Fiat-Chrysler Strikes Deal With UAW Over Compensation

The poor/sick bastard child of Detroit, Chrysler, which is majority owned by Italian carmaker Fiat, has apparently struck a deal with the United Auto Workers union. It's not nearly as beneficial to workers as similar deals struck between the union and GM, let alone Ford, but it ends months of acrimonious negotiations.

The union said Chrysler, which went through bankruptcy protection in 2009, also committed to investing $4.5 billion to retool plants for new models. It planned to lay out more details of the proposed contract, which covers 26,000 workers, at a news conference later Wednesday.

“This agreement is the latest in a remarkable turnaround for Chrysler,” General Holiefield, the U.A.W. vice president in charge of negotiations with Chrysler, said in a statement. “Chrysler has turned the corner and with this agreement will continue to move forward. It’s a new day at Chrysler.”

Chrysler, the smallest of the three Detroit automakers, was the last to reach a deal with the U.A.W. Negotiations there were the most difficult, as Chrysler executives took a hard line against any increase in labor costs.

The union last month ratified a new contract with General Motors that creates or retains 6,400 jobs. Workers at the Ford Motor Company began voting this week on a tentative agreement, reached Oct. 4, that adds 12,000 jobs. Both deals follow the same basic framework, giving workers signing bonuses of at least $5,000, raising entry-level wages and moving work from other countries, including Mexico, to American plants.

“Together with the jobs created in suppliers and other businesses supported by auto manufacturing, a total of 180,000 jobs will be added to the country’s battered economy” if the Ford and Chrysler agreements are approved, U.A.W. President Bob King said in the statement. The 180,000 includes the new G.M. jobs.

G.M. has said its new contract increases labor costs by just 1 percent annually, an amount that prompted Standard & Poor’s to upgrade G.M.’s credit rating. Ford and Chrysler were waiting until their deals are ratified before discussing them in more detail.

Chrysler’s chief executive, Sergio Marchionne, last week described the G.M. and Ford deals as “overly generous.” Chrysler was the only one of the Detroit companies to lose money in 2010 — $652 million — but it has since repaid $7.5 billion in high-interest government loans that were its largest hindrance to profitability.

It repaid those loans by taking out still other loans (it refinanced its debt). The debt is still there, but not nearly as expensive on a monthly balance sheet as it was a year ago. The company has yet to make a profit with the new ownership in place, but a new and improved product line may help - if the public shows any interest in the Fiat products being rolled out that is.

It calls on the company to make $4.5 billion in investments and to add 2,100 jobs in the United States.

It's also expected to include a profit-sharing component, but I find that last part laughable considering that Chrysler has been losing money for years on end, which is why the company needed a bailout in the first place. I understand that the union was trying to get the company to be more receptive to worker needs, but the union also helped put Chrysler in the position it is in by saddling the company with among the highest benefit obligations in the industry per capita.

The company hasn't helped itself by proffering cars that are awful; poor quality and poor performance despite having some of the best looking vehicles on the market. One has to hope that the public takes a liking to the Fiat offerings and that Chrysler's product mix improves significantly on performance and quality. Consumer Reports recently the new Chrysler 300 to be the highest rated Chrysler product it ever tested, but it still falls well short of the best in class (and has the worst fuel economy among those in its class). It's an improvement, but is it enough? I don't think it will be.

UPDATE:
Seems that Chrysler's problems with fuel economy are downright abhorrent. As a brand, Chrysler ranks dead last with CAFE mileage of a measly 19.2 mpg. Hyundai (Hyundai!?) is tops at 26.7 mpg. If customers are looking for fuel efficient cars, the last place they should be looking is Chrysler - not exactly a sign of improvement in business fortunes.

Chrylser Refinancing Debt; Paying Off Federal Loans

Chrysler, the once moribund and bankrupt third wheel of American automakers, is about to repay its federal loan obligations. It isn't paying them off with cash, but rather through refinancing its existing obligations.

Currently, the federal loan is pegged at 12% interest, and the refinancing/reorganization of its debt would end up giving the company a 6% interest rate. It's in the company's interest to reduce its interest rates, and shedding the government loan is a big part of that cost savings.

However, make no doubt about this - Chrysler/Fiat is still in trouble and it isn't paying off the debt completely; it's simply eliminating the federal loan in favor of cheaper loans in the private market. The move will apparently save $300 million annually in interest payments.

Marchionne has said that Chrysler is eager to pay back its loans in part because of the governments' high interest rates of around 12 percent, which cost the company $1.2 billion last year.

To pay back the loans, Chrysler is issuing $3.2 billion in bonds and taking out $4.3 billion in bank loans. It also will use a $1.3 billion investment from Italian automaker Fiat SpA. In exchange, Fiat will increase its ownership stake in Chrysler to 46 percent.

