Auto Industry -- Take II

A couple of weeks ago, I wrote about the many, many problems plaguing GM and the other leading U.S. automakers, in particular when compared to their foreign counterparts. This was just around the time that the CEOs of GM, Ford and Chrysler all flew their private jets down to Washington, DC to plead for what at the time amounted to about $25 billion of federal (i.e., taxpayer) aid in order for them to survive their way through the current economic turmoil in this country. Smartly, Congressional Republicans followed the same logic I espoused in that post, pushing back on these blank-check requests from the automakers that were sadly reminiscent of Treasury Secretary Hank Paulson's first proposal for the federal bank bailout. Congress sent the auto CEOs back to Detroit, giving them until this week to come back with an actual plan (imagine that!) getting these companies back to actual profitability (imagine that!), rather than simply wasting $25 billion throwing it these automakers only to essentially ensure that they would be back with their hands out again for more at some point in the all-too-near future.

Well, they're back. Fresh off the road after this time much more intelligently driving their hybrid vehicles back to the nation's capital, the chief executives of the nation's three largest automakers are indeed back in DC today to argue their cases and exhibit their fabulous plans for how this federal money will help them to survive as going concerns, as opposed to simply putting off the inevitable. And once again, General Motors is at the forefront, as Chrysler and Ford have indicated that they need under $10 billion apiece, and mostly in the form of loan guarantees and credit lines as opposed to actual cash infusions. But not GM. Even since the CEO's first appearance in Washington just two weeks ago, GM has upped its claimed cash needs from $12 billion to now $18 billion, including $4 billion of straight-out cash injected into its coffers right now if it is to stave off a bankruptcy filing.

So let's look a little deeper into GM's "Restructuring Plan For Long-Term Viability". First, one of the first specific passages from my post a couple of weeks ago:

"It is well known that one of the keys to Honda and Toyota's success in this country has been their focus, both marketing-wise and cost-wise, as Toyota has just three car brands in America, and Honda has just two. GM, meanwhile, continues to push on with eight brands -- GMC, Pontiac, Buick, Cadillac, Saab, Saturn, Chevrolet and Hummer -- many of them purchased during the past decade or so as it is. It's not that some of these are bad cars per se, but the inability to focus on fewer brands definitely hurts the company's ability to drive market share, in the U.S. and abroad. Not to mention that each of one these brands carries its own cost structure, from a General Manager and his or her management chain, down to brand managers and marketing folks, its own finance group, its own chain of dealers, distributors, etc. This is incredibly costly, and while their Japanese counterparts have whittled these cost lines down to just a few, GM continues to this day to have to pay eight sets of each of these lines of employees, contributing greatly to the massive problems with the company's cost structure. And here we are today."

So the brand issue is definitely a big one for GM, everyone knows it. And how are they proposing to fix this problem as part of their "restructuring"? In the new plan, GM says it plans to put its Saab and Saturn brands through a "strategic review," which its Hummer brand is already undergoing, which presumably means trying to sell these brands off since it's hard to imagine them simply dismantling the brands entirely. So the plan is to retain five brands -- Chevrolet, Cadillac, GMC, Buick and Pontiac. In my view, this is not enough. Pontiac, as a brand, is in a shambles, with very few Pontiac buyers in America these days in relative terms. Buick is another brand I just can't see the reasoning of keeping for the long term. But that's GM's strategic plan -- to "look into" reducing its eight brands to five, still 100-150% more brands than Honda and Toyota who are eating GM's lunch. To me, that's not enough.

Now let's look at the passage I wrote a couple of weeks ago about the dealership and distribution situation with GM:

"The Wall Street Journal reported the other day that GM has around 7000 car dealers in the U.S. Seven thousand dealerships. In contrast, Toyota has just over 1400, and Honda close to 1000. Is it any wonder which company's sales model works the best? And yet, GM has done nothing to change this bloated dealership structure. A system with fewer, more centralized dealers is well known and understood to be more efficient, again from a marketing, inventory and maintenance perspective, a premise with which GM management does not argue. But it would be a very expensive and politically unpopular process for GM to eliminate nearly 80-85% of their dealerships, so they just haven't done it. For nearly 30 years now. Toyota and Honda have been eating GM and Ford's lunch, and these companies simply refuse to take the admittedly painful steps needed in order to align these companies with their competitors, and with efficient business practice. And here we are today."

