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Thursday, April 23, 2009

What Is GM To Do?

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General Motors (and Chrysler) is between a rock and a hard place. It had to sell its soul to the devil for a few more months of life and now it is time for the payback.

Thursday, April 23, 2009

Daniel Howes

Not so fast on idea of speedy bankruptcy for GM, Chrysler

Whoever thinks a bankruptcy of General Motors Corp. or Chrysler LLC would be "speedy" -- starting with members of President Obama's auto task force and GM CEO Fritz Henderson -- might want to spend some time talking with Larry Denton.

He's the former CEO of Dura Automotive Systems Inc. who successfully shepherded the $2.3 billion supplier through Chapter 11, starting in 2006. He learned the hard way how things go wrong, how federal law and its safeguards drive the process, how executives unfamiliar with bankruptcy can find themselves at the mercy of highly paid specialists. Lots of them.

"If you could do this cheap trick, everyone would do it," he told me in an interview this week. "You only have two results in bankruptcy: You emerge or you liquidate. This is black and white."

Add a company the size of GM, a monolith with 100 years of accumulated structures, brands and commitments, and the notion that the feds can speed GM (or Chrysler) through bankruptcy court looks more fantasy than reality -- with or without concessionary deals from bondholders and the United Auto Workers. [more]

What is happening to the automotive industry is making headlines around the U.S., but the reality is that other segments of the economy are in not doing all that well. The banking sector has many weak corporations and the "price gouging" oil companies are having their woes. Housing remains moribund. Still, multi-billion dollar losses and loans draw attention.

GM has a great product line, but a muddled one. Unlike Ford which has become a lean organization with a very focused product offering [except for the step-child Mercury brand], GM hung on to its 50-year old structure ... actually and expansion of that structure ... despite the significant loss of market share. GM corporate share of the U.S. market was only 18.5% through March. Ford was 14.1%. Yet Ford is a much smaller organization... internally and by dealer count.

General Motors insists that it wants, at a minimum, to keep Cadillac, Chevrolet, Buick, and GMC. The claim is that they are all "profitable." Well, don't believe the accounting. When you are losing money hand over fist, you can't rely on how the costs are allocated internally. Sure, you can talk about marginal or incremental costs for a brand, but no one will talk about how brands can steal sales from other brands within the company. If GMC steals sales from Chevrolet instead of Toyota, how does that add to the "bottom line?"

General Motors needs to do some hard thinking about its brand and product strategy as part of any reorganization or bankruptcy... particularly where Chevrolet, Cadillac, and GMC internally compete with similar product. If GM still had 50% of the market, this would be a moot issue. At 18+% this is a real issue.

Brands cost money. How much can GM afford and still survive?

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There is always an easy solution to every human problem—neat, plausible, and wrong.
Henry Louis Mencken (1880–1956)
“The Divine Afflatus,” A Mencken Chrestomathy, chapter 25, p. 443 (1949)
... and one could add "not all human problems really are."
It was beautiful and simple, as truly great swindles are.
- O. Henry
... The Government is on course for an embarrassing showdown with the European Union, business groups and environmental charities after refusing to guarantee that billions of pounds of revenue it stands to earn from carbon-permit trading will be spent on combating climate change.
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Tracking Interest Rates

Tracking Interest Rates

FEDERAL RESERVE & HOUSING

SEARCH BLOG: FEDERAL RESERVE for full versions... or use the Blog Archive pulldown menu.

February 3, 2006 Go back to 1999-2000 and see what the Fed did. They are following the same pattern for 2005-06. If it ain't broke, the Fed will fix it... and good!
August 29, 2006 The Federal Reserve always acts on old information... and is the only cause of U.S. recessions.
December 5, 2006 Last spring I wrote about what I saw to be a sharp downturn in the economy in the "rustbelt" states, particularly Michigan.
March 28, 2007
The Federal Reserve sees no need to cut interest rates in the light of adverse recent economic data, Ben Bernanke said on Wednesday.
The Fed chairman said ”to date, the incoming data have supported the view that the current stance of policy is likely to foster sustainable economic growth and a gradual ebbing in core inflation”.

July 21, 2007 My guess is that if there is an interest rate change, a cut is more likely than an increase. The key variables to be watching at this point are real estate prices and the inventory of unsold homes.
August 11, 2007 I suspect that within 6 months the Federal Reserve will be forced to lower interest rates before housing becomes a black hole.
September 11, 2007 It only means that the overall process has flaws guaranteeing it will be slow in responding to changes in the economy... and tend to over-react as a result.
September 18, 2007 I think a 4% rate is really what is needed to turn the economy back on the right course. The rate may not get there, but more cuts will be needed with employment rates down and foreclosure rates up.
October 25, 2007 How long will it be before I will be able to write: "The Federal Reserve lowered its lending rate to 4% in response to the collapse of the U.S. housing market and massive numbers of foreclosures that threaten the banking and mortgage sectors."
November 28, 2007 FED VICE CHAIRMAN DONALD KOHN
"Should the elevated turbulence persist, it would increase the possibility of further tightening in financial conditions for households and businesses," he said.

"Uncertainties about the economic outlook are unusually high right now," he said. "These uncertainties require flexible and pragmatic policymaking -- nimble is the adjective I used a few weeks ago."
http://www.reuters.com/

December 11, 2007 Somehow the Fed misses the obvious.
fed_rate_moves_425_small.gif
[Image from: CNNMoney.com]
December 13, 2007 [from The Christian Science Monitor]
"The odds of a recession are now above 50 percent," says Mark Zandi, chief economist at Moody's Economy.com. "We are right on the edge of a recession in part because of the Fed's reluctance to reduce interest rates more aggressively." [see my comments of September 11]
January 7, 2008 The real problem now is that consumers can't rescue the economy and manufacturing, which is already weakening, will continue to weaken. We've gutted the forces that could avoid a downturn. The question is not whether there will be a recession, but can it be dampened sufficiently so that it is very short.
January 11, 2008 This is death by a thousand cuts.
January 13, 2008 [N.Y. Times]
“The question is not whether we will have a recession, but how deep and prolonged it will be,” said David Rosenberg, the chief North American economist at Merrill Lynch. “Even if the Fed’s moves are going to work, it will not show up until the later part of 2008 or 2009.”
January 17, 2008 A few days ago, Anna Schwartz, nonagenarian economist, implicated the Federal Reserve as the cause of the present lending crisis [from the Telegraph - UK]:
The high priestess of US monetarism - a revered figure at the Fed - says the central bank is itself the chief cause of the credit bubble, and now seems stunned as the consequences of its own actions engulf the financial system. "The new group at the Fed is not equal to the problem that faces it," she says, daring to utter a thought that fellow critics mostly utter sotto voce.
January 22, 2008 The cut has become infected and a limb is in danger. Ben Bernanke is panicking and the Fed has its emergency triage team cutting rates... this time by 3/4%. ...

What should the Federal Reserve do now? Step back... and don't be so anxious to raise rates at the first sign of economic improvement.
Individuals and businesses need stability in their financial cost structures so that they can plan effectively and keep their ships afloat. Wildly fluctuating rates... regardless of what the absolute levels are... create problems. Either too much spending or too much fear. It's just not that difficult to comprehend. Why has it been so difficult for the Fed?

About Me

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Michigan, United States
Air Force (SAC) captain 1968-72. Retired after 35 years of business and logistical planning, including running a small business. Two sons with advanced degrees; one with a business and pre-law degree. Beautiful wife who has put up with me for 4 decades. Education: B.A. (Sociology major; minors in philosopy, English literature, and German) M.S. Operations Management (like a mixture of an MBA with logistical planning)