Under that refinancing deal, Chrysler's interest rates will fall to around 6 percent. That will boost the bottom line at the company. It reported a $116 million profit — its first quarterly profit since its 2009 bankruptcy — in the first quarter.

The company still owes the U.S. government $2 billion. The government could get some of that back by selling its 8.6 percent stake in Chrysler.

Fiat/Chrysler Exhibit All the Business Brilliance of a Gnat

The whole purpose of building cars is to make money. Lots of money. So, when you start selling a car that will cost you $10,000 more to build than to sell, something is quite wrong.

In fact, that's a huge gaping hole in Fiat and Chrysler's business plan for the sale of the upcoming Fiat 500 electric vehicle.

Chrysler Group LLC will lose more than $10,000 on every battery-powered Fiat 500 its sells, Fiat-Chrysler CEO Sergio Marchionne says. That heavy financial hit won't stop the automaker from launching the Chrysler-built electric version of the minicar in the United States in 2012, underlining the pressure automakers face to improve fuel economy and remain competitive in the race to offer alternative powertrains.

"The economics of EVs simply don't work. On the 500 that (Chrysler) will begin selling in the U.S. next year, we will lose over $10,000 (per unit) despite the retail price being three times higher" than a version of minicar with an internal combustion engine, Marchionne said on the sidelines of Fiat S.p.A.'s general meeting on Wednesday.

Marchionne said that Fiat would lose a similar amount on the Fiat 500 EVs it will get from Chrysler's Mexico plant once the Italian company starts the car's European sales, likely in 2013. Chrysler has a license from Fiat to build the fuel- and battery-powered versions of the 500, which means the U.S. automaker gets all the profits – or losses – from North American sales of the cars. Fiat has a 25 percent stake in Chrysler.

In the rush to market electric vehicles, car companies seem to have forgotten the bottom line. You need to make money on the car in some fashion, and for a struggling carmaker, the decision to sell cars at a loss like this can and will be disastrous. Fiat left the US market because its cars couldn't compete. Chrysler went bankrupt because its cars couldn't stay on the road and because it couldn't market vehicles that people wanted and turn a profit. Now, the combined company is about to make the same mistakes.

Don't say I didn't warn you.

Of course, there are going to be those people who claim that these cars will eventually be sold and that the costs to the manufacturers will come down as sales increase, but one has to wonder exactly when the manufacturer will recoup the costs. The companies aren't making enough money elsewhere to cover the kinds of losses that could be envisioned on the Fiat 500 EV, and the experience with the Chevy Volt and Nissan Leaf should be instructive. Since they were introduced in 4Q 2010, both cars have sold a grand total of nearly 2,000 cars. Their sales have inched upwards slightly (and Nissan may have trouble in upcoming months as their distribution network was hammered by the 9.0 earthquake and tsunami), but barely register among overall sales.

Had Chrysler/Fiat sold this many of the Fiat 500 EVs, they'd have lost $20,000,000 just to move that many cars. That's unsustainable.

Obama Touting Auto Turnaround And Jobs Saved/Created

How exactly did President Obama save the auto industry with the bailout as numerous articles are professing? The billions went into the gaping maw of GM and Chrysler and both were forced into bankruptcy to reorganize. It was the reorganization of both companies - and the shedding of tens of billions in debts and obligations that saddled both companies with contracts that made them incapable of competing in a global marketplace that may have helped bring both companies into the black for a single quarter in 2010.

Ford managed to do so - without a single dollar of federal bailout funds.

GM pulled an operating profit, but it's underlying numbers are still putrid. The company is betting the farm on the Chevy Volt, the economics of which isn't going to make a profit for the company anytime soon. And the name of the game is making profits. If the company can't produce cars at a profit on a consistent basis, then it will again slide into the red in a big way.

Chrysler somehow managed an operating profit as well.

How did those occur? The bankruptcy reorganizations allowed both to shed bad contracts and rejigger their finances, including some parts of awful deals with the unions (including the jobs bank). However, the companies are anything but on solid financial footing because they still can't quite make a profit on the sale of individual cars. Instead, GM recently signaled its intention to acquire a lender so that it can once again begin provide financing to subprime borrowers (sound familiar?).

And the same result could have been had without federal intervention had GM or Chrysler sought bankruptcy reorganization prior to the federal infusion of funds (the Bush bailouts - which were followed by Obama's own bailouts). Bush didn't want the bankruptcy/reorganizations on his watch, so Bush pushed the bailout to dump the mess in Obama's lap. Obama doubled down with his own bailout putting taxpayer dollars on the hook.

No - the bailouts didn't save jobs and the Obama Administration didn't save 55,000 jobs as they're contending.

