- Chrysler is a good company caught in a bad situation. Chrysler has been a bad headache for years. Daimler bought it for $36 billion in 1998, and actually paid $650 million to have Cerebrus take the company off their hands in 2007. Robert Bruner said in 2007 that
The alternative to a private-equity restructuring would be a government bailout. We as an investing public need to decide whether we want the public sector to step in to support these ailing manufacturers or would we rather have these turnarounds privatized." Chrysler's major problems were not born out of the financial crisis.
- The hedge funds benefited from the government money, so they're getting more than they would have otherwise. As far as I know, Chrysler has burned basically all the cash they got from the government, which is why they're in bankruptcy. They haven't bought exciting new assets the secureds can liquidate; they've just produced more cars that can't be sold at a profit, put more wear and tear on machinery, etc. The deal they made with Fiat doesn't put any cash into the company. It's possible the government money somehow improved Chrysler's current financial hopes, but I don't see it.
- The administration isn't kowtowing to the unions; it's trying to prevent massive job loss. Chrysler employs about 60,000 people. This is a rounding error in the number of jobs that have been lost since this recession began.
To put it another way, we could have taken the $8 billion or so we gave to Chrysler and given every one of the company's employees $133,000 to start their own War on Poverty, while still providing much of their pensions through the PBGC. Of cours, the new Chrysler is going to cut many of those jobs, so the cost of actual jobs saved will probably top $200K per. For as long as the company lasts. Which most analysts do not expect to be long, given that their super secret surprise scheme for turning everything around is to have Chrysler sell retooled Fiats to a country with one-seventh the population density and almost twice the birthrate of Italy. - They're bailing out Chrysler because the company is systemically important. Really? When Lehman failed, huge other portions of the financial system quite unexpectedly quit working. Yet when I look out on the streets, I see no noticeable dimunition of the number of cars there. When I turn the ignition key in my car, it still starts.
Whether or not you agree with the actions the government has taken in the banking system, there is evidence that financial crises have real, nasty, systemic effects that even large industrial failures don't--particularly in a well-diversified economy like the United States. (If Nokia went belly up, Finland would be in trouble. But if Nokia went belly-up, Finland probably wouldn't have the scratch to bail it out, either). I am unaware of any evidence that a single industrial failure has ever precipitated the kind of massive, widespread hardship that followed, say, the failure of Jay Cooke & Co. Intervening to prop up a company that has been struggling for a decade is almost textbook bad economic policy.
« The Price of the King's Shilling | Main | Department of Textual Analysis » How Do I Know That the Chrysler Bailouts are About the Unions?06 May 2009 03:39 pm
This question was asked recently by a seasoned political reporter of my acquaintance. Frankly, I hadn't realized that anyone else seriously believed there was any other reason to bail out Chrysler. But let's go through a couple of the other stated rationales, to see why I find them so implausible:
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The thing that I still don't get is why Obama went through with this even taking the unions into account. That is, the chances of this working out well seem very remote.
The most valuable assets Chrysler has left are Jeep, the Minivans, and the RAM pickups. In other words, exactly the kind of 'bad' low-mileage vehicles that the Obama administration wants to get rid of. But even with those, Chrysler has been bleeding money. FIAT is in shaky financial condition itself, its cars not adapted to the U.S. market, it has a poor reputation among Americans who have any memory of the brand, and there's no way that FIAT can get them on sale in the U.S. in large numbers quickly anyway (how long is it going to take to get those cars ready to meet U.S. regulations, get U.S. factories ready to produce them, get dealer networks ready to service them, get advertising campaigns launched so Americans even know what the hell they are)?
This all seems like a case of really bad political and economic misjudgment (and one likely to repeated on a larger scale with GM). About the only upside, after all the billions wash down the drain, is that it may serve as a textbook case of what not to do, of exactly why we don't want the government to do this sort of thing.
I can only conclude that Obama really must believe that Americans are going to snap up fuel-sipping Americanized FIATS even when gas prices are still in the $2 range. That's nuts -- but what other explanation is there for his hitching his political fate to Chrysler and GM in this way?
"I can only conclude that Obama really must believe that Americans are going to snap up fuel-sipping Americanized FIATS even when gas prices are still in the $2 range."
How long will that be the case with cap and trade on the way?
