Filed under: Chrysler, LLC., GM, Autoline on Autoblog
Autoline on Autoblog with John McElroy
GM-CHRYSLER, WHAT ARE THEY THINKING?
The headlines say General Motors is feverishly putting a plan together to take over Chrysler. From my standpoint, only two theories can explain why this is happening. Either the billionaire boys from Cerberus have a master plan to revamp the American auto industry, or they are in so far over their heads that they don't know what they're doing. More on that in a minute.
If GM does take over Chrysler, then Walter P. Chrysler will be turning in his grave. After all, Walter P. quit GM back in 1919 because he didn't like the direction in which the company was going, and later went on to start the company that still bears his name.
A takeover of Chrysler will be the kiss of death for the company. The only way GM can justify taking it over will be to take an axe to its operations. You think Chrysler has shriveled to a shadow of its former self over the last two years? You ain't seen nothin' yet.
John McElroy is host of the TV program "Autoline Detroit" and daily web video "Autoline Daily". Every week he brings his unique insights as an auto industry insider to Autoblog readers. Follow the jump to continue reading this week's editorial.
Of course, you have to wonder why GM would consider such a plan in the first place. After all, just about every merger and acquisition in the auto industry has produced next to nothing. Ford's takeover of Jaguar, Land Rover and Volvo? An unmitigated disaster. BMW's takeover of Rover? An unmitigated disaster. Daimler's takeover of Chrysler? An unmitigated disaster. GM's takeover of Saab? An unmitigated disaster. I would also add that GM's stock holdings in Suzuki, Isuzu and Subaru did absolutely nothing for the company.
What in the world makes them think that it's going to work this time?
Even more telling, the Wall Street Journal reports that GM's Board of Directors was very cool to the idea of merging with Chrysler when management presented them with the idea. So if the history of these takeovers is littered with debris, and the board doesn't think it's a very good idea, why is GM pursuing it? Here are two theories.
First, two years ago the billionaire's club called Cerberus decided it was going to get into the auto industry and teach those mid-Western rubes how private equity can really run a car company. They were going to squeeze profits out of a bloated Chrysler, they were going to whip its suppliers into line, and they were going to bring the UAW to its knees. Then, by slamming GM and Chrysler together, they would force enough plant closings to greatly reduce the overcapacity that exists in the United States. And a new, bigger GM would emerge as the all-powerful behemoth that it used to be. Under this theory, all we've seen so far is a few pawns being moved on the grand chess board.
But how to get out? So far no other automaker has come up to the counter to buy the Chrysler Corporation. So why not force GM to take it, whether it wants to or not?
Cerberus, which owns 51% of GMAC, moved some chess pieces around when it started tightening the screws on GM dealers, making it very difficult for them to floorplan their cars through GMAC. And then it ratcheted the game up another notch this week by saying GMAC wouldn't make loans to anyone with credit scores lower than 700, which effectively wipes out the vast majority of GM car buyers. Checkmate. Now Cerberus has GM by the throat.
If GM's customers can't buy cars, and if GM dealers can't buy them either, then GM does not run out of cash in the first quarter of 2010. It runs out of cash before Christmas.
GM responded to Cerberus's move with an unprecedented plan that incentivizes its dealers to not do business with GMAC. It will pay them a spiff to get financing from anywhere on the planet, but not from GMAC. Remember, General Motors still owns 49% of GMAC. GM is paying its dealers to avoid doing business with part of GM!
Publicly, we'll be told that this merger will produce all kinds of synergies and cost savings, and that it will be good for America. Privately, I've got to believe GM management is furious with Cerberus. But Cerberus is in the driver's seat. And it has the power to force Chrysler down GM's throat.
It's hard to tell where this is all going because every day seems to bring a new development. But there is one thing we all can be sure of. All the senior executives involved are going to reward themselves handsomely, no matter what the outcome is.
Autoline Detroit
Airs every Sunday at 10:30AM on Detroit Public Television.
Autoline Detroit Podcast
Click here to subscribe in iTunes
Autoline Daily
The headlines say General Motors is feverishly putting a plan together to take over Chrysler. From my standpoint, only two theories can explain why this is happening. Either the billionaire boys from Cerberus have a master plan to revamp the American auto industry, or they are in so far over their heads that they don't know what they're doing. More on that in a minute.If GM does take over Chrysler, then Walter P. Chrysler will be turning in his grave. After all, Walter P. quit GM back in 1919 because he didn't like the direction in which the company was going, and later went on to start the company that still bears his name.