The reorganizations of both companies that enabled them to shed the bad deals did. And all that bad debt is still around - in Old GMCo, which consolidated all the bad debts and liquidated facilities under one toxic entity.

Reorganization could have been done in 2009 without affecting the Treasury and without the federal interference. Heck, GM and Chrysler could have followed Ford's route in 2007-2009 by making substantive and serious changes to their entire corporate operations. Instead, they limped into government's open arms.

And now President Obama thinks he can take credit for a process of reorganization that should have been done long ago and without a dollar of taxpayer funds to enable the companies to limp along just a little while longer out of political expediency by all involved.

UPDATE:
Obama misstated the strength of the Small 3 automakers:

Following the government-led bankruptcies of GM and Chrysler, the companies have shown signs of improvement. Obama said that all three U.S. automakers are "operating at a profit, for the first time in six years."

But the claim that all three Detroit automakers are making money isn't quite true. GM and Ford are making money, but Chrysler has yet to post a net profit since leaving bankruptcy protection in June of last year.

The company had a first-quarter net loss of $197 million, but it made $143 million before interest and taxes. Chrysler's last full-year profit was in 2005, when it made $1.8 billion.

And again - Ford did so without taking a federal bailout. Since Ford managed to do without a bailout, so too should have GM or Chrysler. The bailout instead allowed both companies to avoid making tough decisions and enabled the unions to gain unnecessary control when the unions themselves were a major part of the problem with costs.

Economic Data Roundup Shows Continuing Tough Times Ahead

Today all kinds of economic data and reports were released. There are a few bits of good news, but most of it is indifferent or just outright bad.

Pending home sales are up, but that's because of the homebuyers tax credit that expires in November. People were rushing to buy homes to take advantage of the credit that was equal to 10% of the home value up to $8,000. 30 year mortgage rates are actually testing historical lows, but with tight credit restrictions and more scrutiny, fewer people will find themselves eligible for the best rates. Home prices are still down 30% or more from highs nationally and many are underwater since all too many people bought into the peak, meaning that they'd owe money when they went to sell - making such propositions all the more difficult (and further reducing the number of potential buyers).

Unemployment figures came in worse than expected, but retail sales for the 3d quarter were up 1.2%, pretty much entirely due to the cash for clunkers goosing of the auto sales for July and August.

Ford announced that its September sales plummeted 37.2% from August. CNN notes that Chrysler's September auto sales tumble 42%, but manage to beat analysts' expectations (which were already low to begin with). The cash for clunkers effect has quite a bit to do with that, and I expect sales to continue to slow in the auto sector for the foreseeable future as concerns over job stability and the poor economic climate mean that demand for big ticket items will remain below average.

Saturn is already toast, but with a further slump in sales, even the resuscitated GM and Chrysler will face a down market with little upside. The numbers were also down 5% from last August.

I don't expect the figures to be any better at GM, which didn't see the kind of sales boost that Ford did from the cash for clunkers program. In other words, sales figures from the auto sector are going to be dismal in the fourth quarter, dashing hopes of a rebound.

Saturn's demise also means that unemployment is going to rise, the manufacturing base is going to further decline, and the number of people relying on government benefits is going to rise.

Discerning the Effects of Cash For Clunkers On Auto Sales

There are reports that Chrysler is running into inventory problems and that they're suspending their matching rebate program because of the success of the cash for clunkers program.

That's not entirely true. In fact, I suspect it isn't anywhere near the reality of the situation with Chrysler at all.

Inventory control has been a problem with Chrysler for years, and their efforts this year resulted in multi-month closures of their production facilities so as to reduce the overall inventory of their vehicles on lots to be in line with historical levels - typically 60 days, but in Chrysler's case, they'd be lucky to be within 90.

So, if there are issues with inventories and a lack of vehicles, look first to the policy of factory closures before looking at cash for clunkers. Chrysler has to clear those lots, primarily because the new model years are going to be forthcoming shortly.

Then, there's the issue of the matching rebate offer. Is the new Chrysler really in a position to match those rebates. That's $4,500 a pop that they lose in profit per car sale. How exactly is that good business? Getting it in bulk sales? If they have 10% of the market, then they've sold perhaps 25,000 cars under the program.

According to the latest data, 10 million cars are expected to be sold in the US in 2009. Chrysler would be selling 1 million of that figure. Issuing $4,500 per vehicle with the rebates would mean $112.5 million in lost revenue ($4,500 times the 25,000 cars ostensibly sold under the rebate program - and if anyone can come up with hard numbers for Chrysler sales, I'll update this figure).