Even with cap and trade, who would buy a Fiat over a Toyota? That old "Fix It Again, Tony" joke was funny because it was true.
How long will that be the case with cap and trade on the way?
The surest route to an electoral defeat would be to pass a cap-and-trade bill that substantially increased the cost of gas at the pump. Raising fuel taxes is a much better idea that CAFE, but it's a political non-starter.
But doesn't really matter though, because even IF gas prices rocketed back to $4, Chrysler/FIAT would have a rough time of it competing against the Civic, Insight, Corolla, Prius, Mazda 3, etc. The only way Chrysler/FIAT are going to sell a lot of cars are if the government subsidizes the hell out of them and they go for dirt cheap prices. But how long can that keep up?
I thought that changing the tax withholding tables, so that people receive less on their income tax return than they are used to is a political suicide. Most of the working class receive a tax return, and cutting that is time stamping your own death warrant. Obama either thinks that people are far too confused about their own taxes to catch it, or does not think that far ahead, or has some bulletproof vest against political death warrants.
The only way Chrysler/FIAT are going to sell a lot of cars are if the government subsidizes the hell out of them and they go for dirt cheap prices.
You could be right. But I can't think of a single low cost European brand that competes with VW in the US market. Lots of Americans like European-branded cars. I frankly have no idea what Fiats are like these days -- it's been a long, long time since you used to see them with regularity on American roads. Maybe they're crap for all I know. But, car sales are likely to be vastly higher in four or five years time. It seems to me not out of the question Fiat could move product in the states. Another cheap Asian import? No way. But another European? I wouldn't rule it out. Again, VW pretty much has that space to themselves.
Uh... The same brands that compete with VW in Europe - Renault, Peugeot, Ford Europe, Citroen, Fiat, Opel have all slightly lower cost and quality than Volkwagen. Audi, Mercedes and BMW have competitors in the small car segment, with higher quality and cost.
Nimed: Uh...the French stopped selling cars in the US years ago, and the Opel brand hasn't been around since at least the late 70s. If Audi, Mercedes and BMW are selling cars in the states for nineteen grand, they've been hiding them from me. And why you think a car called "Ford" can compete for the business of Americans looking for a European-branded vehicle isn't clear: it's literally impossible to think of a more quintessentially American brand than "Ford."
As I said, for Americans looking for an affordable European brand, VW has largely enjoyed a monopoly for a number of years. I think this presents an opportunity for Fiat, if they indeed make a decent product.
I can't say as I've ever met anyone buying an entry-level VW model because they wanted "European". They buy VW because the base models of the Jetta/Golf and New Beetle have traditionally been good-looking, affordable cars, while also having either a decent amount of interior volume for transporting people and stuff (Jetta/Golf) or an eclectic and storied history (Beetle).
If FIATsler can do that, great, but Ford also did it with the Focus hatchback, which temporarily displaced a lot of Golf and Civic sales.
Jasper
I interpreted your "compete" as "could compete". The brands I mentioned compete with VW in Europe in every segment. I don't know why they don't compete in the U.S., but it's certainly due not the car features.
I basically agree with the rest of your analysis, except that I don't see any good not reason for pretty much anybody in the world not to buy japonese/korean right now.
I've read more than once on the internets that cap and trade is likely to increase the price of a gallon of gasoline by forty cents. Not sure if that's accurate. Doesn't sound high enough to induce much economizing with respect to cars and driving. Also, while I strongly suspect big government healthcare is indeed on the way, I'm not so sure about cap and trade. I don't think the votes are there at this point.
Why would you think gas would stay that low? Obama's energy policies are guaranteed to keep us enslaved to Arab oil. Look at the price of oil since he took office, all in the midst of economic weakness. The market knows he's going to keep us enslaved to oil.
Good point, Megan. Things are going swimmingly in Michigan. Chrysler going under wouldn't have any deleterious effects on the Midwest's economy. Chrysler doesn't have suppliers; it exists in a vacuum, as we can easily tell from your math. It's all a good old-fasioned Democrats-loving-their-interest-groups story, nothing more (I so love it when new events conform to my previously-held notions, it makes understanding so easy!).
Bailing out Chrysler is horrible economic policy. One wonders why the President is making this decision when there are so many palatable, easy, painless courses of action he could take. Why, there are so many better courses of action, I won't even list them. I'm sure everyone reading knows what I'm talking about.