A takeover of Chrysler will be the kiss of death for the company. The only way GM can justify taking it over will be to take an axe to its operations. You think Chrysler has shriveled to a shadow of its former self over the last two years? You ain't seen nothin' yet.
John McElroy is host of the TV program "Autoline Detroit" and daily web video "Autoline Daily". Every week he brings his unique insights as an auto industry insider to Autoblog readers. Follow the jump to continue reading this week's editorial.
Of course, you have to wonder why GM would consider such a plan in the first place. After all, just about every merger and acquisition in the auto industry has produced next to nothing. Ford's takeover of Jaguar, Land Rover and Volvo? An unmitigated disaster. BMW's takeover of Rover? An unmitigated disaster. Daimler's takeover of Chrysler? An unmitigated disaster. GM's takeover of Saab? An unmitigated disaster. I would also add that GM's stock holdings in Suzuki, Isuzu and Subaru did absolutely nothing for the company.
What in the world makes them think that it's going to work this time?
Even more telling, the Wall Street Journal reports that GM's Board of Directors was very cool to the idea of merging with Chrysler when management presented them with the idea. So if the history of these takeovers is littered with debris, and the board doesn't think it's a very good idea, why is GM pursuing it? Here are two theories.
First, two years ago the billionaire's club called Cerberus decided it was going to get into the auto industry and teach those mid-Western rubes how private equity can really run a car company. They were going to squeeze profits out of a bloated Chrysler, they were going to whip its suppliers into line, and they were going to bring the UAW to its knees. Then, by slamming GM and Chrysler together, they would force enough plant closings to greatly reduce the overcapacity that exists in the United States. And a new, bigger GM would emerge as the all-powerful behemoth that it used to be. Under this theory, all we've seen so far is a few pawns being moved on the grand chess board.
Just about every merger and acquisition in the auto industry has produced next to nothing.
The other theory is pretty similar, except that it posits the Cerberus boys had no clue what they were getting into. The auto industry gobbles up cash, is a highly cyclical business, is extremely vulnerable to oil spikes and credit crunches, and takes years to put new products on the shelves. It's hard to point to any success Cerberus has had with Chrysler. In short, their foray into the auto business has blown up in their faces and now they gotta git out as fast as they can git.But how to get out? So far no other automaker has come up to the counter to buy the Chrysler Corporation. So why not force GM to take it, whether it wants to or not?
Cerberus, which owns 51% of GMAC, moved some chess pieces around when it started tightening the screws on GM dealers, making it very difficult for them to floorplan their cars through GMAC. And then it ratcheted the game up another notch this week by saying GMAC wouldn't make loans to anyone with credit scores lower than 700, which effectively wipes out the vast majority of GM car buyers. Checkmate. Now Cerberus has GM by the throat.
If GM's customers can't buy cars, and if GM dealers can't buy them either, then GM does not run out of cash in the first quarter of 2010. It runs out of cash before Christmas.
GM responded to Cerberus's move with an unprecedented plan that incentivizes its dealers to not do business with GMAC. It will pay them a spiff to get financing from anywhere on the planet, but not from GMAC. Remember, General Motors still owns 49% of GMAC. GM is paying its dealers to avoid doing business with part of GM!
Publicly, we'll be told that this merger will produce all kinds of synergies and cost savings, and that it will be good for America. Privately, I've got to believe GM management is furious with Cerberus. But Cerberus is in the driver's seat. And it has the power to force Chrysler down GM's throat.
It's hard to tell where this is all going because every day seems to bring a new development. But there is one thing we all can be sure of. All the senior executives involved are going to reward themselves handsomely, no matter what the outcome is.
###
Autoline Detroit
Airs every Sunday at 10:30AM on Detroit Public Television.
Autoline Detroit Podcast
Click here to subscribe in iTunes
Autoline Daily
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Reader Comments (Page 1 of 2)
John R 2:44PM (10/17/2008)
General Mopar = "American Leyland" = An unmitigated disaster
Reply
Mobius_1 5:52PM (10/17/2008)
Would be fun watching Adam Carolla and Co. in a few years though...
Todd 2:48PM (10/17/2008)
Well they could just make the C in GMC to be General Motors / Chrysler.
Even if GM doesn't take Chrysler I don't really see them surviving long term.