Oh, and the Chrysler rebate match rescission isn't exactly an elimination of the program. They're simply going to match the rebate and not give an automatic $4,500 for any car done under the CFC program. So, if the car is supposed to get a $3,500 rebate, the match will be $3,500, not the $4,500 as previously provided.

Then, there's a question as to what Chrysler vehicles are supposed to be in short supply. Which ones are they?

They're the Chrysler Town and Country and the Jeep Wrangler.

Neither of those cars actually is truly miserly on the fuel economy. The Wrangler gets 16 mpg.

The Town and Country? 18 mpg.

What kind of cars need to be submitted under CFC to qualify for the rebate?

Neither of these two cars qualify. Neither gets 22 mpg or better.

In other words, the cars that are in short supply have nothing to do with the CFC program. It has everything to do with the fact that Chrysler shut down its production facilities to try and reduce overall inventory. Now, they're going to have to ramp up production on gas guzzlers, which is where the demand is coming from.

Now, we can't quite figure out what is going on with GM or Ford, as their data isn't out yet, but Chrysler's precarious position isn't improving with their rebate offers, and it's costing the company dearly not having the vehicles that people want on their lots.

UPDATE:
Then there's the issue of whether we need another $2 billion or more for extending the cash for clunkers program beyond that which is already underway.

It is true that Internet car shopping activity, showroom traffic, and sales are all up, which is why the auto industry wants to keep the program going.

I love a good sales surge as much as anyone. But it’s not that simple. First, it’s not clear that cash for clunkers actually increased sales. Edmunds.com noted recently that over 100,000 buyers put their purchases on hold waiting for the program to launch. Once consumers could start cashing in on July 24, showrooms were flooded and government servers were overwhelmed as the backlog of buyers finalized their purchases.

Secondly, on July 27, Edmunds.com published an analysis showing that in any given month 60,000 to 70,000 “clunker-like” deals happen with no government program in place. The 200,000-plus deals the government was originally prepared to fund through the program’s Nov. 1 end date were about the “natural” clunker trade-in rate.

Clearly, cash for clunkers was underfunded from the start. Consumers quickly figured that out and rushed to take advantage before funding ran out.

This sales frenzy was inevitable. We have crammed three to four months of normal activity into just a few days.

What everyone fails to realize is that once this backlog is met, interest in the program will fade.

There is also an ironic unintended consequence. Car companies have cut the number of vehicles coming off their assembly lines in response to the recession, which is leading to spot shortages. This is particularly the case for fuel-efficient models the program was suppose to encourage consumers to buy. As prices for these autos rise, buyers will inevitably use their cash-for-clunker dollars to buy less-efficient models and thus crush one of the touted environmental benefits of the program.

It will be interesting to see just how the new sales break down, and whether the program actually resulted in new sales above and beyond what should be expected for the current quarter and the next quarter (when the new model year comes into showrooms and dealers need to clear inventories).

In other words, based on the Edmunds.com data, it appears that customers looking to trade in their clunkers either delayed their purchases to take advantage of the $1 billion program, or have accelerated their sales. In both cases, that means that they haven't actually increased the overall sales, just shifted around when those sales occurred.

UPDATE:
Ford released its earnings for the quarter, and it reported 2.3% increase in sales. Good for Ford. While the media is quick to credit cash for clunkers for the increase, what about the fact that it was the only domestic automaker not to receive a government bailout, and that it has one of the most popular cars in the country, the Ford Focus, which was cash for clunkers eligible.

It's Official: GM Declares Bankruptcy; Chrysler Sold to Fiat

So, where does the company go from here?

General Motors Corp., the world’s largest carmaker until its 77-year reign ended last year, filed for bankruptcy protection in the U.S. with a plan to create a 21st-century company that can compete in world markets.

GM reported $82.29 billion in assets and $172.81 billion in debt. The U.S. government will bankroll the transformation of the 100-year-old automaker, a victim of tumbling sales and higher gas prices. The U.S. plans to convert much of its $50 billion of loans to a 60 percent stake in the new entity, administration officials said. Today’s filing coincides with a deadline for GM to convince a government auto task force that it could reorganize out of court through debt and cost cutting.

“It’s been a long time coming, but the reality of a GM bankruptcy is still a bitter pill to swallow -- it’s a bit like the Titanic sinking,” said Stephen Pope, chief global strategist at Cantor Fitzgerald in London. “This is a step they should have taken more than a year ago, which could have put them in much better shape before the economy went down.”

Detroit-based GM is the largest manufacturer to file for bankruptcy, surpassing Chrysler LLC. The carmaker plans to launch a new company in 60 to 90 days, armed with vehicles from its Cadillac, Chevrolet, Buick and GMC units for the U.S. market. A federal bankruptcy judge would supervise the sale or liquidation of unprofitable brands, such as Saturn and Hummer, and at least 11 unwanted factories.