Megan is right, Obama should read the textbook on historically important industries failing during unprecedented economic crises. It's crystal clear what he should do, duh!
And that obligates the rest of us to bail them out... why? If you can't find a job where you live, move somewhere else. Even if you accept the government has some sort of duty to provide people with jobs at taxpayer expense, this is a spectacularly inefficient way to do that.
And that obligates the rest of us to bail them out... why?
Because the government has more guns than you do, as well as more prison cells.
This. This is all there is - a group of people claiming the moral right to steal from, order around, kidnap, and murder the rest of us.
There are no palatable or painless solutions, but there are easy ones: let shitty companies fail.
I hear very few people going around trumpeting that the government has the "moral" right to do this or that with our money. I think for a long, long, time, it has simply been assumed by the vast majority of people that the foundation of our polity -- and its capacity to mandatorily tax you and me and use the proceeds however the majority sees fit -- is morally legitimate.
Actually you don't seem to realize how intertwined the Big Three's suppliers are. That's why the CEO of Ford begged Congress to save the other two auto makers. Their suppliers are deeply intertwined and hurting as well.
Save Chrysler from what, exactly? To continue producing cars that cannot be sold at anybody's profit, and therefore languish on the lot while the production facilities enter cycles of increasingly protracted temporary shutdowns? What good will Chrysler's suppliers gain from having Chyrsler around if the company effectively cuts off its orders?
The Big Three have been tottering on the brink for years, preserved from actually toppling by the money they were able to make in large SUVs and through their financing divisions. First the SUV market satiated, and now the finance market is in the latrine. Chrysler and GM do not have a viable business model going forward, and Ford is only surviving on a pre-existing mortgage arrangement with its creditors. Inasmuch as all three have overcapacity and are overleveraged, continued intervention will only delay the day of reckoning (at best) or turn them into zombies (somewhat worse).
Since at least one of them has to go down, best to start with the smallest, as that will make the extended ripple throughout the supplier industry at least a bit more tolerable.
Of course, those are the same suppliers the Big 3 have abused to the point of bankruptcy and collapse over the past decade. Watching the Big 3 cite their suppliers in any plea for Obama's mercy is like watching an abusive parent beg a judge for reduced jail time, so he can go back and take care of his beloved children, and whup @ss on those kids some more in the process, of course.
If Chrysler goes under it won't be the end of the world. Its capital assets won't be wiped off the face of the earth. It will be placed under new management (if it survives as an entity) or sold for parts, reallocating its resources to more efficient uses.
Kicking this can further down the road is no kind of solution.
Obama could also make life easier on the autos by repealing silly regulations like CAFE standards. A bankruptcy that abrogates union contracts would also be a real boost.
But in the era of "hope and change" and "yes we can" it is clear that the president's overriding priority is to serve his base, meaning the unions and environmentalists, so such ideas are a nonstarter.
This is also why Obama stuck the knife into school vouchers in DC today, buying off the existing students while also delivering the program's head to the NEA.
Painless and easy are impossible goals in economics. Destruction is as necessary in economics as death is in ecology. If you don't like reality, there are ways to leave it, many easy and painless.
Chrysler almost goes bankrupt every ten years; this is not a unique problem related to an unprecedented crisis. And nobody has a plan to avert the next decadal crisis, because it's a systemic part of what Chrysler is. In the meantime, its continued existence makes life that much harder on Ford and GM, who would have been in much better shape had Chrysler been allowed to go under back in the early Reagan Administration.
As far as the auto supplier problem, let Chrysler go under and put the suppliers on genuinely temporary support as a cushion. After which Lear, Magna, Johnson Controls, Delphi, and the rest can depend on selling to GM, Ford, and foreign transplants.
I'll let you in on a secret here, guys. The foreign transplants -- at least the Japanese -- don't generally buy from the US suppliers, at least for things they consider important. They typically buy exclusively from their old keiretsu partners from Japan, and US producers generally must JV with a Japanese company to get into the game, even when perceived or actual quality is not an issue.
The proposed sale leaves ~$2 billion in cash in the company for the secured creditors. Meanwhile, Chrysler's current cash balance is $260 million, down from $1.34 billion three months ago. (from the bankruptcy judge's approval of the proposed sale's bidding procedures, summarized here).
