games on us.) Sure, there are exceptions – Walter P. Chrysler himself, for example – but in general, you don’t get what you pay for in executives any more than you do in management consulting firms or computer programming outfits (hi, KPMG and Siemens.)
Fiat is getting a great deal, and it’s about time they put something onto the table other than technology that will not cost them much to give away. There’s been talk they might pay for the tooling to sell their cars here, which is a nice start, but what about the tooling for the Chrysler versions? There have been few details given out, and some of those have been contradictory. The latest news that Fiat might sell a division to pay for the deal is a good sign.
And then there are the unions. I disagree with the governments’ (including Canada) demands that the unions take the same overall pay, including benefits to past employees, as “non-union import plants.” Then people will end up getting paid more at the nonunion plants, at least until they drop their own wages. Really, there are two issues here – fairness and the domino effect. (I’m not including the question of government intervention in private industry, because in this case, private industry asked for it.) With regard to fairness, there are also two sides, the retirees – who contracted for one thing and are apparently to get another – and the current employees, who are being asked to get paid not only much less than they are under contract for, but also less, it seems, than workers at foreign factories in the United States.
As for the domino effect, consider what will happen to the guys at the import plants once the UAW and CAW are rendered useless and harmless. There will be absolutely no incentive for them to deal with safety and health issues or to provide better than the prevailing local wage. Salaries at import plants will simply plummet to compensate for the new UAW deal, and then the automakers and governments will demand that the UAW drop again until everyone reaches minimum wage. If you think that’s a good way to compete, think about what this will do to the middle class – hundreds of thousands of people once doing well will be on sustenance wages ($6.55 per hour), having to pay their own health insurance ($1,100 a month for a decent family plan). The people who sold things to those families will lose their incomes and so on. Anyone who thinks this does not affect them, will find out differently. Anyone who thinks that banks are unique in supporting our economy will also be corrected, the hard way.
That said, there will need to be more sacrifices from the guys who make the cars. I believe, though, that these should be clearly temporary in nature. There should be an understanding that once there are profits, wages will go back up, if not to their current levels than at least to levels somewhere in between.
Chrysler’s attitude towards Canada has been shameful. The Canadians have been more loyal to Chrysler than any other nation, and in return they are being threatened with the shutdown of all local plants and facilities. That’s just wrong. What’s more, Chrysler is using exchange-rate games to get lower wages from the CAW. That’s wrong, too. The public threats may well backfire, and Chrysler would deserve it — but who would lose? Not Cerberus executives, who use other people’s money, but the investors and the employees.
Finally, I have been surprised by the Obama administration’s actions throughout this crisis. Obama has been doing admirable things in a wide ranging of areas, outside of the economy, and it seems that every day there is a minor news item about some old scandal that’s being addressed, from getting nuclear weapons under control to constructive negotiations with other nations to stopping the giveaways of our resources to foreign mining companies. But his use of Wall Street insiders will backfire, and the double standard of money going to banks and industry is inexplicable even by his own Treasury Secretary. I never thought I would see a Canadian PM or a Democratic President demanding that unions give up negotiated contracts for nonunion wages, but then, it seems that Wall Street is calling the shots. (Perhaps with China’s assistance.)
The fact of the matter is that if you want retiree costs to go down, the best way to do it is to increase the sales of the automakers, not cut them. Chinese automakers are getting stronger and stronger, to the point where their #4 company easily beats our #3 company in sales, and China is soon expected to become the largest auto producer in the world. We’re slashing our capacity while they’re building up. Companies from India, Korea, and Germany are planning new factories in the United States, and that’s not to mention Italy; and we’re slashing our capacity, and the people are cheering.
When Chrysler started its 1990s renaissance, it had the highest per-car pension costs of the Big Three. By the mid-1990s, it had the lowest per-car pension costs. The fact of the matter is that the more cars you build, the more you spread out the fixed costs. As the automakers accede to public and government demands by shrinking, they increase their fixed costs. The only ways out are to expand, or to screw the pensioners. We’ve apparently chosen Door #2 and the American public is cheering.
Chrysler, incidentally, did not become successful in the 1990s – enormously successful – by slashing costs, which GM was doing at the time. GM’s cost cutting led to bigger losses. Chrysler’s investments led to huge profits. There’s a lesson there for anyone who cares to learn about it, but apparently that’s beyond journalists, Wall Street leaders, the White House, and both political parties, one of which wants the automakers to slash and burn, the other of which simply wants them to go away so that foreigners can build more plants in states that vote “the right way.”
There is still time to change, but it will require leadership. I have yet to see President Obama stand up for the automakers. Admittedly, it isn’t easy. They have had incredibly vain leaders like Wagoner and Mulally, who insisted that you can’t get a decent CEO for less than $20 million a year. They have had a culture of penny-pinching and low standards which gave the Japanese an edge and brought us technical inferiority. They have had a short-term view. And, in Chrysler’s case, they sold out to a horrific German company which they must have known would lead to awful results (over the objections of the only executive who spoke German and knew what was happening.) We have endured the Ford Escort and Tempo, the Chevette and J-cars, the Ultradrive and Neon head gaskets, the insanely over-recalled Ford Fairmont and Ford Focus, the oddly conceived Chevy SSR and Pontiac Aztek, and the squandered-opportunity Neon and PT Cruiser, not to mention overproliferation of models, complete ignorance of brand fidelity, and other moves which could only be described as “they just shot another hole in their own feet.” From the union workers, yes, there have been cases of malingering, laziness, violence, and drug use – the latter two mainly before the Japanese Car Invasion, and the former two apparently rare now. But the fact is that we still need them, and for all the foolishness of poorly tested contrivances (GM diesels, Chrysler Lean Burn, Ford vehicles), bad marketing, bad branding, executive excess, and the like, they have also had times of genius (Northstar, new and old Hemi, Neon) and sheer lovability.
More important, they are OURS. They are the North American automakers.
In some places, that’s the most important thing.
The President needs to use his bully pulpit to start promoting American vehicles instead of talking about how bad they are. This country needs to start investing in autos, not tearing down its own plants so Hyundai and Mahindra and Honda and Toyota and Volkswagen can have less competition.
China believes in the industry so much that the government appears to have started numerous automakers. France invested heavily in their industry and it’s competitive now. German protects its automakers, and so does Japan. Only here do we demand a slash and burn approach, and that’s got to change. Our futures are all riding on it.
