GM and Chrysler – Last Exit Before Bankruptcy

30 Mar

McClatchy is reporting as follows:

President Barack Obama on Monday will reject requests for almost $22 billion in new taxpayer bailout money for General Motors Corp. and Chrysler, saying the car makers have failed to take steps to ensure their viability.

The government sought the departure of GM chief Rick Wagoner and said the company needed to be widely restructured if it had any hope of survival. It said it would provide the company with 60 days operating capital to give it time to undertake reforms.

The government will grant Chrysler 30 days operating funds, but said it must merge with another carmaker in order to remain viable. Talks with Italian carmaker Fiat are underway.

GM and Chrysler have already received $17+ billion in federal funding to stay afloat, and had a further need for federal bailout money in order to avoid bankruptcy. They had both submitted strategic plans for recovery which have been deemed inadequate.

The problems with GM and Chrysler are so long-standing and fundamentally structural, there’s probably little way they can be fixed without something drastic like bankruptcy. The problem is that the public’s already weak confidence with these automakers will only become weaker when questions about warranty service enter into it. The feds, therefore, have instituted a warranty guarantee program to avoid that problem.

Many are making much of the idea that forcing Wagoner out represents little more than communism. The difference, of course, is that under communism the government expropriates private industry without recourse. Here, the companies came to the federal government begging, hat in hand, for money – and they accepted it under certain conditions.

Chrysler already got bailed out once in the early 80s, and it repaid the government every penny. This is nothing new, and accusations that the government is just trying to run business is intellectually dishonest and silly. The government didn’t ask to bail out GM or Chrysler – the automakers made the plea.

When Chrysler needed that bailout it was in the wake of the 70s era energy crises which saw MPG trump HP in people’s purchasing choices. Honda, Toyota, and Datsun sold fun, fuel-efficient cars while Detroit was still making crappy gas guzzlers. Attempts to compete in the small car arena came too slowly, and more often than not, they were failures. GM’s horrific late-70s diesels still curse passenger car diesel acceptance in the US to this day.

Throughout the earlier part of this decade, GM, Ford, and Chrysler relied on the sales of gas-guzzling pickups and SUVs. People love them, and the companies’ margins were higher when they sold these vehicles. All of a sudden, when gas hit about $4.00/gallon, SUVs and pickups getting 15 MPG were unsellable, and domestic automakers were faced with a small handful of decent, attractive, fuel-efficient cars. It’s no surprise that the company that would put the Aztek to market would soon fail.

GM and Chrysler have made poor decisions, and built mediocre vehicles for many years. They’re also the backbone of American manufacturing. When they came begging for public money, they sacrificed a great deal.

18 Responses to “GM and Chrysler – Last Exit Before Bankruptcy”

  1. Howard Goldman March 30, 2009 at 9:46 am #

    Did I read it correctly in the Wall Street Journal this morning? I thought it said that the government has a majority stock ownership of GM. Can this be true?

    Obama stated that he is going to force more concessions from each party. I guess that events will tell us if the government took control of GM or if in reality the unions have taken control. So far, Obama has ousted the CEO but not the union leader.

  2. STEEL March 30, 2009 at 10:15 am #

    Obama has no authority in the Union. How could he oust its elected leader?

    That is the car we would still be driving if the Japanese and Germans did not come along.

  3. Howard Goldman March 30, 2009 at 10:39 am #

    Steel,

    Up until a couple of months ago, the government had no authority over private enterprise to fire an executive.

    We are living in a time when everything is possible. Just like they all promised during the campaigns.

  4. mike March 30, 2009 at 10:52 am #

    howard’s right, Ike did’nt fire the CEO of Packard did he?

  5. STEEL March 30, 2009 at 11:07 am #

    Howard

    The company asked the Government for money. Since they ran their company so poorly they could not get private investors. So the company execs asked the Government to be an investor. Now, as the largest investor in the company why would the government not have the right to fire its under performing CEO? Are you saying that the government should just give GM money and not expect anything in return? WOW, talk about corporate welfare!

    By the way, without that Government investment the company would not currently be in existence.

    I still don’t get your point about the union. The government has no stake in the union which is run by its members.

  6. BuffaloBloviator March 30, 2009 at 11:52 am #

    Steel,

    My advice to businesses and individuals remains: Avoid accepting welfare of any type from the government because in the process you are selling a piece of your soul.