As you say, Fiat isn't putting up any money, so all of that cash is coming from the government. This includes $3.2 billion lent to Chrysler last week to keep them running through bankruptcy - a loan which the administration immediately forgave - the government's $4.7 billion contribution to the "new Chrysler," and commitment to provide another $1.5 billion before the end of 2010.
Maybe the company could have gotten a $3.2 billion gift plus almost $5 billion in seed equity and $1.5 in operating capital on the open market, but I doubt it.
I don't mean to be sarcastic - I know that the bulk of that money is going to more junior creditors - but that cash would simply not be there were the government not able to use it to help the unions. The money going to the unions is not coming at the expense of the secured creditors - if it weren't going to the junior creditors it wouldn't exist.
Of course, the ultimate comparison for the secured creditors is how they would do in an open market liquidation versus how they will do once the union takes its cut of the government's massively overgenerous payments. Obviously we can never definitively answer that question. However, far more solvent companies, such as Sirius Radio, have had trouble obtaining financing recently and had to sell seemingly valuable assets at firesale prices. As well, no independent merger partner has ever emerged. Finally, one has to doubt the value of the assets which would supposedly be valuable in the liquidation - such as the "Jeep" brand - given that GM has been able to receive absolutely nothing for the brands it is choosing to shutter.
None of these observations is definitive, but they cast doubt on claims that the government is preventing a rosier scenario from emerging. In any case, the bankruptcy judge at least thinks that the bidding procedure will be fair enough to allow any sweetheart suitor to come forward.
Additionally, all of the creditors have benefited from the government's largess as it has allowed them to pursue a buyer with the leisure of completely secure operating capital. In the last months, in addition to the ~$8 billion noted above, the government gave Chrysler $7 billion in last year's bailout and $4 billion in the last days of the Bush administration. As you point out, the company ultimately burned through the money. However, the time and leisure was still valuable at the time - the company could devise and pursue alternative strategies without having to worry about suddenly being brought to its knees by a sudden cash crunch - even if in hindsight none of the opportunities worked out. Again, maybe they could have gotten such capital on the open market, but I doubt it.
On your overall point, I agree that the government has acted for the benefit of the unions. You are right to dispel any other notion.
"Finally, one has to doubt the value of the assets which would supposedly be valuable in the liquidation - such as the "Jeep" brand - given that GM has been able to receive absolutely nothing for the brands it is choosing to shutter."
Just a quibble, but did GMC ever try to sell a brand that is in the same ball park as jeep? There always seems to be a market for the wranglers (dedicated if small) and most people I know with Grand Cherokees like them, and it's another long lived model. I don't have a good idea about how people feel about Liberty, Patriot, and COmmander, but to my knowledge that's still a significantly better brand than any that GM tried to unload.
It's a good question and I'm unsure. I explain my thoughts below, in the meantime supplemented by a helpful business week article I found.
I wrote Jeep part with two ideas in mind:
1) GM received nothing for either Pontiac or Oldsmobile. I would agree that Jeep could be more valuable than either, but it's hard for me to see how it could get you close to $2 billion if GM received $0 for those.
2) The reason? The car market is so miserable right now, and there is a glut of unprofitable companies trying to raise money by unloading niche brands and assets. This environment makes a sale at anything other than firesale prices unlikely.
As explanation, the Jeep play that makes sense is for a lesser known perhaps developing world car company to acquire its marque and dealer network to move into the major Western and status conscious markets. That was the motivation of Tata, the Indian car maker, in acquiring Land Rover and Jaguar for $2.3 billion the early part of last year. The market, though, has gone down so much since then that it is difficult to see who would and could make such a play. Tata stands as a warning - its investment is now bankrupt, and it is haggling with the British government over a loan to keep the companies going and the factories in England open. Ugh.
I found the Business Week article instructive in going deeper here. GM paid $1 billion for Hummer in 1999 but is finding it can't get more than ~$150 million for it today. Why? There are a lot of brands on the block - Hummer, Saturn, Volvo - with which an up and coming company could move into the developed markets. Yet, sales in those markets are collapsing - Jeep, for instance, saw a 30% drop in US sales last year - and attached to any purchase are the unionized plants and ultimately the politicized mess we've been discussing here. Ugh.
