The Horrible Choices Facing the US Auto Hospice

The United States will either lose its car industry and with it much of the industrial midwest, or the federal government will force it to restructure against its will — something few companies can tolerate. A few weeks after naming a highly qualified Auto Task Force, the White House today 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 adopt Chrysler or let it die and buy some parts. Now would be the time for family members to stop by and say their farewells.

GM is dying and requires brutal, radical surgery that its current CEO has resisted. It is far from clear that the White House will forcibly restructure the company. Thus GM is receiving end of life care at a very expensive hospice because frankly, we hate to see this old guy go.

The White House needs to focus on GM’s core US and Canadian operations and 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. To anyone trying to save GM’s life, they are a distraction.

GM’s illness is chronic and long term. It has been losing market share for decades. In 1980, GM sold 45% of the cars in the US; in 1990, GM’s US share was 36%, in 2000, it was 29%. In 2008, its share was 22%. GM has been losing 0.7% of the market each year for 30 years. At the root of this problem is consumer perception that GM makes lower-quality cars (despite meaningful improvements in the last few years). This leads customers to insist on greater discounts, which depresses profitability. Over time, GM needs to be able to maintain its prices if it is to produce margins into line with its best-in-class peers. Also, GM earns a disproportionate share of its profits from high-margin trucks and SUVs. It 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.

Despite its NUMMI alliance with Toyota, 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.

GM is forecasting that its cash needs associated with legacy liabilities (pensions, health care, and old plants) reached $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 the company fighting to maximize volume rather than return on investment.

The situation is way past 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 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. The Feds fired Wagoner, as they should fire the Wall Street guys they bailed out. Taxpayers hate bailouts, but the head of an ineffective CEO head on a stake tends to quiet the crowd.

Now, with a new CEO, the bankruptcy judge has 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 loss on their debt, pension, or other obligation. The federal government, having wiped out the shareholders, pass out new shares to workers, dealers, and lenders, create a new board of directors, and hire new managers. Unless the cars get a lot better, lemon socialism will take on a whole new meaning.

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 laptop has wireless — customers expect it.)

Rationalizing GM products into a smaller, profitable business is a Rubik’s Cube even 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 restructuring grow ugly fast. In normal times, one would not expect either GM managers or White House appointees and their BMW-driving consultants to get this right.

The Auto Task Force has to do this very quickly, meaning ruthlessly. By summer, the UAW will be talking suicide strikes, 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. In short, Obama is spending taxpayer capital because a full scale liquidation of GM requires that he spend more political capital than he can possibly build or borrow. Effectively, Barack Obama now owns General Motors.

At very best, a judge approves 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. A bit like giving Grandpa 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. Barrack Obama cannot deliver that.

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 who don’t work in cars, GM doesn’t matter. Three decades ago, GM shuttered a plant here in Silicon Valley. Toyota reopened it as a joint venture that they effectively control. NUMMI has flourished, more or less, ever since. It did not cost taxpayers a dime. 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 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 he puts into GM is a dime for 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 of 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 Oldsmobile, but it was a helluva lot of fun and explains no small part of our occasional urge to “save” GM.

Face it, in high school, nobody ever got laid in a Toyota.