Thursday, December 04, 2008

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.

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Blogger Mondogarage said...

I won't go through repeating the whole of my previous comments on reducing dealer network size -- suffice it to say that you can't simply wave a wand and will your way to a 1/3 size dealer network. Under existing laws, it simply can not and will not happen. It can take upwards of 3-4 years to simply shut down one underperforming dealership, and that's even when the dealer is acting in bad faith or committing some form of fraud.

However, there is an extremely compelling case for not allowing the automakers to go into any form of Chapter 11 bankruptcy, whether pre-arranged or not.

That is, who the hell is going to want to buy a vehicle from a company in bankruptcy? You have zero confidence that your warranty will be upheld, zero confidence that the automaker will be around in 6-7 years for parts, your trade-in/resale values will plummet compared to comparative cars of other makes, etc.

It's one thing for a bunch of money men to sit around a table and hash out ways to package a bk action, but if they're simply assuming that folks will buy cars from an automaker in bankruptcy court, they're fucking delusional, even if that bk action is done solely with the intent of restructuring debt or union contracts.

Also, I might add that France and Japan have already bailed out their automakers.

None of this is to suggest that the government shouldn't be demanding huge concessions from the Big 3 beginning with replacement of the top levels of management of every one of them being a condition of getting a bailout. That's just for starters.

But BK is a VERY BAD IDEA, whether the same investment banker types who hedged the entire economy's way into this clusterfuck think it can be done in a tidy manner or not. They're not to be trusted.

And the dealer networks simply are not Matchbox collections that can be tossed away at the government's whim. Those thousands of dealerships are owned by literally thousands of different business entities and individuals, not by the automakers.

3:20 AM  
Blogger Astin said...

I can see them MAYBE getting down to 3 brands, but 4 would be easier.

Combine Chevy and GMC and focus on trucks, SUVs, and vans, and I guess the Corvette.

Pontiac becomes (stays?) their "performance" line - faster, sleeker, aimed at a younger crowd or more sensible middle-agers who want a little kick.

Cadillac stays the ONLY North American luxury brand. You make high-end cars, both in style and reliability.

And Buick? Seniors need something bland to putt around in. Drop the Tiger Woods crap, stop trying to focus on anyone under 65, and just build reliable cars that get you from A to B that old people will buy.

But they should seek Chapter 11 and restructure that way. Government loans will only delay the inevitable.

3:24 AM  
Blogger Champ said...

Wow. Great write. Great comments by all.

4:05 AM  
Blogger Hammer Player a.k.a Hoyazo said...

I totally disagree that bankruptcy would not work for the auto companies. If the government simply guarantees the warranty coverage, I think there would be no problems at all, as long as people understand that there is a governmental commitment to the long-term existence of these companies.

And my only point about closing the dealerships is that if we get GM into bankruptcy or quasi-bankruptcy, that's the best way to cut through much of the red tape that would be needed to be cut through in order to close the dealerships faster. And that's a guarantee.

4:35 AM  
Blogger l.e.s.ter said...

How much would it cost to buy up all of GM's common stock today? Michael Moore suggests it's about $3 billion or so. Why would we throw $18 billion in taxpayer dollars at something worth 1/6th of that, especially since we know we're never seeing any of that money again.

5:19 AM  
Blogger Bayne_S said...

Market Cap of Ford is $6.5B.

Market Cap of GM is $2.51B.

Neither one has the collateral for requested loan so it is ridiculous to lend them that much money.

5:44 AM  
Blogger Mondogarage said...

"And my only point about closing the dealerships is that if we get GM into bankruptcy or quasi-bankruptcy, that's the best way to cut through much of the red tape that would be needed to be cut through in order to close the dealerships faster. And that's a guarantee."

I have to disagree with this completely, as it implies you still think the manufacturers have some kind of ownership interest in the dealerships. They simply do not. Under no kind of federal bankruptcy law can a federal bankruptcy judge order some 3rd party owned business to close its doors.

Not to mention that there are a raft of constitutional issues involved here, as the federal government has turned over automotive franchise law to the states, and state law governs that contractual relationship.

If I'm the owner of Pontiac/GMC/Buick dealership, and GM decides to shut down their Buick division, that's one thing (which still requires more red tape than you know, as all their dealers are operating under largely continuous franchise agreements). But if GM filed for bk, and you're Judge Ondabench, you really don't get to tell me I have to close my dealership -- I'm not party to the bankruptcy.

I do not know whether a fed bk judge has the authority to unilaterally terminate the franchise agreement, but I'll tell you what -- if he tries, the fed may have about 4,000 opportunities to try to defend their right to do so in state courts in all 50 states, and lose TRO motions in each one in the process.

None of this even begins to take into account who decides (and under what methodology) what dealerships you arbitrarily kick out of the business.

Most dealerships in the US are owned by entities that own no more than a couple of dealerships (typically no more than one of any make). There are very few large ownership groups in the country, because most manufacturers limit the % of dealerships that can be owned by a single owner (in order to minimize influence on the manufacturer by a franchisee). There are literally thousands of separate automobile dealership owners in the states.

You would not argue that the fed has the right to simply walk into any random McDonald's and say "you're out of business", just because a company that supplies that franchise raw materials is broke, would you? If so, on what basis?

As for concepts such as the government taking on all warranty work, that's a workable concept, but the average consumer simply isn't that bright -- all they see is, why the fuck should I spend $30k on a vehicle from a company that's bankrupt and may go out of business, when I can just buy a car from Company B for the same price instead?

The fact the government *can* take on warranty obligations doesn't mean they're going to convince Joe SUV Buyer that buying a Chevy Tahoe is good idea. Buying a $30k car from a business that's tits up ain't the same as buying a set of placemats from Linen 'n Things' liquidator. It's just not.

If you're writing auto loans, why would you write an 80% loan for a new vehicle whose value is likely to be VERY much below loan value in three years if the manufacturer is out of business? If you're a replacement parts manufacturer, why are you going to invest in tooling to manufacture parts for a company's cars when that company is likely to be out of business before you recover the cost of the tooling in parts sales?

"Trust me, I'm from the government."

6:50 AM  
Blogger StB said...

Good post Hoy. Propping up a company that makes a product that people do not want to buy is ridiculous.

10:57 AM  

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