The only point I'd add is that if we withdrew the government's support, then the sale would not occur at the patient pace of the past months but likely in a cash crisis firesale. This is one reason I disagreed so strongly with Ms. McArdle's contention about the lack of benefit from the government's money. You can only maximize your value in bankruptcy if you have the financing to keep going while you sort things out. If the government hadn't stepped in Chrysler could have run out of cash, and then all hell could have broken loose - shuttered dealerships with lots of rotting cars, no spare parts, canceled warranties, rioting workers. Not to be too dramatic, but we're considering the situation today from a position of relaxed luxury paid for by the government's money. To pretend that things would be just as calm without it seems to me a bit naive or irresponsible.
The conclusion on Jeep? According to one analyst in the article, Jeep could probably fetch $4 billion in a good market, "[b]ut this is a total buyer's market, and there are very few buyers, so a market price is very hard to set." That seems right to me, and this uncertainty means that it would be difficult to prove that the 363 sale will result in an unreasonably inferior price compared to what one could get in a liquidation. As a consequence, legally, it will be very difficult to attack the choices of Chrysler and the administration, a fact which the bankruptcy judge implicitly recognized today.
Still, we'll see, and I hope Jeep keeps going strong regardless.
GM has repeatedly destroyed the unique value of its brands by doing badge-engineering jobs that put essentially the same car under multiple marques with cheap styling makeovers, or stealing successful styling elements from one division and applying them to others. In the Canadian market, they even released a version of the Chevy Aveo (a cheap, fuel-sipping golf cart purchased from Daewoo) with Pontiac rebranding.
Chrysler was actually heading that way with the Jeep brand (Compass? Give me a break) but got cut short. As such Jeep has a much more unique history, particularly the Wrangler and Cherokee vehicles, the latter of which has survived as a borderline luxury SUV in spite of Chyrsler's infamously lackadaisical build quality in their corporate drivetrain components.
People who are worried about Chrysler's suppliers are missing a vital piece of information:
There is such a fall in demand for cars that many of them will go out of business regardless of whether Chrysler is saved or not.
Take any kind of business. Reduce demand for its product by 30-50% and you will find many of them go bankrupt.
Regardless of what happens to Chrysler, the pain will go on.
I'm sympathetic to your views here, but your numbers obscure an important consideration. Chrysler may only employ 60,000 people, but far more people are employed by companies that make parts for Chrysler. They are not a rounding error.
Not that I'm opposed to bankruptcy proceedings. Like you, I still see cars everywhere, so I don't think the industry is exactly dying, and with reorganization carmakers can certainly be profitable again. Demand for new cars is just more flexible than it used to be, probably in part because cars are so much more durable than in decades past.
I worry, though, that the auto industry's woes are getting too much scrutiny while the much bigger and more systemic problems in finance are ignored, perhaps because they are too arcane to gain traction with the general public. Allowing institutions that are "too big to fail" creates implicit guarantees that the market does not fail to apprehend. If we're going to bail companies out, they should also be required to accept being broken into pieces small enough such that a failure doesn't require taxpayer financing.
From a political standpoint, bailing out Chrysler is the only intelligent option.
Result 1: Chrysler is saved. "We saved Chrysler and we'll save the rest of America if you'll only re-elect us." Unions rejoice.
Result 2: Chrisler is not saved. "We did the best we could to save Chrysler, but in the end, the damage Bush did to the economy was just too great. We need more time to undo the damage, so re-elect us." Unions rejoice.
That's how a politician thinks.
You can't approach these topics from the perspective of whether or not taking a particular stance is intelligent. No thinking person, spending their own money, would be bailing our Chrysler (as evidenced by their having to resort to bankruptcy).
That's why politicians can step forward. They have no skin in the game; it's costless for them to bail out Chrysler. And they win whether Chrysler is saved or not.
That's why you pay 50% of your income in taxes in this country. Meantime, most people in the Obama Administration are taking home 6-figure salaries and not paying their taxes.
As Yakov Smirnoff once said: "What a country!."
And yet Sweden did not bail out SAAB or Volvo.
I suspect a politician thinks the way you lay it out until one day, a tipping point arrives where they can't fool the people any longer (or the people have learned that these policies don't actually work well.) Then they have to change their tune.
