Next Steps for the Auto Bailout

Thursday, November 20, 2008

Today, Congress told the Detroit CEOs to return in the first week of December with business plans that show how the bailout money would be spent and how their businesses would return to profitable viability. Hopefully, the bailout would be conditioned on demonstrating such viability. Most likely, the $25 billion honey pot at the Department of Transportation that was previously approved to help the auto companies meet fuel efficiency standards (one does wonder why we have to pay them to do that, isn’t it their job to produce fuel-efficient vehicles?), would be stripped of those regulatory green requirements and just handed over to them, providing them a bridge to Obama’s administration and a Congress that awaits to give out more taxpayer billions.

Here are two other suggestions to the unashamed CEOs: First, as a measure of immediate & ongoing conservation of your precious but dwindling cash reserves, without delay liquidate your private corporate jet fleets and return to Washington aboard commercial airline flights. Then apply this rule of tightwad frugality to all corporate decisions up and down the management line. Second, lead by accepting $1 in yearly salary, the way CEO Lee Iococca did the last time Chrysler was bailed out. (Oh, and third, cancel the dividend & bonus payouts until return to profitability.)

The 1980 Chrysler bailout offers an historical context for the current Detroit dilemma. Back then, Chrysler’s CEO Lee Iacocca, known as a product innovator responsible for the Ford Mustang, had been brought in to help fix Chrysler in 1978. He lobbied Congress for a bailout, and in January 1980 $1.5 billion bailout in federally guaranteed loans was signed into law. Chrysler repaid them three years later.

``Lee Iacocca had a clear plan to return that company to profitability,'' said Peter Morici, a business professor at the University of Maryland. ``These guys do not.''

Senator Charles Grassley, an Iowa Republican, said in a letter yesterday to the three auto leaders that they should follow Iacocca's example and cut20their own pay. Iacocca took a $1 yearly salary and his executives as much as 10 percent salary cut-back after the bailout.

Current Chrysler CEO, Bob Nardelli, alone among the three, said he would accept $1 per year in salary if it would help Chrysler obtain its $7 billion share of a proposed $25 billion automaker rescue package. Nardelli said he would make that gesture in response to a question from Sen. Jon Tester, D-Montana, who said sacrifice by Lee Iacocca in 1979 helped Chrysler Corp. win a $1.5 billion loan guarantee.

Looking Back at the 1980 Chrysler Bailout
[Posted By Barry Ritholtz On November 20, 2008 @ 9:00 am]

The current no-strings-attached bailout demands of the Big 3 stand in stark contrast to the 1980 Chrysler deal. Regardless, the subsequent decades post-bailout reveal the deal wasn’t particularly good for either the industry or the firm’s employees.

In the 1950s, Barron’s described the Detroit automakers as the big two and a half – with Chrysler, the perennial sales laggard, as the half. When the oil embargo hit, Chrysler suffered the most of the Big Three.

By the mid-seventies, the company was hemorrhaging cash. Chrysler lost $52 million in 1974, and a record $259.5 million in 1975. As smaller, less expensive and more fuel-efficient from Japan and Europe gained increasing market share in 1970s, Chrysler found itself in an ever-deepening hole. It looked like they might have to declare bankruptcy.

As soon as the energy crisis ended, it was back to business as usual. 1976 was a hugely profitable year: the company’s net income was $422.6 million. 1977 was profitable, but less so: $163.2 million net income. By late 1978, they were running in the red again, losing $204.6 million. The fall of the Shah of Iran and a new U.S. Oil embargo sent prices higher once again. By 1979, Chrysler was looking at its first billion dollar annual loss.

Management decided it was time to visit their Uncle Sam

The Chrysler bailout was everything Lockheed was – its predecessor in the bailout timeline by 9 years – and more. It was bigger and more expensive. Lockheed had loan guarantees worth $250 million dollars; Chrysler’s were for six times that amount,. The rationale for the rescue of Lockheed, the country’s biggest defense firm, was national defense. With Chrysler, it was the economy, and saving 200,000 jobs in the U.S.

But the big difference between the two was that the Chrysler rescue package was much more complex. The terms of the Chrysler loan guarantees required an additional $2 billion in commitments or concessions from: “its own owners, stockholders, administrators, employees, dealers, suppliers, foreign and domestic financial institutions, and by State and local governments. ”

The Chrysler bailout of 1980 was not quite a pre-packaged bankruptcy reorganization. It left the company with the same management team, the same union contracts, the same pension obligations, and the same health care coverage ; all the bailout did was buy the company a few more years. Indeed, the pre-bailout industry looked almost identical to the post-bailout industry. None of the Detroit automakers, Chrysler included, received any long-term benefits from the bailout.

Chrysler survived, but a slow necrosis gradually handed over the dominance of the U.S. automobile market to the Japanese, Koreans, and Germans. In 1980, Detroit had a ~75% market share of autos sold in the U.S. For the first time ever in May 2008, that number slipped under 50%, and it is now down to ~48%.

You read that right, the majority of automobiles sold in the USA are no longer vehicles made by U.S. companies.
The UAW.’s membership suffered even more than Detroit’s market share. It peaked in 1979, a year before the bailout, when the Union had over 1.5 million dues-paying members. 25 years later, UAW membership had fallen by two thirds — down a million to 538,448 (2006).

And, year-over-year totals are still falling. From 2006 to 2007 (the most recent full year of data ) the union saw its membership decrease yet another 14% –down another 73,538.
Had Chrysler been allowed to fall into bankruptcy, it’s not too difficult to imagine a vulture investor obtaining all of the aforementioned assets, and putting them to good use. Just picture a refurbished Chrysler Corporation – newly recapitalized, minus the onerous labor contracts, pension obligations, and healthcare overhead. Its new owner would have been free to pursue new manufacturing methods, new automobile designs, even new markets – with all the advantages Chrysler itself had, but without the defunct company’s baggage.

A post bankruptcy Chrysler would have been as leaner, meaner and more cost-efficient, and maybe even more fuel-efficient machine than the rest of Detroit. Surely, they would have been willing to take chances on some new designs that broke free of the stodgy boring cars put out by Detroit in the 1970s and 1980s.

Not only would Chrysler have been much more competitive in the U.S. and world markets, its mere existence would have forced GM and Ford to streamline their own processes, improve their vehicles in terms of attractiveness, mechanical reliability, and fuel efficiency.
Down Below 50% “Detroit 3”U.S. Market Share 1986 –June 2008
(Sales of Detroit 3 N. American “owned”production)

Source: Center for Automotive Research

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