Chrysler Makes a Poor Fit for GM

by: Peter Morici October 26, 2008 | about stocks: GM    

Peter Morici

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This article was originally published in the Detroit Free Press

General Motors Corp. (GM) is having trouble lining up the financing to acquire Chrysler LLC -- either by merging it into its operations or as a scaled-down subsidiary. Observers may blame the credit crisis and the present reluctance of banks to lend. While that makes GM's task more difficult, it certainly is not the central reason why the acquisition should not go forward.

Simply put, Chrysler has two good franchises that would complement GM's product mix, but those are hostage to an otherwise uncompetitive corporate structure. GM can't fix those problems easily.

Jeep and Chrysler minivans are great brands. Although these products are in shrinking market segments, these segments will continue to be large and important. Properly managed, the Jeep and Chrysler minivans could be the survivors that reap large profits. Moreover, their brands and architecture could be extended into smaller more efficient crossovers like the Nissan Rogue, which are sorely needed now in the U.S. market.

However, Chrysler products suffer from poor quality -- reliability issues and poor product appointments to compensate for high labor costs and clumsy management. Those issues might be better solved by a joint venture with a Japanese manufacturer such as Mazda or Toyota (TM). I like Mazda best, because the Jeep and minivans complement its strengths in sedans very well, and it could get trucks from its other partner, Ford (F).

Ford sells the most pickups on the planet for a reason: The marketplace finds them the best!

The recently negotiated UAW contract does not adequately reduce hourly labor costs and/or remove the burden of legacy costs. It only potentially moves most of those to other corners of the balance sheet. If GM acquired the Jeep and minivan franchises, GM would still have to pay heavy severance bonuses to workers it laid off in streamlining operations. Similar payments would be required to shutter much of Chrysler's unattractive truck and car operations, and GM would still have to fund the union health care fund for retired Chrysler employees. Those costs are simply more than the Jeep and minivan franchises are worth.

The simple fact is that the best solution for Chrysler is Chapter 11 to remove the burdens of the UAW contract and scale down the company to something one-half to two-thirds its current size. That would serve GM's interests, too -- both Ford and GM would benefit from some capacity and cars going off the market.

Suggestions are emerging that Uncle Sam take a stake in the combined company. Rewarding two of the worst run companies on the planet makes little sense to me. It would be better to formulate a comprehensive strategy for the industry to encourage the build out of high efficiency vehicles.

Washington should require much higher mileage standards for automobiles than the 35 miles per gallon target set for 2020, offer incentives for consumers to trade in their gas guzzlers, and provide substantial product development assistance to U.S.-based automakers and suppliers. The latter includes Toyota and Honda, as well as the Detroit Three, battery makers and other suppliers to accelerate the production of high-mileage innovative cars.

The condition for assistance would be that beneficiaries do their R&D and first large production runs in the United States, and share their patents at reasonable costs with one another. The huge U.S. market would attract producers from around the world and rejuvenate the U.S. auto supply chain.

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This article has 7 comments:

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    Oct 26 11:06 AM
    The write-up has some good points. I also don't think a GM/Chrysler merger would be good for GM. GM has Hummer, doesn't need Jeep, but the RWD platform and minivan platform would come in handy. I'm not exactly sure about now, but usually, Ford doesn't sell the most pick-ups; GM does. (Combining Chevy and GMC). Also, to say that GM and Chrysler are the "two worst run companies on the planet" is a major overstatement. They have made some mistakes, but given the circumstances, legacy costs, currency manipulation, trade unfairness and sudden change in fuel prices, I think GM has done OK. Cerberus has proven that running a car company is not as simple as so-called "experts" who have never been associated with cars claim it to be.

    UH2L
    www.thingsivenoticed.c...
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  •  
    Oct 26 11:34 AM
    One thing omitted (as far as I know) from all discussions about a GM/Chrysler merger is... who would actually execute it? After years of shedding white-collar executives at both firms (not that they didn't need to do that), who is left to do the heavy lifting of putting all the different pieces and parts together? Both firms have skeleton staffs now, with no bench strength left to carry the deal out. I recall years ago an (anonymous) Toyota executive telling me his reaction to the Daimler/Chrysler deal: "Whether it works out for them or not I have no idea, but they will be dead in the water for at least 2 or 3 years while they put it all together, and we will gain market share in that time, by just sticking to our knitting." Amen.
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  •  
    Oct 26 11:36 AM
    If GM & Chrysler merge would give them access to many resources that each have developed over the years and make good business sense given the state of the economy, but this would only be a temporary fix until the next crisis - the North American governments have opened the flood gates to every for every manufactured good that we already make - but we are not evolving from being a 3rd world country therefore we cannot compete with the wages, so we will be back here again until North Americans learn that we need to BUY domestic to have the JOBs to get the MONEY to buy the CAR. We cannot close the gates now but we can educate the people - when companies like GM, Chrysler & Ford are doing GOOD .... the economy is doing GREAT, sure we will hit potholes but we will be able to fill the pothole and get back to business MUCH quicker!!
    What I would really like to see (& every one else as well)) is the data that shows the over-all number of automotive jobs lost for the last 10 years in North America as well as how it has affected the spin off service groups since the Asian imports have flooded our markets – I think those numbers alone would make us all realize that it’s time to get back to buying what our NEIGHBORS build and service.
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  •  
    Oct 26 05:08 PM
    Although the merger would be good for me, job wise, I honestly don't see the fit. There is nothing that Chrysler can offer to GM except the Jeep brand. A combo of Jeep and Hummer could be an interesting fit, if GM doesn't sell Hummer. Most Chrysler dealers have become used car stores with a new car shingle for the pre-owned programs. I would like to see GM stand alone, downsized, with some government loan guarantee program. Its engineering and craftmanship is second to none. Their problem is they have become the poster child for America's manufacturing woes. Also, we should limit the Asian imports the same way they limit our imports into their countries. All playing fields should be level.
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  •  
    Oct 27 03:13 AM
    Foreign auto makers, primarily the Japanese, are heavily supported by their own governments. They also build vehicles on U.S. soil with a HUGE advantage, in that they do not have to contend with the UAW. U.S.-based auto companies are saddled with UAW relationships that are truly from another era. GM, in particular, is developing fuel cell, electric, bio-fuel and compressed natural gas vehicles, many currently in actual fleet-testing. Many independent reviewers now find their quality on many vehicles on a par with the imports. With all the domestic industry must overcome, don't these accomplishments make them worth saving?
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  •  
    Oct 27 10:31 AM
    I don't know who it could be that finds GM's car quality on a par with that of the Asian automakers. But they must be from another planet! U.S. car companies have had 30 years to fix their shortcomings, but have failed miserably so far. That means either they don't know HOW, or they simply CAN'T.
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  •  
    Oct 27 10:38 AM
    Either way, they need to keep at it. Maybe bankruptcy, as drastic an option as it is, is the answer. Greater government involvement certainly isn't.

    Our government can't run its social programs or even the post office efficiently, so to suggest it could somehow turn our automakers around in such a competitive industry is complete and utter fantasy!
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