Letter To The Future Car Czar

Today (Friday), President Bush approved an emergency bailout of the U.S. auto industry Friday, offering $17.4 billion in rescue loans in exchange for tough concessions from the deeply troubled carmakers and their workers. The government will have the option of becoming a stockholder in the companies, in effect partially nationalizing the industry.

If the carmakers fail to prove viability by March 31, 2009, they will be required to repay the loans, which they would find all but impossible. A firm will be deemed viable only if it can show positive cash flow and can fully repay the government loans.

Under terms of the loan, General Motors (GM) and Chrysler must provide the government with stock warrants giving it the option to buy GM and Chrysler stock at a specific price. In addition, the automakers would be required to agree to limits on executive pay and eliminate some perks such as corporate jets.

Today’s rescue plan retains the idea of a “car czar” to make sure the auto companies are keeping their promises and moving toward long-term viability. The carmakers have announced extended holiday shutdowns. Chrysler is closing all 30 of its North American manufacturing plants for four weeks because of slumping sales; Ford Motor Company (F) will shut 10 North American assembly plants for an extra week in January, and General Motors will temporarily close 20 factories — many for the entire month of January — to cut vehicle production.

This is a band-aid, but not the surgery this industry needs. In essence, we see this as the first step towards a long-term solution, which will include the following:

• 1 - Getting a bankruptcy attorney and filing ASAP — this measure extends this until March 31. Then healthcare and pension issues can be removed and this would go a long way towards making Detroit competitive with foreign manufacturers.
• 2 - Separate dealerships from the rest of the company. The parts and service issue can be guaranteed by the US Government and these companies can be separated and recapitalized from the rest of the Big Three. We find it hard to believe that consumers would not buy something from a bankrupt company.
• 3 - Get a labor attorney and have a nasty confrontation with the UAW while in bankruptcy. This would be the worst labor showdown in out memory and may involve the Supreme Court at some point.
• 4 - Have the US Government be a DIP [debtor-in-possession] financer, as opposed to writing blank checks to the auto manufacturers. They are there to support — but not nationalize — the industry. The challenge will be when to get these companies out of the private sector hospital, which is the US Government.
• 5 - Focus on only 35+ MPG vehicles. Transition from SUV to AFV (Alternative-Fuel Vehicles).
• 6 - Remove the top-50 officers of the all of the Big Three and replace them with outsiders. Encourage creative and dynamic thinking.
• 7 - The US Government should look at tariffs and quotas to protect these companies as they restructure. Also, this would force foreign manufacturers to build plants in the US rather than export, which would make a worker-retraining issue a worker-relocation issue, which is far easier to deal with.
• 8 - Consumers should be allowed to deduct automotive interest, which would increase demand for autos and alleviate the credit issue that surrounds the industry now. Perhaps this can be for AFVs and 35+ MPG vehicles only. There should be a punitive tax on SUVs which will make them unaffordable for consumers. These tax revenues can fund growth of the AFVs and high MPG vehicles with tax credits.
• 9 - Global alliances should be forged among the manufacturers to take advantage of global economies of scale. These new “super-car” companies would be able to tap into the Chinese and Indian markets, where the car industry is a growth business and billions of people are screaming for a new car, not just a second hand retread from the US or Europe. Economies of scale/Rationalization and China/India increasing the global baseline demand for cars may permanently increase profitability for the industry and avoid this situation from happening again.

We see the following as impacted companies: General Motors, Ford, Toyota (TM), Nissan (NSANY), Honda (HMC) and Daimler (DAI).

Subscribe by RSS Subscribe by Email

Comment by Car-man

2008-12-20 07:53:59

This is by far the most IGNORANT collective of ideas about the auto industry I have ever seen.

Reply to this comment