Daimler Takes a Bath; Chrysler Gets a Break
I’m a car guy. This means I like cars, I like to work on cars, I like reading about cars and am heartbroken at the mess the Big Three automakers have made of their product lines. So from my perspective, the news the DaimlerChrysler is shedding its lemon Chrysler unit for 7.4 billion large – a fraction of what it paid nine years ago — to Cerberus Capital Management is not good news.
This is because Cerberus, a private equity investment firm run by former Treasury Secretary John Snow, doesn’t know squat about making cars, although it does have a stake in GMAC, General Motors’ financing arm. It apparently knows a great deal about making money, and obviously believes it can wring the losses out of Chrysler, which it bought for a song, and have itself a dandy windfall of a winner.
Firing a bunch of front-office bigs in Detroit and dumping unprofitable isn’t going to do the trick if Chrysler is going to be turned around. Well-designed, well-enginered and competitive automobiles is the only way that small miracle will happen.
Let’s step back for a moment and put this in perspective: The smug suits at Daimler believed they knew so much about making cars that glomming Chrysler onto its line of German-engineered automobiles was well worth a $37 billion investment.
Well, Daimler had not anticipated several things: That there were beaucoup problems with its own cars, that U.S. labor costs were going to be a bitch and that their Japanese rivals were stealing a march on the entire global auto industry.
Toyota Motor passed DaimlerChrysler in U.S. sales for the first time last year as GM, Ford Motor and Chrysler all lost buckets of money on their North American operations and announced plans to close plants and make deep cuts in staff.
The major reason: With few exceptions, they made boring products.
Not only has Daimler taken a bath with Chrysler, its fleet has seemed especially out of step to me: Flashy and derivative pimpmobile stylings that seem like caricatures of themselves.
More here.
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8 Responses to “Daimler Takes a Bath; Chrysler Gets a Break”
Shaun -
As another huge car guy, I have mixed feelings about this sale. While your point about Cerberus has validity, what are the alternatives?
Staying with Damlier would have eventually led to shutdown (Germans aren’t very sentimental about business, especially overseas holdings)
Management buyout? Well, they are the idiots that have mis-managed the company for so long. What expectation of success could we have hoped for from them?
Now, to you point of Cerberus being ‘money guys’. Yes, they are. Maybe that is actually a good thing. If Chrysler cannot be profitable, it cannot continue to exist.
Also, Cerberus is indeed interested in value growth to their investment. They are not stupid people, and know that pure cost-cutting at this stage is a suicidal, self-fulling prophecy (as they would eventually find themselves with NO costs to cut, as the company would eventually become bankrupt).
They are probably the best hope for hiring a ‘car guy’ to run the company and try to drive top-line sales. Cerberus could provide the cost and profitability monitoring expertise under that model.
If the new CEO (and a new President) have the freedom to concentrate on those areas, and the cajoles to re-reinvigorate the product line, long-term this COULD work. After all, Chrysler does have an institutional history of innovation.
AR – The Canadian auto supplier Magna made a bid and were blown off. They (Magna) bring the knowlege to help Chrysler regain it’s footing, Cerebus will probably just be a corparate raider selling off profitable arms for profit leaving a dead torso.for bankruptcy lawyers and accountants.
Rudi – I hope not, but what ‘profitable arms’, as independent operating companies not dependent on a healthy Chrysler to exist, does Chrysler have in a breakup mode?
Rudi — I had heard as well about Magna and a number of people have made commented that they would have preferred that Magna buy the company, while I have seen one writeup specifically urging Magna to avoid Chrysler.
I have not (yet) heard anyone remark that they fear Chrysler will be treated in a manner similar to Delphi. Maybe this is being left unsaid because everyone suspects there will be large cost cuts and it’s not necessary to say the obvious.
Shaun — it is impossible to avoid the legacy costs that Chrysler has (that Daimler now largely escapes), which are what are killing the “Big Three” more than anything. The future liabilities that Detroit faces are so large they would even give people in the federal government sleepless nights.