  7. Howard Goldman March 30, 2009 at 11:54 am #

    Sorry to confuse the readers. I switched workstations and my computer cookie caused my blog name to identify my last comment.

    BuffaloBloviator

  8. STEEL March 30, 2009 at 12:10 pm #

    Howard,

    You say that as if the company just found some money and it… “surprise”… turned out to be the government’s as if it was fish bait .

    These companies ran themselves into the ground and then turned to the government to save their asses. How much do you want to bet that the GM execs are mostly republicans too.

  9. Mike Walsh March 30, 2009 at 12:33 pm #

    This has nothing to do with political parties.

    They turned to the government because they saw them bailing out the crooks who ran the economy into the ground, which was a bipartisan operation.

    I’m not defending the auto companies but the major event that tipped them over the edge was the increase in oil commodities. The financial firms, the government and the Federal Reserve had a very large role in causing that no matter what other explanations are bandied about by media stooges.

  10. STEEL March 30, 2009 at 12:51 pm #

    I know. These poor auto execs were doing a great job designing great cars and through no fault of their own their companies crashed and they were forced to take the evil government money.

  11. Keller March 30, 2009 at 12:56 pm #

    The root cause of the US auto industry’s failure was the SUV. Wagoner placed his chips on the big ticket, gas sucking trucks—and he failed. That is 50% of the blame.

    25% goes to the American consumer who soured on SUV’s around 2002 (I suppose they are not to ‘blame’ per se, but they didn’t exactly replace their 2002 SUV’s with 2007 Focues, Malibu’s and whatever Chysler makes these days).

    The unions, from the stories my uncle tells, were often to blame too…he bragged about getting paid $70+ an hour (with benefits) to read the paper. Not a way to run a business…give them a 25% share of te blame too.

    In retrospect—not being nimble to the American consumer’s demands cost the Big 3 dearly.

  12. Howard Goldman March 30, 2009 at 1:19 pm #

    Steel,

    I love cars. The Wife calls me a Tonawanda motor-head. I have owned, collected, and restored lots of them over the years. Every car I’ve owned has been a US brand. I have nothing against foreign cars, maybe sometime I’ll buy one, I just happen to take pleasure in being proud of American cars. I have a dozen cars right now. Every one of them is a US brand. Many of them I picked up so that I can restore them someday when I retire.

    Back in college I earned my money by restoring Corvettes. I dreamed of one day being able to afford to own my own. When my friends tell me that I am brain damaged, I can happily blame it on all of the lacquer fumes I used to inhale. I used to literally sand my fingerprints off.

    Ever since I was a teenager, I have been inspired to succeed enough to buy my own Corvette. Lusting after the 1984 Corvette is what inspired me to start my own business in 1984. I was inspired because I saw Brian Lipkey and his brother park their new 84 Corvettes at the marina where my friend had a boat. If I ever meet Brian, I will thank him for helping me start a business. I still have that ’84 Corvette sitting in my shop. I bought it as a left-over in 1985. I actually didn’t save up enough money from my new business to buy it, but I did make enough for the down payment. Then I had to continue to work hard so that I could pay it off. The last time I drove that 1984 Corvette was 10 years ago on my first date with The Wife. I told her that it is only used for first dates. I store it in case I ever need it again. lol

    In 1990 the Corvette ZR-1 came out, and thankfully it motivated me to work even harder so that I could afford to qualify for the lease. That car took me 9 years to pay off! I still have that one too. I can’t believe that it is now 19 years old.

    I may or may not decide to ever buy another Corvette, but the thought of living in a world where you don’t have the option of walking into a Chevy dealer and buying a new Corvette disturbs me. I love driving by the Tonawanda Chevy plant and thinking about those Mark IV engines that they used to build for the great Vettes and the other great Chevy muscle cars. I love talking to my buddies that work at Chevy about the heritage of the plant.

    Because I have such a personal attachment to GM, it bothers me more to see the company become a walking zombie, controlled by the government rather than the markets. GM is the mark of excellence, not the mark of socialism. I would rather let it die with dignity, if that is its fate. As I would rather die then meet a similar indignity.