We own the company - by we, I mean the federal government, which continues pouring billions into the company while the company reorganizes, but will not get the money back. Instead, the government is buying a significant stake in the company.

I don't have anything good to say about this particular arrangement. The government continues to do an awful job of predicting winners and losers, and to suggest that the government can figure out what vehicles the public wants is going to be entertaining to watch. Of course, the government could simply dictate that the public has to buy those fuel miser vehicles, but that's going to lead to significant backlash. They'll have a quick opportunity when they decide the fate of the Chevy Volt, which is one of those expensive loss-leaders that GM was going to rely upon to help improve its CAFE figures, but which wouldn't help improve its solvency issues. The government will have to figure out which is more important - getting the company on solid fiscal footing or pushing it's eco-agenda. Shareholders responsibility is to get the company on solid fiscal footing, so if the company holds onto the Volt, they'll have to run serious contortions on why this makes fiscal sense (then again, it's the government, which means fiscal responsibility is out the window).

Thousands of dealerships will be let go, and that means that tens of thousands more people will be laid off. It was long overdue, but it doesn't make the situation any better. Factories will be shuttered and the nation's industrial base will shrink further. Again, these changes are necessary, but that doesn't reduce the pain that will be felt throughout the industrial centers around the nation. It also means that tens of thousands more jobs are at risk as suppliers find product lines coming to an end.

Magna is buying General Motor's European division, Opel, and it's expected that the brand will focus on electrification. Unless you have a power generation and distribution system that can handle increased loads, and charging stations for those vehicles, the electric vehicles will continue to suffer from image problems.
GM will also apparently retool a factory that is currently idle so as to produce new smaller more efficient cars. It remains to be seen if anyone will actually go ahead and buy them.

Separate from all this is the fact that the government is shredding traditional bankruptcy policy by putting junior creditors ahead of senior creditors. Bondholders are getting shafted, which has long term credit implications since they'll be less likely to invest in other entities when they know that the government will simply shove them aside in favor of the unions. The unions make out like bandits under this proposal, getting 17.5% of the company, while the bondholders and other unsecured creditors get 10% (their actual share was much higher, and they will get warrants to buy another 15%).

Meanwhile, the Chrysler sale has been cleared to Fiat. CNBC also reports that the unions finally made concessions to help bring the costs in line with that of Japanese automakers operating in the US. That's going to save the new GM more than $1.3 billion annually.

In the U.S., the United Auto Workers' ratification of concessions, announced Friday, will save GM $1.3 billion per year and bring its labor costs close to those of its Japanese competitors. The new UAW deal freezes wages, ends bonuses and eliminates some noncompetitive work rules.

It also moves billions in retiree health care costs off GM's books. In exchange for its ownership stake, $6.5 billion of interest-bearing preferred shares, and a $2.5 billion note, the trust will take on responsibility for all health care costs for retirees starting next year. Higher health care costs alone accounted for a $1,500-per-car cost gap between GM and Japanese vehicles.

GM will offer buyouts and early retirement packages to all of its 61,000 hourly workers as it plans to shrink overall employment. The company also has about 27,000 white collar employees. In contrast, GM employed 618,000 Americans in 1979, more than any other company.

If this new company can't get its act together, those concessions wont mean a whole lot, nor will the ownership of the company.

UPDATE (Legalbgl):
In related news, the Dow Jones Industrial Average has replaced GM with Cisco.

The Dow Jones industrial average is adding Travelers and Cisco Systems, dropping Citigroup and General Motors.

The announcement Monday of the changes to the 30 stocks that make up the best-known barometer of Wall Street comes as GM enters bankruptcy protection, a move that was widely expected.

Dow Jones said in a statement that Travelers, the property and casualty insurer and one-time division of Citigroup, would replace its former parent. Cisco , which makes computer networking gear, is filling the role left by GM after 83 years as part of the Dow.

The changes take effect June 8.

GM and Citigroup's place on the DJIA has been tenuous at best as of late. The DJIA has strict rules regarding keeping your stock price over $1.00, and both of these companies have dipped below that level recently (although Citigroup has rebounded to over $3.85 as of late.)

GM; Chrysler Continue Path To Bankruptcy

General Motors (soon to be Government Motors) continues showing why it is in the position it is. They're looking to unload Saturn and Hummer and failing that, discontinue both brands.

GM has said it will decide this year whether to sell or discontinue both brands as part of the stringent cost-cutting measures aimed at trying to restore the ailing company’s financial stability. The overall effort also has created an uncertain future for two other GM divisions, Saab and Opel.