Yeah, I don't think that's going to work. Even though he's spending our money, he's clearly got a lot of (political) skin in this game. He's arranged the terms of the Chrysler (and soon to be GM) bankruptcies. He's unilaterally committed the government to honoring warranties. He's done his version of the Lee Iococca commercial -- going on TV to talk up Chrysler's bright future. He's really made himself de-facto chairman of the board of these companies. If this all consumes billions and billions more over the next few years and collapses in a messy heap anyway, he's going to have a hard time not having the failure stick to him.
All you regulation types out there, shouldn't the Big three and the UAW be investigated for collusion? The reason I ask is because I have been shopping for a truck and the deals are not that spectacular. The Dodge Ram is within 3k of a Ford F150. You are only getting a 10% discount on Dodge trucks. Big Deal! Why isn't Ford driving the dagger into these companies to increse market share. I don't buy the supplier excuse. For years, the Big Three have been ruthless with their suppliers. They have used the suppliers to subsidize the salaries of the UAW and executives. The UAW at Chrysler should be agreeing to a sustantial pay cut and reduction in benefits to save their jobs. If Chrysler could dump the price of their cars by 20 or 30 % and maintain them there, their market share would jump overnight. In a just market, this would put downward pressure on the other manufactureres and result in pay cuts for their employees. The UAW needs to wake up and smell the coffee, my house took a 30-40% hair cut, why souldn't the second largest purchase of a household take a significant pay cut. Maintaining these current prices on cars is unreasonable. Well, I will just keep driving the old car I have. We all have to make sacrifices in these times and a new car at these prices is not a luxury I am motivated to have. Give me a 30% discount on a truck and I will buy one tomorrow. In the end, isn't the government just hurting the little guy by maintaining high prices on vehicles making it too expensive to buy a new car? It seems to me that the public is demanding cheaper prices on these cars and the auto manufacturers are refusing to listen.
Think about it, over the last 10 to 15 years, a large portion of the automobile market share was an illusion. Alot of the new cars sold were financed either through unsustainable leases or home equity loans. This market share is never coming back. The cars being sold under those conditions were a distortion in the market and shouldn't have been bought under normal economic circumstances. Cars have been overpriced for years putting them out of the reach of a majority of Americans. It's ironic how the UAW who stands for the little guy really ends up putting the simple luxury of owning a new car out of the reach of most of these little guys. Thanks! How does this make me wealthier?
The aim by the left has been and remains the destruction of property rights. They will take form one group to give to a more politically favored group.
First they came for the hedge funds,
And I didn’t speak up because I wasn’t rich;
And then they came for the car companies,
And I didn’t speak up because I wasn’t a car company;
And then they came for the hospitals and clinics,
And I didn’t speak up because I wasn’t a doctor;
And then . . . they came for me . . .
And by that time there was no one left to speak up.
If the government is going to forgive the loans provided to Chrysler and GM, shouldn't the elimination of employee discounts be one of the conditions? Why should these employees get a better deal on their product than the rest of the general public? The savings could be used to reduce the cost for all of us.
Chrysler going under? Oh, NO!
Obviously none of you remembers the horrors that came about when American Motors went out of business in the early eighties during the Carter recession that was actually worse than today.
Surely you remember how bad that was, don't you? No?
Nary a ripple.
Obama, as Rahm Emanuel articulated, is taking advantage of a CRISIS! to transfer billions to the UAW, plain and simple.
Schlock Doctrine, anyone?
Nary a peep from TPTB.
It seems to me that there are only 2 choices:
1. The UAW taked a significant pay and benefit reduction along with a reduction in their work rules which will allow for a reduction of cost for the automobile. This will:
A. Increase the market pool of people who can afford their product which will lead to increase in production and jobs.
B.Reduce the transportation cost for household budgets leading to increase savings and capital formation or increased spending in other areas of the economy which will provide stimulus. Both of these will increase jobs and wealth for everybody.
2. Try to maintain the current pay, benefits, and work rules resulting in more jobs lost, higher transportation cost for households, and ongoing taxpayer subsidies.
The choice is clear for me.
Text book example of why welfare states will always consume themselves and lead to less wealth for everybody in the end.
