Of Chrysler, Fiat and Diplomacy.

Over the weekend, The Economist published an interesting article on the possible Chrysler/Fiat joint venture, along with a picture of the revived, succesful (and very attractive) Fiat 500, which Chrysler wants to make here.

It would be tragic if this sensible merger of sorts would fail to go through because of politicians arguing that taxpayers should not foot the bill for Chrysler to be bought out by "them darn furners". Oh please. We would have a global company which would continue to produce vehicles and parts in the US, and would produce more fuel efficent vehicles to boot. Jeeps would be sold worldwide by Fiat, which has not had a credible SUV in its lineup.

What SHOULD happen is that the American and Italian governments, motivated by self interest on both sides, should begin discussions on a joint bailout package, designed to create a truly global company. Aircraft manufacturers have done this for decades. The only caveat is that Chrysler may be too far gone to survive the negotiations.

If Chrysler does go under, this scribler will always look back at this as one of the great missed opportunities of the global automotive marketplace. And a lasting memorial to the hypocrisy of promoting globalization abroad but denying its benefits at home.

Learning from Abroad

I recently re-established contact with an old friend from my time in Brazil, whose passion for cars actually exceeds my own. He was the previous owner of a red 1968 Karmann Ghia which I purchased, mentioned in a previous post. Exchanging e-mails with him reminded me of how our own industrial myopia and arrogance is a sign of the automotive times. Allow me to elaborate.

Throughout the entire current automotive crisis, I have not heard a single voice of humility. That includes the humility to admit that there are solutions in other countries which we could apply here if we could ever admit that we are wrong and they have a better way. The whole Detroit/Washington mindset seems to be that we got ourselves into this mess without your help and by goodness, we will get out of it too, using the same tools we have used with such brilliant success up until now. Am I the only one who sees this?

Ford's most modern plant in the entire world is in the Northeast of Brazil, and is a modern marvel. Different suppliers actually make the parts on the Ford factory floor and place them in the vehicle as it goes by on a conveyor. Parts transportation and warehousing costs for Ford = Zero. Admittedly this is not a Brazilian solution but Ford did implement it in Brazil. Union rules prohibit such modernity in the US, but instead of showcasing to Congress, this plant as an international solution for current cost woes, as well as what Ford can do with a relatively uneducated workforce, it is carefully hidden away in a corner of the developing world. Why? Is it because there is a hidden agenda that wants to show Congress how hard it is for the poor automakers to make cars here in the current environment, so please....give us money? GM makes some very popular vehicles in Europe. They have brought some them here, put them in their most bland brand, Saturn, marketed them as humdrum family transportation and then used this as proof that European cars don't sell so......give us some money. They brought two cheaply assembled vehicles from Australia and marketed them as sports cars (Australia - that land of thoroughbred automotive excellence, the new Germany) which flopped, and wondered why we did not sell our BMW's and jump into an Australian Pontiac.
Do you see a pattern here? Foreign solutions squashed and hidden so that we....give them the money. This is not a conspiracy theory, but a recital of facts. At best, it shows a gross ineptitude on the part of management to leverage global capabilities on anything approaching a comprehensive scale. At worse, it is an effort to get their hands on our money. Either way, shame on Detroit. I just wish that we had an alternative. If GM and Chrysler go under (I still have faith in Ford), who will pick up the juicy leftovers abroad? Where are the capital investment funds today? Oh, yes, they are in dire straits and currently "unavailable" because we were so adept at leveraging our "expertise" in mortgages on a global scale.

Are We Really So Capitalist?

This week saw the sad spectacle of Automotive CEOs trudging sheepishly up the steps of the Capitol to ask for money to save themselves. I recall a similar scene in 1980 when Chrysler did the same. Now they are all there.

In retrospect, Chrysler then was different. Lee Iaccoca had big ideas and was hugely successful with a new and popular car lineup and later, the debut of the minivan. That things have gone so awry for Chrysler is a round condemnation of the management post-Lee.