Even with such efforts, however, many believe the company will be forced to file for bankruptcy protection, perhaps as soon as Monday.
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GM spokesman John M. McDonald said this week the automaker has identified parties interested in purchasing Saturn and Hummer, but he would not provide specifics on who might be interested or when any deals might be reached.

“Obviously our interest is to have these brands find a home outside of GM and to continue as a business that can grow and flourish,” McDonald said. “At the same time, I don’t think there’s any illusion: We need to restructure GM, and as we restructure GM there’s no room for those brands.”

GM ran both brands into the ground, and I can only hope that Saturn finds a home somewhere.

Saturn was at one time considered the future of GM, but corporate culture destroyed Saturn by making it conform to the rest of the company, rather than the other way around. Saturn made some great products, and people bought into the no-hassle sales approach, but Saturn ended up on the rocks because the company didn't innovate and the corrosive attitudes from the rest of GM crept in.

Hummer is a different story. It succeeded at a time when SUVs were ascendant, and nothing beat a Hummer H1 on the road. The thing looked like it was from a different planet - modeled on the military version. The scaled down H2 and H3 were better proportioned to today's roads, but the moment the price of oil spiked, the company's fortunes sank.

Is there still a market for Saturns? I know there still was one for Saturn. Probably not much longer, especially if Saturn remains in the GM fold. If they get bought by another company, there's a chance that it and the GM European brand Opel are done as a package deal (which makes sense since many Saturns are restyled European GM offerings).

I say was, because if General Motors becomes nationalized in the course of the approach taken by the government, people aren't going to buy the resulting products because they'd much rather buy from Ford than either GM or Chrysler.

Is there still a market for Hummer? Probably not. They are the anti-green company, and there's something to be said for counterculture, but they are probably never going to be more than a niche business.

As for Chrysler, they too have been severely mismanaged for years, but the vehicle styling was as vibrant as ever, particularly on the Dodge line. The reliability issue remains a major problem with the company's image, and the merger with Daimler Benz didn't help.

Their position under Cerebus isn't any better.

Of course, all this talk of bankruptcy can't be concluded without noting all the billions the government sank into both companies to keep them afloat, and which will never be seen again. That policy started under President Bush and accelerated under President Obama, and it was an absolute mistake to have done so. It was a waste of taxpayer funds to try and prevent the bankruptcy and orderly reorganization of those businesses, but the political sign of not having those companies go into bankruptcy on their watch helped spur the "bailout" which really was little more than putting a band-aid on a fatal wound.

GM Cuts 1,100 Dealerships in U.S

Well, yesterday it was Chrysler, today, the other shoe fell. General Motors cuts 1,100 dealerships.

General Motors announced plans to drop about 1,100 U.S. dealers as it struggles to slash billions of dollars in operating costs and debt ahead of an anticipated bankruptcy filing by the end of the month.

Taken together with a similar announcement by bankrupt Chrysler a day earlier, over 2,300 U.S. auto retailers have been put on notice that they are being eliminated by the two embattled automakers.

The unprecedented closures taken under the oversight of the Obama administration's autos task force put over 100,000 jobs at risk across the United States and show the spreading economic pain from the collapse of the two Detroit-based automakers.

GM confirmed it planned to eliminate about 1,100 dealerships on the grounds that they are less profitable and weakly capitalized by letting their franchise agreements expire between now and the end of 2010.

The automaker expects to drop another 470 dealerships from cutting its Saab, Hummer and Saturn brands, said GM spokesman John McDonald.

After merging remaining dealerships, the plan is for GM to cut about 2,600 showrooms, or 40 percent of its U.S. retail network.

"We are telling them basically that you are not going to fit into the picture long term, but between now and then we will help wind the business down the best way individually with each dealer," GM spokesman John McDonald said.

GM dealers affected by the closure plans received letters by express mail Friday morning informing them that the automaker did not see how it could have a "productive business relationship" after 2010.

Well, congratulations President Obama, you have successfully moved 100,000 people onto the public payroll. Now, instead of fostering a true renegotiation of the union contracts, which would have lowered the production costs of GM and Chrysler cars to competitive levels, President Obama has supported the Unions, which empowered them to stand up to GM and Chrysler which has led to Chrysler's bankruptcy, and the impending GM bankruptcy, and at least 100,000 people (non UAW people, so they really don't count to President Obama) have lost their jobs. And who is going to pay for this? Who is responsible for picking up the tab? US. The taxpayers. As these people loose their jobs they will collect unemployment. They will loose their health case so they will move to government sponsored plans, that we all pay for. The consequential costs of this are enormous. Each one of those dealers also supported local economies, paid taxes, bought food at local diners, paid landscapers, paid for trash pickup, etc. Each dealer that gets put out of business effects each business that it dealt with. Therefore spreading the misery. That is the damages that protecting Unions will deal to the economy.