  13. STEEL March 30, 2009 at 1:46 pm #

    Howard,

    You just don’t get it. GM has been a walking zombie for many years. You talk as if the government caused this. IT DI NOT! You act as if the government forced GM to take money, as if the bail out it is a diabolical socialist plot.

    American car companies have been their own worst enemies for many years.

    I remember the big fight over air bags. The American car companies were dead set against any rules requiring air bags even though they were thoroughly proven to save lives. They fought until foreign companies started offering these life saving devices in their cars. Cars with air bags became extremely popular and the American companies were behind the curve as usual. This has been the way of almost all advancements in this industry. The American companies are dragged into building better cars that people want to buy. I have never bought an American car. They don’t build anything that appeals to me. My father only buys American cars (Ford). He may buy only one or two more cars in his life time. That says a lot about their business plan.

    Build big gas guzzling cars even though the world is moving away from wasteful and dirty fossil fuels. Build cars that do not have the most advanced styling or technology. Build cars that rarely rank high for safety, Build cars that appeal mostly to an aging demographic. Build cars that often rank low for quality and longevity (have you noticed that show rust are American built and designed?) This has been the path of the American car company and this is why they had to ask for a government hand out. Funny how industry does not want government interference until they need their own buts saved.

  14. Mike Walsh March 30, 2009 at 1:48 pm #

    @Howard Goldman:

    “I love driving by the Tonawanda Chevy plant and thinking about those Mark IV engines that they used to build for the great Vettes and the other great Chevy muscle cars.”

    454,427,366….I worked on those over there in the late ’70’s….

    I think they still make a big block engine for boats.

    @Keller:

    “The root cause of the US auto industry’s failure was the SUV. Wagoner placed his chips on the big ticket, gas sucking trucks—and he failed. That is 50% of the blame.”

    BECAUSE oil prices skyrocketed.

    “The unions, from the stories my uncle tells, were often to blame too…he bragged about getting paid $70+ an hour (with benefits) to read the paper. Not a way to run a business…give them a 25% share of te blame too.”

    The only time that would happen would be if a line was down for repair. The rest of the time it’s a dirty, crappy,sweaty job. Just imagine 40-70 hrs a week inhaling dirty oil and sweating your ass off.

    @Steel:

    “I know. These poor auto execs were doing a great job designing great cars and through no fault of their own their companies crashed and they were forced to take the evil government money.”

    Where did you learn reading comprehension?

  15. shim March 30, 2009 at 2:54 pm #

    Unions have to assume at least 50% of the blame for the mess that GM is in. Don’t tell me that all those years of union contracts that included job banks, full medical for retirees, full pay and overtime for working no more than 2-3 hours a shift, and everything else that adds at least $2,000 to the price of every American made vehicle haven’t taken their toll on the auto industry in general and GM in particular over the years….yes management caved in and gave them the contracts and yes unions have begun to give back but unfortunately it’s far too little far too late. Bankruptcy may be the only viable option. Then we can start from scratch with accountable management and new and realistic union contracts.

  16. Keller March 30, 2009 at 3:49 pm #

    @Mike Oil Prices are not a fixed cost (unless you live in Iran, Venezuela or Saudi Arabis). Blaming the supply/demand cycle is not reasonable.

    As for the Union blame—it is smaller than management’s but after hearing these stories of job banks and senior members doing nothing while on the clock, well, where there is smoke, there is fire.

    Productivity increases have not been a key union concession. In the end, one could easily imagine GM being run with 1,000 people or less—-including labor.

  17. Mike Walsh March 30, 2009 at 6:46 pm #

    @Keller:

    I agree with a lot of what you say. I didn’t mean to imply that the price spike in oil was the sole reason but I believe it was the event that pushed them over the edge.

  18. Adam K. March 30, 2009 at 11:20 pm #

    BP-

    you driven or seen the 2010 Ford Fusion and its 41 MPG City, 8 more than Camry hybrid?

    Or looked into Ford’s EcoBoost technology, which will have Every Single Model Ford makes beating its Japanese counterparts in Fuel Mileage by the end of 2010 by adding at least 5 MPGs to every car with Eco-Boost technology?

    Every time you write on this you lump in Ford, who have taken no money from the government and aren’t asking for anything. Seriously, look up Eco Boost, and test drive the Fusion, you’ll want one. Consumer Reports gives it a full red dot for reliability…

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