Once More, This Time with Feeling

carmakers

Let’s dig into some of the headlines we saw this morning:

GM, Chrysler Push for More U.S. Aid After Legacy of Mistakes (Bloomberg)

Auto Maker Bankruptcy Looms (Wall Street Journal)

“YOUR TIME IS UP” (Steve Parker, the Car Nut)

The Tres Amigos are not showing up in person this time; two of them (Chrysler and GM) will be filing their reconstruction plans electronically late today. That is a good thing, as we don’t need another circus. They are probably having their own private circus with the UAW as the bargaining continues in Detroit over the $47 billion GM obligation for retiree health care. Yikes.

The money involved in all this is truly mind-boggling. It’s not just the industry’s tremendous fixed and legacy costs, its expensive and inefficient dealer network, its total fall-off in sales. As Bloomberg reminds us, it’s the cost of rebuilding that also must be built into any plan.

GM and Chrysler must show progress in getting creditors and the UAW to accept equity in place of billions of dollars in scheduled cash payments. The automakers must also ensure that future models will meet environmental rules that may require $100 billion in new technology.

The real deadline for the GM and Chrysler plans is March 31, when President Obama’s car task force (the car czar idea is out) will determine whether and how the industry goes forward. Heavy hitters Tim Geithner, Treasury Secretary, and Lawrence Summers, National Economic Council chairman, will have help from others.

One of these is Ron Bloom, an expert in restructuring whose advice, we can predict, nobody will like. Says the Journal,

Mr. Bloom, a Harvard Business School graduate who spent 10 years at investment banks before joining a team advising the steelworkers union, is seen as one of the chief architects of a consolidation of the steel industry that has involved about 35 bankruptcies over several decades. He’s known as a blunt communicator. . . .

In a 2006 speech at a corporate turnaround conference in Scottsdale, Ariz., he described his approach to restructuring as “dentist-chair bargaining,” in which the patient “grabs the dentist by the b — and says, ‘Now let’s not hurt each other.'”

Under Mr. Bloom’s guidance, the United Steelworkers gave up pay, job security and benefits in a bid to help the industry recover. In some cases, thousands of steelworker jobs were lost when union leadership agreed to large-scale reductions in restructured companies. Mr. Bloom also negotiated benefits for union members and retirees that kicked in once reconfigured steel companies became profitable. Such solutions could also come into play at the automakers.

Finally, Steve Parker. After showing us a picture of dictator Benito Mussolini in his Alfa Romeo and reminding us how the crowd pulled him out and hanged him, Steve offers this tidbit about the impending Fiat-Chrysler deal:

Last week, a right-wing legislator in Italy called for public protests if any Italian money is used to pay Chrysler’s debt to taxpayers. Their government essentially owns Fiat and all its ancillary companies, and it’s the country’s largest manufacturer of any kind. Even a loan—or money used by Fiat to purchase Chrysler—may well be seen by Italians as their taxes going to the U.S. government, which is probably one reason Chrysler is willing to cede control of the company to Fiat for not one penny—or lira.

auto-workerYou and Ron Bloom both realize that there are 3 million jobs tied to the U.S. auto industry. How are you going to save them?

—jgoods

1 Comment

  1. I believe that most casual observers, had they had a vote and the economy were in better shape, would allow the automakers to go into bankruptcy. The economy, however, is the main impediment to the public’s perception of what should happen to the automakers. The economy is not going to improve for at least 2 years because of the multitude of factors weighing against it (jobs, deficits, unemployment, Afghanistan and Iraq, housing, the banks, etc) and thus the public would most likely support some kind of lifelife for the automakers. Therein is the rub.

    Most observers will tell you that the automakers will need in excess of $100B to get them to the point where they can stop losing money in the next 2 years. In light of the trillions that the Fed, Obama and Treasury have pumped into the economy the average person must pause and ask the obvious question: “is it worth $100B to save the jobs of less than 100,000 workers?” Logic dictates a “no” answer.

    So that begs the question “why doesn’t the government structure a bankruptcy for them?” According to Rick Wagner, “bankruptcy would cost more”. The UAW seems to be the key player here and progress towards trying to convince them to give up their negotiated benefits is not only difficult for them, but to the automakers and Obama as well. I usually always side with the worker in most instances, but here I simply have a problem. Many of these workers have benefits that would embarrass the average Congressman and consumer. When times were good both labor and management made out like bandits, pun intended, at the consumer’s expense. Much like the questions we ask of Wall Street and its CEOs, “how much is enough?” Most of those gains and perks came at the expense of the consumer. Humongous price increases over the last 5 years allowed both labor and management to overlook the obvious excesses in compensation and benefits packages. Now that the house of cards has fallen, the fiddler must be paid. There just simply has to be a structured bankruptcy here or else our financial system and our way of life will be forever altered.

    A classmate of mine who worked for GM bragged about his benefits after his retirement. As a clerk for GM in Ohio, he earned over $4000/mo. in pension benefits plus a lavish health care plan. His regular salary alone was over $65,000 a year. This for a man with a high school education. A line worker often made over $100K working only 37 weeks/year. While I applaud the UAW for gaining these benefits for their members, I find it difficult to not side with those that say that some of those gains could be “given back” during these tough times. Giving back is very difficult to do, but in truly desperate times, it must be done.

    The key player in this discussion is Ron Bloom, who worked for both management and labor. There was a nice piece on him in my morning paper and he seems to have the attributes that are necessary to bring both sides to see each other’s difficulties. I certainly wish him well, because I’m not eager to be giving these guys a free pass in light of their very dubious past practices and policies. The truly sad part of this debacle is the fate of those whose jobs are related to the auto industry in ancillary positions. Now we are talking about millions of jobs and lives that will be severely impacted. The guys working on the GM, Ford and Chrysler factory floors cannot exist without these ancillary workers so we are looking at a humongous number of lives impacted. The financial industry is a piker when compared to the manufacturing sector. So even if we have a structured bankruptcy, we the consumers are still going to be on the hook for over $50B. So no matter what happens, it is a Lose-Lose for the American consumer. Good luck to our grandchildren!!

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