And this depressing economic news comes after Chevrolet (a GM unit) and Ford posted some impressive numbers against rival Toyota.

For the first time all year, not one but two Detroit brands outsold Toyota. Chevrolet and Ford both posted brand sales that exceeded Toyota’s figures, proving that there are some silver linings, at least in Detroit, in the continuously cloudy new car market in the United States.

Toyota wasn’t the only Japanese automaker to post a bigger-than-expected sales decrease; Nissan posted its biggest decline of the year and Subaru posted its first sales slide this year.

***

Hyundai sales were down 14 percent, the least of any high-volume, non-luxury brand so far. April was the best month ever for the Genesis and the Accent and Sonata both saw 26 and 7 percent increases, respectively.

Both Chevrolet and Ford outsold Toyota for the first time in 2009. Toyota’s 112,345 cars and trucks couldn’t match Chevrolet’s 115,265 or Ford’s 116,263.

Chevy’s Traverse crossover sold a reasonable 8,2004 units, its best month this year, while HHR, Tahoe and Express passenger van sales were all up, as well. Overall GM sales were down 33.7 percent to 173,007 units.

Ford’s Fusion, including the 2009 and redesigned 2010, which recently hit dealers, had its best-ever April with 18,321 units sold.

So lets debunk the myth that GM and Ford can't build cars that Americans want. The problem is that GM, Ford and Chrysler cannot produce cars that Americans want at the same price point that Toyota, Honda and Nissan can. The reason why is simple. The American big three are struggling against high health insurance costs, high pension costs and until recently, high job board costs. These are costs that add to the bottom line, that Honda, Toyota and Nissan just don't have. And its was not bad business that straddled them with this debt. It was the fear of union strikes, bad publicity and political pressure that forces the big three to kowtow to union demands. If you want to save the automakers, if you want to save American manufacturing, if you want to save the economy, if you want to save blue collar workers, you have to force the unions to make hard decisions and help the companies survive.

Chrysler Closing 1/4 Of Dealerships Nationwide

This shouldn't come as a surprise as Chrysler struggles to get on sound financial footing. It's closing a quarter of its dealerships.

Chrysler LLC will close down 789 dealerships, or roughly 25% of the current number, according to a plan filed in bankruptcy court Thursday.

Chrysler had a total of 3,181 authorized dealers in operation at the time of its April 30 bankruptcy court filing, according to court filings. Just over half of that number accounted for more than 90% of Chrysler sales, according to the filing.

The dealers being shut down represent 14% of Chrysler's total sales, the carmaker said.

Auburn Hills, Mich.-based Chrysler does not believe closing these dealerships will adversely affect sales.

For New Jersey, it means 30 dealers are going by the boards, which are named here.

That means that those dealers that are closing represented a drag on business and weren't profitable for the company. It also means that those working at those dealerships will soon be out of jobs, and will have a hard time finding work within the industry given the dire problems facing the US automakers.

No More Delaying of the Inevitable

Chrysler is going to file for bankruptcy, at least according to headline reports at CNN, which notes that negotiations with creditors have collapsed.

That's a better situation than the one that the government was hoping to induce, which essentially gave the UAW a larger say in the company affairs than the shareholders, who have more money at risk. It would have also created the unusual situation wherein Ford would have to be negotiating with its competitor - the UAW - when it came time for employee contract negotiations. You see, the Obama Administration was pushing the idea of making the UAW part owners of both GM and Chrysler, which meant that Ford would have been forced to negotiate with its competitors to determine the next union contracts. How exactly is that supposed to make sense?

It only makes sense to the Administration who has to dole out favors to those who have backed it in the past. It's a spoils system, and they're fighting over the spoiled remains of an auto industry decimated by bad business decisions and union inflexibility to adjust to changed circumstances.

There are reports that the Administration is backing a Fiat-Chrysler merger, but that's a bad deal for all. Fiat isn't exactly a healthy company either, having been boosted by the Italian government after its near collapse. It's a matchup of two sick companies, one of which has been on taxpayer funded life support that has delayed the inevitable bankruptcy.

The president’s staff is aiming for Chrysler to file for Chapter 11 protection as early as today to pave the way for Fiat to take a 20 percent stake in the Auburn Hills, Michigan-based automaker, people familiar with the situation said. If Chrysler has to go through bankruptcy, it won’t take long, Obama said.

“It would be a very quick type of bankruptcy, and they could continue operating and emerge on the other side in a much stronger position,” Obama said.

Chrysler’s best assets would be sold to a new entity that would have an ownership structure similar to that envisioned in an out-of-court deal between the U.S. automaker and Turin, Italy-based Fiat, said the people, who declined to be identified because discussions are private.