Reply
felix.cruz 2:50PM (10/17/2008)
regardless what happens, its not good for anyone but the higher ups.. the rich get rich and the poor lose everything!
Reply
dan spalinger 2:51PM (10/17/2008)
For once I agree with McElroy...usually his opinions are similar to those mergers he describes--unmitigated disasters...But here he is spot on...except for one fact...Renault/Nissan is in talks to buy Jeep from Chrysler currently...leaving GM likely on the hook to buy up the rest of the stinking dump that is Chrysler/Dodge...
Reply
Red 3:20PM (10/17/2008)
Jeep is the only brand worth saving. Most every other
platform/vehicle is absolutely expendable, when you compare it to GMs products.
I'm curious as to how many products will disappear (does GM need another midsize car? they already have several) and how many will survive and be I guess swallowed into the GM product lineup. I would imagine perhaps the Challenger/Charger would live on, for example. Sebring/Avenger...not so much. Either way, this could lead to a lot of plant closings.
Stéphane Dumas 5:02PM (10/17/2008)
Interesting point dan. For a moment I taught of the other way around, GM getting Jeep while Renault-Nissan get Chrysler and Dodge.
I wonder what might come next, Ghosn talking to Wagonner for a "triumvirate alliance" GM-Chrysler-Renault/Nissan? ;-)
Iridium 2:56PM (10/17/2008)
This has more to do with Cerberus taking over GMAC than anything else. Even though Cerberus owns Chrysler they can do a lot more with Chrysler being a private company than GM can do with any of its divisions.
GM has nothing without GMAC, which also has a huge exposure to mortages. Cerberus stands to make a lot of money from the government bailout with its stake in GMAC, it doesn't want to lose that. Cerberus can actually buy all of the outstanding shares of GM as well to become the majority shareholder of the company.
GM would also stand to gain factories already set up to produce smaller cars, rather than retool truck plants.
It is a battle of wills and I'm willing to bet Cerberus has more cash on hand.
Reply
dakota 3:31PM (10/17/2008)
FINALLY! Someone with enough brainpower to actually see what's going on here.
Not only that, but everyone also seems to forget that Daimler still owns a portion of Chrysler, and there hasn't been a peep from the Damiler boys on what they are doing with their stake in the company.
Chrysler is better off without GM anyways:
They have a successful RWD platform.
They have a pretty advanced EV program going on, and unlike GM they aren't running around tooting their horn about it.
GEM and ENVI
Dual-Clutch Transmission Program
Ram Truck Program
Flexible Manufacturing Plants.
AZMike 2:57PM (10/17/2008)
a few problems with the theory:
1) less than half of the GM dealers floor with GMAC, so this move wouldn't hurt them at all.
2) it has been very difficult for customers to get financed with GMAC for several years now; this is actually nothing new. they haven't been financing used cars, with the exception of Certified units, for about three years. again, nothing new here.
the only exceptions to the two above rules were if a dealer was a platinum GMAC dealer. however, only about 20% of GM dealers are GMAC platinum dealers.
it's been stated by several sources that the only thing GM wanted was the 11 billion in cash that Chrysler has on hand. this is rather ironic, as this is exactly the same amount they had on hand when Daimler swooped in and grabbed Chrysler back in the '90s.
no matter how you try to figure it, a GM/Chrysler alliance makes almost no sense at all, except from the standpoint of shared engines, platforms, and plants, with both staying exclusive entities. this arrangement is actually quite common in other countries.
AZMike
Reply
gforce 4:12PM (10/17/2008)
"...no matter how you try to figure it, a GM/Chrysler alliance makes almost no sense at all, except from the standpoint of shared engines, platforms, and plants, with both staying exclusive entities. this arrangement is actually quite common in other countries."
And there's nothing to say that this couldn't actually be the result of these discussions. All the talk of absorption and the dissolution of Chrysler is complete speculation. In fact, if you add the information from the leaks and the actual official announcements, this appears a more likely scenario.
Barney 3:04PM (10/17/2008)
The thought of GM taking over Chrysler is disgusting. I quit buying GM cars in 1988 after the lousy attitude of GM dealers regarding the last two new vehicles I had purchased and had problems with. I vowed at that time I would NEVER buy another GM product. Since then I bought 14 Fords from 1988 until 2004, and now six new Chrysler products from 2004 to present. I have not had any serious problems with any of the vehicles I have purchased since leaving GM.