Chrysler alone has unfunded pension and health costs approaching 22 (twenty-two) billion dollars. (GM, $45 billion, Ford, $34 billion)
I’m shocked to note little concern by UAW members yet! It’s as if the UAW continues to be largely in a state of denial. Now with ownership change and people who want to see their purchase pay off, expect a lot of long-overdue rationalization of UAW pay and benefits. The JOBS bank obviously needs to be eliminated (Gettelfinger wants it to be retained!) and a lot of other changes are in order; the company needs to be put in the state of other automakers who are thriving, in the southeastern USA. Hargrove’s union in Canada is not only in denial, but militant. It wants a written commitment by Chrysler of no (zero) job cuts between now and the end of its current contract. Any sane UAW member at Chrysler should be very, very worried, for harsh reality is very likely to intrude in the next year or two.
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Cerberus acquisition of Chrysler makes little sense
“Despite Cerberus’s strong track record of cutting costs in other firms it has acquired, the concession accepted by the UAW in deals with Chrysler, Ford and GM indicate a Cerberus-UAW deal will not completely and adequately align non-legacy labor costs with Toyota and other transplants in the United States. Without that, Chrysler engineers would have to be superior in every way to Japanese and Korean engineers, which is absolutely inconceivable.”
http://www.finfacts.com/irelandbusinessnews/publish/article_10010074.shtml
“But there are signs that all three of the firms are ready to make changes: they have each cut (or at least plan to do so) their workforces, through union-mollifying buy-outs; both Ford and GM have wrested some concessions on health care and pensions from their workers, helping to lower the long-term costs of making cars.”
http://www.economist.com/business/displaystory.cfm?story_id=9175453
“The name says it all: Cerberus, the three-headed hellhound that, according to Greek mythology, guards the gate to the Underworld, is what Stephen Feinberg calls his investment management firm.”
http://www.spiegel.de/international/business/0,1518,482878,00.html
DLS:
You have it exactly backwards. The legacy costs exist because the Big Three have not stayed competitive. It is a symptom of the disease and not the disease itself.
> You have it exactly
> backwards.
No, I don’t, Shaun.
> The legacy costs exist
> because the Big Three
> have not stayed competitive.
Designing and selling better products is certainly needed, in the sense that makes the companies more competitive, but the legacy costs are killing the companies, and those costs definitely ruin Detroit’s competitiveness.
“In all, the per-car cost gap between the Big Three and nonunion assembly plants – mostly in the South – is about $2,400 to $3,500, says Tony Faria, a professor at the Odette School of Business at the University of Windsor, Ontario. ”
http://www.csmonitor.com/2007/0515/p01s04-usec.html?page=3
“The resignation of the United Auto Workers union to a private-equity takeover of the Chrysler Group is a sign that Detroit’s old order is starting to crumble, and the U.S. auto industry is headed for a tough battle with labor in negotiations this fall.”
“The UAW now faces the prospect of negotiating with another struggling automaker in Detroit that doesn’t have a thriving European parent company to finance its operational difficulties.”
http://www.thestreet.com/newsanalysis/automakers/10356711.html?puc=googlefi
AR,
I think bankrupt is a key word here. In today’s legal environment I wouldn’t think it would be impossible for Cerberus to total up the assets and liabilities and then file for bankruptcy in order to get out from under all of those commitments. Other large corporations have succeeded at it. This worries me a bit since I have a friend who is a retired Chrysler worker and I can see him losing everything except his social security and his other sources of income, which aren’t huge.
Jim – Good point. However, bankruptcy is a trickier endeavor for creators of tangible goods than it is for service providers. You don’t worry about the 5 year viability of an airline when you buy tickets, but you sure do for a car.
And creditors have a different view as well. Sticking to airlines, it is much easier for airlines to shed unprofitable routes and assets than it is for car manufactures to discontinue product lines and eliminate plants. Not impossible, but more difficult for sure.
GM is the more likely bankruptcy target anyway, IMHO.