If Ford can invest in a new $550million retooling of an SUV factory to build electric cars -without taking bailout money- why should we prop up Chrysler?
www.jourtegrity.blogspot.com
Mouse: I've never met anybody who bought a VW solely because it's a European brand. But nonetheless for many people, a car purchase is one of the most emotional, image-oriented buying decisions they ever make. I think it's obvious that for many folks, the panache of a European or German brand is something that's highly desirable. And again, for the most part, if you find yourself amongst the ranks of europhilic car buyers, and your budget tops out at around $20k, there's really no place to turn to in the states besides VW, with the possible exception of low end Minis (a car many Americans can't even fit into).
I think we have to keep in mind, too, that in the U.S. European models have the (generally deserved) reputation for advanced technology but poor to mediocre reliability (e.g. worse than the D3) and expensive repairs. For a number of years, Mercedes produced some of the least reliable models in the U.S. and VW has been problematic also from a reliability and repair cost perspective, too. I'd actually prefer a modern turbo-diesel like those I've driven in Europe over a hybrid. But at this point about the only choice is VW, and I don't trust VW. FIAT is at the bottom of European reliability rankings, and whatever lingering reputation FIAT has in the U.S. is not good.
Remember that GM brought over the generally well-regarded Opel Astra to sell here as a Saturn with little modification -- how did that work out for them? Was it a profitable, big seller for GM?
For a number of years, Mercedes produced some of the least reliable models in the U.S....
Yes, and the brand has suffered terribly for it. Mercedes is an outlier.
If you're shopping with BMW, Mercedes, or Audi money, sure. With a bit less, maybe you're buying a nicely optioned Passat or something. But at 20k? That's not somebody buying for image, that's somebody young buying what they can afford that still looks good, plus with the Jetta and Golf you get crossover association from the upmarket performance models like the GTI.
I've heard the popular small VWs described as "cool" (guys) or "cute" (girls). "German panache" hasn't come up yet, but I'll keep listening.
That's not somebody buying for image, that's somebody young buying what they can afford that still looks good
Huh? When I refer to "image" that's what I'm talking about: something that looks good (as opposed to something that's merely, reliable, or economical, or safe, or what have you).
I've heard the popular small VWs described as "cool" (guys) or "cute" (girls).
Sure. And some people find that a European brand has a "cool" factor that surpasses that of Chevy, or Hyundai, or Toyota, or Honda. Again, that's not to say all automobile consumers think like this, nor even a majority, nor even a particularly large percentage. But, yeah, at the end of the day there are plenty of folks who like the style (maybe that's the word I should've been using all along) of automobiles produced by European firms (indeed, one of the criticisms of the Jetta is that it has become too "Japanese" looking). Without a luxury brand budget, those consumers have had little choice for many years now but VW. I suspect if they can bring a quality product to the market (and that's admittedly a huge "if"), Fiat therefore has an opportunity. We shall see.
Okay, we basically agree. And I do think that the most recent Jetta looks like a Corolla on a good hair day.
On the financial side, everyone's got to remember that auto companies sell products and banks sell services. When you buy a car from Chrysler, you have the car until you get rid of it, regardless of what happens to Chrysler. When you invest in a fund with Lehman Brothers and Lehman Brothers goes bankrupt, you're at the mercy of wherever the fund winds up in the bankruptcy proceedings.
Products are driven by markets. If the market still exists for a product, the removal of one seller makes the other sellers bigger (as constrained by capacity). The suppliers discussed above are still supplying parts for all the cars in the country, regardless of how many sellers there are. Services are driven by relationships. If your investment house goes out of business, you can move the same investments to another seller, OR you can take whatever money you have left and go home.
All of that said, must we move legitimate criticism into "the world is ending" mode? Obama's decision here, while damaging to our economy and to our underlying trust in government, is not going to bring about the apocalypse. That kind of hyperbole is what made me tune out all the Bush detractors for the last 2-4 years.
Markets continue to adapt. FIAT can sell their cars under a different brand name through Chrysler's existing dealership network. By Q4, the general economic health will be better and car sales will be up from where they are now (nowhere else to go?), and so "New Chrysler" will almost certainly do better than "Old Chrysler" did, although we'll never know if it would be better than Old Chrylser would have done.
I'd bet against "New Chrysler" doing better than "Old Chrysler".
