GM/Chrysler: “We’re getting fat and old and this is probably our last chance to not die alone” wedding update

Has been postponed until God knows when (I have read a bit indicating enthusiasm on the part of Obama to facilitate the merger, but even if he is willing to support funding the merger, I doubt he would make it one of his first major acts of business in office.  And that is a few months away regardless.  The condition of GM and Chrysler and the economy at large could force Bush’s hand).

As a recent (Tuesday morning, $5.99/share) purchaser of GM shares, I am very keenly following any updates on the situation.  I was hoping I could piggyback on the largess and get me a cut of that government cheese that has become so fashionable lately, but my failure to sell at $7.00 means I’ll likely have to hold this horrible carmaker’s shares for months before getting a payout.

The facilitated-merger rumours have drawn the ire of many journalists and the public at-large (though not to the extent of the TARP of course, as the direct Federal costs are being estimated between $5 and $12 billions:  Not even 2% of the TARP outlay).  Many have phrased the merger as Some Assembly Required has:

“The taxpayers give $15 billion to GM/Chrysler to help them merge, and in return they lay off 74,000 taxpayers.”

That seems very accurate to me but what he does not mention in his sarcastic summary is that watching GM and Chrysler fail would appear to be a much scarier prospect.  As the article he links to describes (Bloomberg):

“A “free fall” by Chrysler in which the company runs out of money, enters bankruptcy and stops producing cars would almost destroy the U.S. industry and cause massive supplier failures, she [Kim Rodriguez, who leads Grant Thornton's automotive restructuring group] said. While that scenario is unlikely, it would mean “significant” job losses.”

Despite the likely vested interests of Ms. Rodriguez (and myself, as a small investor), I do believe this is an accurate depiction.  And the same would apply to GM.  GM is estimated to be losing over a billion per month and could run below the $11 billion or so necessary to maintain operations sometime in 2009.  The Chevy Volt (which I believe was originally scheduled for a mid-2009 release) is, according to CNN Money, expected for late 2010.

Unlike the financials that have been bailed out so far, I actually do believe GM has a relatively bright future ahead of it if it can make it to the Volt’s release.  This merger would likely cost thousands of jobs in the short term, but no merger would cost thousands of jobs in the short term as well (as the Bloomberg article indicates, Chrysler is eliminating 25% of their salaried workforce already) and should GM not find some way to survive the continuing automotive downturn, there seems to be a fair chance that 74,000 jobs could be lost in next year between GM and Chrysler if nothing is done.

The larger question that doesn’t seem to be posed much in print (but is alluded to or stated rather matter-of-factly in the commentary about the news) is whether or not GM or Chrysler desreve to survive as companies.

GM and Chrysler have ignored the writing on the wall for years and have continued to shortsightedly build their business around the (in my opinion, embarrassing) once-growing trends in SUV ownership and refused to acknowledge the shift towards more economical vehicles, even in the face of coming (or already arrived at) Peak Oil (to clarify: I’m not saying we’re almost out of oil, but we’re out of easy-to-get-at oil).  The Detroit Big Three (and Toyota) were so committed to their SUV market that they actively and aggressively lobbied against improved fuel economy standards just last year (Autoweek story).  I wonder if they wish that money spent lobbying against the imminent tightening of fuel economy standards wouldn’t have been better spent… improving their fuel economy?

Quite frankly, my personal financial interests aside, I would love to see all three American automakers fail to some extent (I am commenting on just the companies: Though I would not consider working at an automaker so behind-the-times and more eager to compete through lobbying than automotive innovation a point of pride, I certainly don’t wish unemployment and poverty on their workers).  Despite my fondness for the Chevrolet Volt and GM’s entire public and uncompromising approach to its development, I would be perfectly happy to see GM liquidated and a stronger and less idiotic automaker purchase the Volt and its compatriots and let the rest of the brand die.

But I do not see that happening.  Despite Detroit’s consistent inability to build a reliable automobile for the past decade or more, US consumers nonetheless continue to purchase American (albeit in diminishing numbers).  Ford’s quality has improved and could even be said to be impressive with three of their brands in the top 10 for JD Power’s 2008 Initial Quality Survey if you include Jaguar, which Ford sold this March.  GM tends to rank somewhere in the middle, with no marques cracking the top 10.  Chrysler manages to dominate the bottom 10 of the 36 brands with the last place finisher (Jeep), and a total of three brands in that bottom 10 (Pop Quiz – Question:  How many brands does Chrysler have?  Answer:  Three).

Industry average:  118

Ford’s five brand unweighted average (for the brands it currently controls):  117.400

Ford’s seven brand unweighted average (including Mazda, Volvo, and the recently sold Jaguar and Land Rover):  122.857

GM’s eight brand unweighted average:  127.875

Chrysler’s three brand unweighted average:  150.000

The quality of American cars (or lack thereof) is no secret.  Quite frankly, I would estimate based on my brief employment in the automotive industry that consumer impression of US carmaker quality is even below what JD Power’s ranking would suggest.  What American consumers’ decision to continue to buy horrible American cars despite competitively priced and superior performing import availability says to me is that there is a major impulse among American carbuyers to purchase American, and should a company like GM release a product worth buying (perhaps the Volt?) Americans will flock towards them.  Of course, $7,500 tax breaks (as per the CNN Money article) would help.  But GM has to survive for the Volt’s release for that to happen.

So the companies, for the most part, suck.  And the market, without a doubt, totally sucks.  But so do the options.  Given the choice between a slow (if you consider fewer than five years slow) drift into liquidation for Detroit’s Big Three and a still-possible drift to liquidation in an indeterminant amount of time, but potential post-2010 resurgence if $12 billion or so is provided to make a merger possible, I have no doubt that Washington will choose the latter.  Despite my financial stake in its event, I do not support it.  I have no doubt, however, that the fear of the difficult-to-predict consequences of the automakers’ failure in the weakened American economy will drive Washington to action.  And I doubt the Big Three have cut back on their lobbyist expenditures either.  That will probably help.

… and the cow goes moo