Of the others, let's start with Ford. As I have stated in the past, I think of the not-so-big three, they have the best chance to survive. They are strong abroad, and are moving quickly to shake up their product line in the US to make it appealing in a $4 a gallon/recessionary world. Gas prices are down temporarily but they will go back up, and in a recession, people that do buy cars are going to be looking for economy, safety and flair. Ford offers all three in droves.

GM is another story. In a typically dysfunctional move, they announced that they are cutting back drastically in new model development. Perhaps they think their current lineup has been so very successful that they can afford to take a rest. They are going down the road of no return, winding down the shop, disconnecting the utilities, well, you get the picture.

Chrysler, if I were a betting man, could maybe recover with another bailout. They have some attractive new trucks, they have finally realized that quality and comfort matter, and they have always had a pretty good design shop (since 1980 anyway). They own Jeep, which despite having diluted its brand with the introduction of "soft roaders" could survive as a smaller brand.

However, they too have precious little in the pipeline and need an injection of cash, pronto.

But the real question, the 600 pound gorilla in the room, is should we bail out companies that have been so mismanaged? The argument that Detroit is too important to let die, is a fallacy. In a market economy someone will still need to make and sell cars to and in the US. There will be huge pain in the short term, but maybe the economy needs a reshaping. America will have to prove again that it can make cars and supply quality parts to do so. But to keep bailing out companies that insist on failing is to waste money on a truly titanic scale.

GM & Chrysler to Merge? Chry-Mo!

A reader contacted me late last night to give me the news that appeared in Today's Wall Street Journal, about the talks between GM and Chrysler about merging. I spent the last 12 hours ruminating about this, and, between irritation and laughter, I decided I had to jot down a few ideas about this rather fuzzy idea.

First, why do companies merge? The idea that you merge with an equal to produce a company twice the size has long since been discarded. You can merge to take advantage of synergies, improve finances for both companies, increase competitiveness, pool resources to make R&D more cost effective....you get the idea. Not everyone will agree, but I think you have to have at least 3 of the above good reasons in order to merge.

Now, lets look at some of the fundamentals, which, in the automotive industry begin and end with the product line. Both Chrysler and GM have developed Johnny-come-lately retro muscle cars to compete with the Ford Mustang, which has been a big hit.So right there, you have two products on which you have spent good cash developing, competing. Chrysler is in the process of rolling out its redesigned line of Dodge Ram pick-up trucks, and GM invested heavily doing the same thing almost 3 years ago. In the SUV world, nothing is selling, but GM has a better lineup of full size SUV's and they both have recently launched a slew of small crossovers. All that development money would be lost because if you merge, some - if not most - of those vehicles will have to go. In the sedan lineup, there are synergies, if only because Chrysler made such a mess of the Sebring/Avenger launch, with a sub-par product. Still not convinced? Look at Hybrids. Both companies have rushed hybrids of their big SUV's onto the market. Now go see how similar the technology is. Certainly not identical. Now think about how much money has been spent and how you would decide about which technology to adapt and how to service these vehicles. Inventory costs for the new company, which will have to continue to service all of the current lineup, will be staggering.

On an international scale, I do concede that Chrysler has struggled to gain a relevant foothold anywhere but the North American market. In this sense, GM's worldwide operations might benefit the Chrysler side. But GM is in trouble in Europe, and car sales are slowing everywhere.

Of course you will produce a smaller company, but the hope is that by some miracle, all this downsizing will produce more cash and a more efficient operation. It's a bit like a zoo deciding that since they both eat meat, it would be more efficient and cost-effective to make the crocodile and the lion share a cage. Neither will be very happy. I doubt if more people would pay to watch them just because they share a cage. Yes, the zoo will have temporarily lower costs, but eventually one or both of the animals will die, and you have nothing to show but an excuse to the tune of "it seemed a good idea at the time".

Finally there is the slew of legal issues that will arise. Chrysler still uses a slew of Daimler Benz technology which our surly German friends will be most reluctant to hand over to Chry-Mo. The dealers will be in endless squabbles about who gets what and how much.