1. The auto market is not going to recover soon.
2. The Chrysler/FIAT integration process is going to messy, slow, and trouble-prone.
3. Some fraction of people are going to shun the 'New Chrysler' for a variety of reasons, for example:
- continued uncertainty about the future of company and dealers
- dislike of bailouts and government heavy-handedness
- fear of shoddy products from a company with demoralized workers
I predict Obama is going to be faced with the prospect of continually pumping fresh billions into the company or seeing it fall right back into bankruptcy.
You cannot be sure "it's all about the unions."
The Obama admiminstration seems very intent on keeping a lid on the amount of bad news that is allowed to occur in a short time frame.
For example, reassuring results from the bank stress tests, which most commenters believe understates the real deficit in banks' positions by a factor of 3 or 10.
Why work on keeping down the bad news? Because a lot of bad news all at once reinforces a collective sense of panic and doom. This is psychology, but it's also very real - psychology makes people hoard cash in a recession or depression, and there we are in the deflationary death spiral.
I believe this Administration believes it's far better that New Chrysler is liquidated in 2 or 3 years, when it will be a blip on peoples' radar screens, rather than now, when it would be a Sign of the Apocalypse.
Maybe they're right to believe that, or maybe they would be better advised to subscribe to the "rip the bandaid off" school of thought, but at any rate it's ingenuous to maintain the only possible explanation is that "it's all about the unions."
To understand this, we need two things:
What were the claims of the all the creditors ranked in order of priority?
What is the sources and uses of the funds in the post-bankruptcy transaction?
Hard to analyze this rationally without that info. I know the secured creditors were owed $6.6B and that the VEBA claim is roughly $10B. Remember that the secured creditors are getting cash at closing while the UAW will have to sell its 55% equity stake to raise cash. That will be hard to do. What I don't understand is why the secured creditors didn't get any equity in Newco while Fiat and the Canadian govt did with no money contributed?
Will there by any debt on Chrysler after bankruptcy? How much did they reduced their costs? What level of sales do they need to generate free cash flow? Can Chrysler can generate free cash flow?
Interesting math problem. While I am a big wingnut, I think we need more info before we pile on.
Sorry -- didn't edit my comment. Let me try again:
To understand this, we need two things:
What was the total dollar value of the creditor claims in order of priority from secured to unsecured?
What are the sources and uses of the funds in the post-bankruptcy transaction?
Hard to analyze this rationally without that info. I know the secured creditors were owed over $6B and that the VEBA claim is roughly $10B. Remember that the secured creditors are getting cash at closing while the UAW will have to sell its 55% equity stake to raise cash. It is hard to know how much the equity will fetch in the secondary market. What I don't understand is why the secured creditors didn't get any equity in Newco while Fiat and the Canadian govt got equity with no money contributed?
After bankruptcy, there are also a bunch of questions:
Will there by any debt on Chrysler after bankruptcy? How much did they reduce their costs? What level of sales do they need to generate free cash flow?
This is an interesting math problem. While I am a big (right) wingnut, I need more info before I pile on. Thanks to anyone for any perspective here.
To step back from the minutia, it is hard to see this working without ongoing subsidies which will be very unpopular. Obama is gonna be in a pickle - either pull the plug or continue to subsidize this loser of a company. When global sales fall by 40%+, there is too much automaking capacity. Subsidizing Chrysler makes the GM bailot even more expensive.
http://chapter11.epiqsystems.com/, then Chrysler LLC, then #23 on the court docket, pg 13
-$7bn first lien secured bank loan (where the dissident lenders sit)
-$2bn second lien loan (from Cerberus and Daimler, but forgiven soon after infusing Chrysler with $2bn of non-taxpayer money)
-$4bn Treasury term loan, secured on whatever random assets were not already pledged to the first lien. Not secured on principal auto manufacturing facilities. Has some claims at Chrysler Parent, which owns CarCo and FinCo.
-$5.3 billion unsecured trade claims -- Chrysler will pay off some of these suppliers as necessary, screw the rest
So, the debt held by the union is ... none! However, Chrysler did promise to infuse the retiree VEBA (which pays out the retiree medical, insurance etc) with $6.5 billion. Since this is just a promise, it's an unsecured claim.
Also, the PBGC will have an unsecured claim created if Chrysler dumps the pension.
That's the order of priority.