So, from those nearly 7000 GM dealerships in the U.S., GM proposes as part of its strategic restructuring to shrink those down to "just" 4700 dealerships by 2012. Now, there is no disputing that this would be a very significant endeavor for the largest American automaker. But I just can't get away from the fact that the company plans to take four years to "shrink" to a number of dealerships that is still 3 to 5 times more than Honda and Toyota have. Why? Why not bite the bullet, take the unpopular step and get your company down to a level of efficiency that will truly allow for growth and truly lead to long-term profitability?

GM also notes in its restructuring plan as submitted to Congress this week the "additional efficiencies" it could make use of by amending its contracts with the all-powerful United Auto Workers union. But no specifics, no ideas above and beyond the elimination of the jobs bank that I wrote about in that last post that was already announced earlier this week.

To me, this is clearly not sufficient. Putting three of GM's brands "under strategic review" is an interesting thought, but as I mentioned above, the target would be for five brands to remain with GM, which is simply not sufficiently low enough to put GM in proper position to compete effectively with its more efficient rivals. It's not. It's not like I am making this decision. The market, the economics of the situation make these decisions, and GM will still have significant fluff to its cost and marketing structure with five distinct brands. And that doesn't even get into the time it will take GM to sell off each of Saab, Saturn and Hummer. Conservatively, compelting those three brand divestitures sales would probably take a year or more, and that's assuming they are even able to find willing buyers in this horrid market. I would say there is a fair likelihood that one or more of those brands would not find buyers at prices deemed acceptable to GM, and then what? Does GM take the goodwill from those brands, chuck it in the trash and simply dismantle the brands entirely? How long does that process take?

Similarly, I don't want to wait four years just for GM to reach its stated restructuring "target" of nearly 5000 dealerships, when Honda and Toyota have 1000 and 1400, respectively. Who knows how long it will take a non-bankrupt GM to negotiate its way through the buyouts, severance and the legal roadblocks that would be required to close down some 2000+ dealers. That process could easily take more than the four years being proposed by GM. And even if they did get there, they will still have way, way more dealerships than their more efficient foreign rivals. Even adjusting for the larger number of vehicles sold by GM than Honda or Toyota, GM should be aiming for a number of dealerships closer to the 2000 - 2500 range, not 5000.

And we all know how long and difficult negotiating further concessions from the UAW is going to be, in particular if GM is given the $18 billion it is currently requesting from the federal government. Who knows what the end results would likely be, and who can guess how much time it would actually take to get there with the UAW?

And that's just the problem: time. GM indicates that it needs a $4 billion cash infusion from the government within the next month or so if it is to stay afloat and continue to meet its obligations, in addition to another $14 billion in loans and other guarantees to be able to make it through the current economic doldrums. In exchange for this $18 billion of taxpayer money, the company is committing to "look into" plans to shrink to five brands, to begin a four-year process with the hope of shrinking to a mere 5000 dealerships in the U.S., and to continue working with the UAW to win further concessions from the most powerful union in the world.

Uh-uh. I'm sorry guys, but I'm not buying it. If GM is forced to declare bankruptcy -- or something equivalent to bankruptcy -- just like any other company or person would if it cannot meet its ongoing obligations, I suspect that would make winning significant concessions from the UAW almost a foregone conclusion, and probably literally some number of years faster than if GM negotiates with them directly after receiving all this additional federal funding. Similarly, closing the thousands of dealerships GM needs to close in order to get itself lean and competitive would probably be done in far less time and with far less resistance than if GM continues, flush with taxpayer cash. I said it a couple of weeks ago and I'll say it again now: letting these companies disappear is not and should not be an option for the U.S. government -- the auto industry is far too big and wide-reaching in this country, and the economic impact of simply letting GM collapse would very likely tilt our national economy towards a full-blown depression. But now is the time for some strong leadership in America to step up, force these companies to make the hard decisions and face the harsh realities that they have brought on themselves, and seize the opportunity to ensure that sufficient changes are made in exchange for yet another bailout of billions and billions of dollars so as to leave the recipients of these funds in a position to survive and to thrive in the future.