So the government has ordered bailout-seekers General Motors and Chrysler back to the drawing board - and sent GM's former CEO Rick Wagoner packing. The broad message is clear: The Obama administration - and a huge chunk of voters - are fed up with failing companies asking for handouts.
But Team Obama also issued some stark guidelines laying out each company's shortfalls, which serves as a roadmap for what GM and Chrysler must do to earn the government's support and qualify for more bailout loans. Here's what the immediate future looks like for each automaker.
Obama's automotive task force acknowledged that America's biggest automaker has "made meaningful progress in its turnaround plan over the last few years," and said that GM can become healthy again if it makes dramatic changes. But the task force also excoriated GM for submitting a weak viability plan in February and failing to meet the March 31 deadline for several key benchmarks. In several areas, the government debunked GM's rosy assumptions - which helps explain why it lost confidence in Wagoner, who oversaw the viability plan. The regulators also highlighted key reforms that GM has begun, but needs to move much faster on. A breakdown:
Better planning assumptions. The task force charged GM with making poor, even dishonest assumptions about vital business matters: its future market share, the prices it will be able to charge, the number of big trucks and SUVs it will be able to sell, and the boost it will get from the Chevy Volt electric plug-in due late next year. The task force pointed out, for instance, that GM has been losing 0.7 percentage points of market share a year for the last 30 years, yet its future projections are based on much smaller loss of just 0.3 points per year – at a time when bankruptcy speculation is trashing the company’s reputation.
Another startling example: GM assumes that the operating margins on each car it sells will increase slightly over the next few years - even though the car industry is in deep distress, everybody's cutting prices, and GM is planning to sell fewer big vehicles, which have the highest profit margins. GM’s planning assumptions have been so unrealistic, in fact, that it’s already falling short of sales and market-share expectations for 2009. The unmistakable message: GM has been in deep denial and needs to snap out of it, with a turnaround plan based on real-world assumptions.
[See 6 upsides to a GM bankruptcy.]
Big concessions from creditors and labor unions. The showdown is on. Both groups have drawn a line in the sand, with creditors reluctant to trade $28 billion in debt for stock in GM, and unions averse to accepting stock in exchange for half of the cash GM plows into a healthcare fund for retirees. With Obama and new CEO Fritz Henderson now saying that a Chapter 11 filing could be likely, expect some high-stakes brinksmanship leading up to the May 29 deadline for resolving the issues.
Fewer brands and dealers. GM has finally acknowledged that its 8 brands are at least 3 too many. It also plans to trim its network of 6,000 dealers to about 4,700 by 2012. But that plan "does not act aggressively enough to curb these problems," according to the government analysis. That means GM must move a lot faster to unwind the Saab, Saturn, and Hummer divisions, transform Pontiac into a profitable niche brand, and power-shrink its dealer network.
[See the cars that drove Detroit’s customers away.]
Fixing Europe. GM’s European market share has fallen from about 13 percent in 1995 to about 9 percent today, and its European Opel division says it needs about $4.5 billion in aid from European governments to stay afloat. GM recently said it’s willing to sell a controlling stake in Opel, but in such a lousy market it will probably be forced to accept a low price.
New technology. The government task force likes the idea of the Chevy Volt. But it also cuts through the hype, pointing out that the cost will need to fall dramatically – which will take years – for the Volt to be “commercially viable.” Meanwhile, GM is “at least one generation behind Toyota on advanced, ‘green’ powertrain development,” according to the task force. That means the GM needs to invest much more heavily in new technology, while slashing spending on SUVs and other vehicles.
Making a profit. This is the bottom line, of course, and the task force pointed out that even under GM’s overoptimistic plan, the company will have nearly $15 billion in negative cash flow in 2014 – after the bailout! That means taxpayers may not get their money back, and GM, under that scenario, would become a kind of black hole where money goes to disappear. (Which it already is, come to think of it.)
The cuts necessary to return to profitability are so daunting and draconian that Obama obviously concluded that bankruptcy – which would void billions in debt and other obligations - may be the only way to get there. If that happens, GM will face a whole new set of demands. But it might also help GM, since a bankruptcy judge can order changes that the automaker may not be able to negotiate on its own.
The No. 3 U.S. automaker survived one near-death experience, in the late 1970s, but might not make it this time. The government has agreed with many other analysts in concluding that “Chrysler is not viable as a standalone company.” There are many reasons. Chrysler can’t compete with bigger competitors on R&D, cost, and price. Quality is weak and improving it will take years. Chrysler is so heavily dependent on trucks and SUVs that it won’t be able to meet new fuel-economy standards. And with a small footprint overseas, Chrysler is too vulnerable to fluctuations in the U.S. market.
The government has essentially given Chrysler an ultimatum: Merge with Fiat – and ink a deal within 30 days - or tell it to the bankruptcy judge. If the Fiat deal goes through, the feds will provide $6 billion to help the combined company succeed. But even that is dicey. Here’s what a Fiat deal would have to offer for the government to stand behind it:
Greater scale. Chrysler deploys half as many engineers to a car project as GM. It spends just one-fourth of what GM does on suppliers, limiting its ability to demand volume discounts. Spreading its costs over a much smaller volume cuts potential profit by several hundred dollars per car. A merger with Fiat or any other automaker would have to bring big leaps in scale and efficiency for the company to be competitive.
Fresh new products. Chrysler is barely a presence in the market for small cars – and it has no meaningful plans to build any new small cars of its own. Yet tough new fuel-economy rules virtually require every automaker to sell considerable numbers of high-mileage vehicles. So if Chrysler doesn’t find a partner who can offer that, it’s basically out of luck.
Chrysler’s overall new-product plans are weak as well, with just four new models planned for the next five years. Compared to aggressive innovators like Honda and Toyota, that’s almost the equivalent of giving up. Chrysler’s standalone plan is to focus on its strengths – pickups, SUVs, and minivans. But shifting consumers tastes and the risk of rising gas prices make that an untenable strategy that has already drained the company of cash.
Making a profit. Chrysler’s uphill climb is even steeper than GM’s. To return to profitability, the automaker needs to plug a widening quality gap with competitors, wean its customers off some of the biggest incentives in the industry, rapidly rush dealers new products that aren’t even on the drawing board yet, and further slash its workforce and industrial footprint, all while achieving greater scale. A Fiat deal may help somewhat, but it would depend on the willingness of American consumers to make a leap of faith and buy untested new cars from a foreign maker that left the U.S. market years ago. If Chrysler pulls that off, it will have cheated death twice.