I am sorry, I just don't get it. Who would a merger benefit and how? Under the details leaked, GM would get Chrysler and Cerberus, the current masters of Chrysler would get GMAC, the much weakened auto lender that recently dabbled in mortgages.Nice timing GMAC. Cerberus would be the big winner. They would get a quick and clean exit from the car manufacturing business, which they should never have dabbled in so heavily anyway, and will go into turning around a large financial venture. As venture capitalists, they have the expertise to try this in a credible fashion. GM on the other hand, would be landed with the problems of sorting out not only their own headaches, but Chrysler's as well. Since the current management of GM has done such a sterling job of sorting out GM's situation, why not add in another car manufacturer? Surely that will make things better? Sure. Now, about buying that Brooklyn Bridge....

This merger benefits only one party, Cerberus. If they can convince everyone else otherwise, and pulls this off, I might ask, check book in hand, if they need more investors.

Chrysler Comes a Cropper

"Coming a cropper" in English slang roughly translates to "taking a hard fall". Indeed Chrysler has taken a hard fall, some of it through no fault of their own.

Take for instance, their purchase and then sale by Daimler Benz. In theory it was a marriage made in heaven. Mercedes could give Chrysler access to engineering technology and Chrysler could give Mercedes the sharp design language it was lacking. What ended up happening was a Vaudeville farce, with Mercedes building the (then) all-new ML in the US (instead of using Jeep's proven expertise in this area) and Chrysler proving itself achingly slow to adopt new engines, engineering and forward thinking. All this run by a heavily mustached German who insisted on making appearances in their advertising as a kind of humorous German grandfather figure, which is kind of creepy.Both companies suffered, although Daimler came out of the deal with a less scathed reputation.

Now that Chrysler has been bought by private equity, there was, for a while, hope that Chrysler could be turned around. With the current economic woes, however, this is increasingly less likely. Yet some of the attractions that led the current masters to close the deal are still there:
* Chrysler arguably has the leading edge in minivans, which they invented. Their products are stylish, comfortable, innovative and affordable.
* Jeep still has an attractive halo for a variety of demographics and some are actually used (by a few) for what it is best at: off-roading.
* There a couple of very decent sedans in the lineup (the 300 and the Charger)and a very nice coupe, the Challenger. The rest are frankly unattractive.

There have been serious efforts to improve quality, notably with the interiors, but the poor quality and dowdy interiors of the past will take years to be erased from the minds of the buying public. Add to this a shortage of new vehicles in the pipeline, and the future is less than rosy.

So what can be done? If I were the owners of Chrysler I would be looking hard at selling the company off piecemeal. Jeep, for example, would make a wonderful partner for Land Rover in the US. Both make products aimed at being as capable on-road as off, and both have failed to penetrate each others home markets in any significant way. In addition, the dealer network for Jeep would be a great way to get more Land Rovers out in front of consumers. Tata Motors take note.

Volkswagen, who is just beginning to build a minivan using Chrysler minivans as a base, might be interested in buying the minivan business. After all, although Chrysler invented the minivan, it was Volkswagen, with their rear engined bus of the 50's and 60's that planted the seed. This would link Volkswagen back into a market it once dominated: people-moving vans.

The Dodge name holds little cachet in the market, so their products would probably be difficult to pass on. For years they have been trying to revive the name as a muscle car legend. The new Challenger is a credible step towards this goal. The problem is, between the high gas prices (temporarily low due to current hardships), poor economy and frankly The Grim Reaper, who is slowly robbing the client base of people who remember the muscle car era, this strategy may be irrelevant. Toyota, which has lacked a serious sports car in the US for some time, might be interested, if they could figure out a way to sell the vehicles with Toyota street cred., i.e. quality.

Ford, who has lacked a credible large sedan for some time may want to integrate Chrysler's outstanding rear wheel sedan platform into their lineup, but they do have a certain lack of, um, moolah.

All this would hardly make a dent in the price that was paid for Chrysler. But at some point, someone will ask the fateful question: Do we cut our losses now, or wait and take our chances? I know what I would do.