Admitting the obvious is their best chance to restructure.
By Paul Ingrassia
WSJ.com
November 21, 2008
The moment of truth in the nation's automotive bailout debate might have come this week. As the CEOs of GM, Ford and Chrysler begged Congress for federal aid, a Detroit radio talk-show host asked whether Michigan, as well as the car companies, should get assistance. The state is being hit by an economic hurricane, he said, just as New Orleans was hit by a natural hurricane
Huh? Will the victimology myth never end? Hurricane Katrina was an act of God. The car crisis is an act of man. For the difference, consult the Bible. Any version will do.
Yesterday, congressional leaders gave the car companies until Dec. 2 to come up with viable business plans and renew their request for aid. Meanwhile, it's worth examining the myths that are shaping this debate.
One is GM's assertion that "bankruptcy is not an option." In truth, GM already has conceded that it's bankrupt -- by publicly stating it's nearly out of cash and needs emergency assistance. The company hasn't made a formal bankruptcy filing, which is no small matter. But it has declared bankruptcy everywhere else. Chrysler, at this week's Senate committee hearing, did the same.
A second myth is that management changes in Detroit would be pointless. GM CEO Rick Wagoner said he wouldn't resign to secure federal aid for his company. This was like Louis XIV saying, "L'État c'est moi." Mr. Wagoner explained that he didn't see "what purpose would be served." Well, the same one served by the presidential election in this country three weeks ago: to bring in somebody new to try some fresh ideas to fix things.
Mr. Wagoner has been GM's chief executive officer for eight years. Even before this year's calamity struck (the company lost $181,000 per minute in the second quarter), the company's U.S. market share, financial results and stock price had plunged precipitously.
At Chrysler, CEO Robert Nardelli has been on the scene just a year. Before that he was at Home Depot, where he took a $210 million departure package when the board wanted him out. There's no reason to begrudge Mr. Nardelli that money. But any plan to save Chrysler will inflict great hardship on dealers, suppliers, workers and managers -- and even if Mr. Nardelli is a great executive talent, he isn't the guy to lead the clarion call for sacrifice, despite his recent offer to work for $1 a year. Symbols are important here, which is why the spectacle of the Detroit CEOs swooping into Washington on corporate jets to ask for money was so jarring.
Ford CEO Alan Mullaly has been on the job just over two years. He seems to be making the right moves -- cutting costs, eliminating the dividend early on, revamping product plans, mortgaging assets to raise money to fund the turnaround, etc. That's why Ford, while not in great shape, is in a materially better position than the other two.
Mr. Mullaly is the Detroit chief executive I'd keep on the job. But that still doesn't mean it's right to hand federal aid to Ford or any of the other companies without requiring a bankruptcy restructuring in return.
Which raises the third myth: Bankruptcy means death. In fact, it means getting a second chance. Detroit's car companies point, correctly, to the cost cuts, labor concessions and other stringent measures that they've enacted in recent years. Ron Gettelfinger, the president of the United Auto Workers union, got his members to accept two-tier wages and big concessions on the health-care and retirement plans.
Nonetheless, far too many valid contractual claims remain on the car companies' revenue streams from dealers, employees, retirees and others for these companies to survive -- even if we get a modest economic recovery soon. The companies remain saddled with cumbersome contracts with the UAW that make work rules and plant procedures a constant challenge. A bankruptcy trustee or receiver could cut through all this quickly and give the companies a fresh start.
Myth number four is that banning executive bonuses or requiring more fuel-efficient cars will save Detroit, and are strings that should come with any federal aid. Executive pay isn't the problem in Detroit; and the companies will have to build more fuel-efficient cars to satisfy the market, not to meet mandates. These would be pseudo-strings designed to appease organized labor and the environmental lobby. Instead of saving Detroit, they'll pave the way for a bigger bailout later on.
Finally, the fifth myth is that a merger of GM and Chrysler will propel both companies to prosperity. Some of the slide-shows making the rounds on Wall Street assume that a merged company would have a 30% market share, slightly less than the two companies now have combined. It isn't true. The elimination of duplicate brands, models and dealers would push a combined market share down to 25% or less. The revenue projections behind a potential merger seem greatly inflated. GM has massive problems of its own to address without taking on those of Chrysler, which needs a profitable, and committed, foreign buyer.
The biggest beneficiaries of a GM-Chrysler merger would be Cerberus, the private-equity firm that owns Chrysler, and the big banks that hold billions of Chrysler bonds that they haven't been able to sell. The bonds were used in Cerberus's purchase of Chrysler from Daimler. The banks expected to sell the bonds to investors, but have been left holding billions in Chrysler debt that they'd dearly love to unload.
Cerberus has offered to forego any profits on a sale of Chrysler, but that's phony. There won't be any profits. Just relieving Cerberus of the need to keep funding Chrysler would provide the private-equity moguls with a bonanza. As for the banks holding Chrysler bonds, didn't we already bail them out? Why should we have to do it again?
Mr. Ingrassia is a former Dow Jones executive and Detroit bureau chief for this newspaper.