From my point of view, the management and personnel of GM are worthless, and I would hate to see them destroy a perfectly great icon of the auto industry such as Chrysler. GM should be left to hang out on their own. They made the choices themselves to destroy their own company.
Reply
Frank 3:10PM (10/17/2008)
Barney,
I have the same sentiment. I ditched GM back then too. Kudos Pal.
skzzilla 3:38PM (10/17/2008)
Barney,
You have bought 20 cars in 20 years? I would think any dealer would want you as a customer!
Pete 3:28PM (10/17/2008)
Good article John! You bring a new light on that issue, thanks!
Reply
jamie 3:33PM (10/17/2008)
McElroy is right on in one aspect.
GMAC stopped lending to anyone with a credit score under 700, which excludes about half of the country. Most Chevy buyers reportedly score in the 600 range. Note however that GMAC funded 43% of all GM sales in the second quarter, but only 20% of funding in September. Cause for concern is quite apparent.
Look back at the deal Studebaker and Packard pulled off in the mid 1950s.
Both automakers were in trouble. Studebaker had a larger number of dealers, an interesting but overpriced collection of smaller and sporty cars and a decent line of light and medium trucks. Packard only had moderately updated luxury cars, but it did have cash. So they merged.
Today GM plays the role of Studebaker, with the dealers and the product advantage, while Chrysler with its $11 billion cash hoard plays Packard.
Cerberus would have to buy the 20 percent of Chrysler owned by Daimler. Already happening. Then GM would swap GMAC for Chrysler. Cerberus would probably have to sweeten the deal just a bit more by say $3 billion to ensure a smooth transition.
Cerberus could then merge Chrysler Financial with GMAC. No doubt they will reap big benefits from Bernanke Bailouts Inc for their ResCap exposure as well.
Will GM still look to Cerberus for auto financing? Hard to say. Chasing three headed dogs from hell probably doesn't interest GM anymore.
Reply
MachinaDC5 3:38PM (10/17/2008)
Frankly I'd love to see Chrysler purchased and dismantled. Nobody's willing to shake things up in the auto industry... hanging onto outdated concepts of heritage preventing the American auto industry from moving forward. I wonder why foreign automakers, even foreign automakers with union workers, are so much more profitable. Ford celebrates how it doesn't have to kill off Mercury. Too many old men are in this business and not enough business men, guys willing to make real.
I guarantee this won't be a popular comment, but I want to see something fresh happening in the American auto industry, not the same stuff that's been happening for the last 30 years that got so many of these companies into this mess.
Reply
jamie 4:01PM (10/17/2008)
Killing Mercury is a two edged sword. On paper it makes a lot of sense. However the demographic that this brand serves is rather unique and loyal. Sounds like Oldsmobile again, right?
The upscale refined image of Mercury attracts a lot of female buyers who wouldn't even look at another Ford product.
Suggestion for Mullaly:
Replace Mercury with Volvo and you will achieve a newer more polished image with the added "Safety" cachet there to boost sales. You won't lose any Mercury customers and gain better recognition and acceptance of Volvo products.
Often heard intriguing idea is that Mercury should be a Scion counterpart. Hmmm, sounds good to me also. Ford needs to enter the young and single market more forcefully. This ain't your grandfather's Olds...re, Mercury! LOL
MachinaDC5 4:25PM (10/17/2008)
Yeah I mean Mercury just seems to me to be a bit superfluous. Volvo's a better brand all-around, I love Volvo and many of their products, but Mercury seems to offer nothing that Ford/Lincoln don't offer already. Why waste the money saving it just for the sake of its name? The costs far outweigh the potential for profits there so why not just make the decision to make more money? I'm sure Ford would be losing many loyal customers by killing Mercury, but the benefits would just be far greater. It's too costly to maintain Mercury so they've got to give it the axe. Sad to see it go, I know, but it's a new market that requires such decisions.
Frankly I'd like to see GM axe Buick (in the US), shift about 1/4 of Pontiac's products into just Chevrolets, and turn GMC into a commercial/fleet-only brand. Consolidation could really benefit domestic giants.
Barney 8:12PM (10/17/2008)
skzzilla, I describe myself as a car-a-holic. I've had over 200 cars since I was 15. Dealers DO like me very much. But, now that I am older(63?) I feel I really need to slow down. My middle name is "negative equity" ! Plus, my wife has threatened to divorce me.