Administration officials were still resolving outstanding issues and the plan wasn’t finished, one of the people said yesterday.

“I don’t think there should be a stream of subsidies to automakers, but helping them to restructure now,” when sales have collapsed, is “realistic,” Obama said.

Chrysler is expecting the Obama administration to say today whether the company has met all of its requirements to go ahead with the proposed Fiat alliance with Fiat, Chief Executive Officer Robert Nardelli said in a note to employees.

When the Administration says that they are hoping to sell the best assets to Fiat, it means the actual factories and manufacturing base. The bad assets: that's the union pensions and benefits packages, plus the financing arm. Who will hold that bag? The taxpayers.

Count on it.

UPDATE:
The Times reports that UAW stands to gain a say in company operations at automakers. Sorry to break it to the Times, but they've had a say all along. They've been the ones dictating employee costs for generations, and it is their refusal to accept changes in compensation practices over time that has led the automakers to bankruptcy.

What the Times ought to have said is that the UAW now stands to have a much bigger say in the automakers, but it doesn't mean that it will do the automakers any good. It just means that the taxpayers will be left holding the bag when the UAW realizes that it can't justify its own costs.

Chrysler Preparing For Bankruptcy Filing

This shouldn't come as a surprise. Chrysler has been hemorrhaging money for years, and its merger with Daimler-Benz was a disaster. It's subsequent takeover by Cerberus Capital didn't improve matters.

Reorganization under Chapter 11, here we come.

The Treasury Department is preparing a Chapter 11 bankruptcy filing for struggling U.S. automaker Chrysler that could come as soon as next week, according to a New York Times report.

People with direct knowledge of the action told the newspaper that the U.S. Treasury has an agreement in principle with the United Automobile Workers union, whose members’ pensions and retiree health care benefits would be protected as a condition of the bankruptcy filing.

In March, the Obama administration gave Chrysler has until the end of the month to reach agreements for an alliance with Italy's Fiat, a reduction in secured debt and resolution of labor issues with its unions.

President Obama said the turnaround plans that the automakers presented to Congress earlier this year hadn’t gone far enough. He gave Chrysler one last chance to turn its operations around, raising the threat that he might force the company into a quick, managed bankruptcy if that proves to be the fastest way to restore it to health.

So, the bankruptcy filing will mean that taxpayers are on the hook for Chrysler's pension and health benefit obligations. That's quite the sop to the UAW, but we expect nothing less when dealing with the Democrats biggest backers.

There was nothing that Chrysler could do that would turnaround the company. Producing products that the public didn't want and which cost too much because of those pension obligations meant that Chrysler was at a disadvantage. Couple that with the left's assault on the very vehicles that Chrysler excelled at making - SUVs and minivans - and it was a recipe for disaster.

No auto company could manage a turnaround in a short period of time when factoring in the design and production costs with creating new vehicles.

So Now Obama Thinks the Automakers Aren't Viable?

Late yesterday word came down that President Obama pretty much fired General Motors CEO Rick Wagoner from his job. Obama did something that the GM shareholders didn't do for eight years, even though Wagoner oversaw declining sales, market share, and lackluster product introductions all because the Administration needed a scalp to claim:

Wagoner, 56, who spent 32 years with GM working all over the world, stepped down effective immediately, the company said in a statement early Monday. He was replaced as CEO by Fritz Henderson, the company's vice chairman and chief operating officer.

GM board member Kent Kresa, a former chairman and CEO of Northrop Grumman Corp. (NOC), was named interim chairman and said new directors will make up the majority of GM's board when a new slate is nominated for election at the company's annual meeting in August.

"The board has recognized for some time that the company's restructuring will likely cause a significant change in the stockholders of the company and create the need for new directors with additional skills and experience," Kresa said in a written statement.

GM shares tumbled 86 cents, or 24 percent, to $2.76 in premarket trading Monday. That is down 89 percent from its 52-week high of $24.24 on April 30, 2008.

The management shake-up, according to several industry analysts, shows that the administration is serious about forcing GM to change more quickly and dramatically than it did during Wagoner's nearly nine-year tenure as CEO.

Jeremy Anwyl, chief executive of the automotive Web site Edmunds.com, called the move "political theater" to appease an increasingly bailout-weary public.

"American taxpayers are not happy," Anwyl said. "But this way you're able to point to Rick and say he's gone, and that creates an environment where the loans become politically palatable."

By all accounts, Wagoner made progress in fixing GM. While CEO, he cut its U.S. work force from 177,000 to roughly 92,000 today.

The stock market isn't reacting too well to the changes, given the stock price drop this morning.

Replacing Wagoner isn't going to fix GM. Ridding GM of the onerous contracts is a good start, but that means that the company has to go up against the unions, which are one of Obama's biggest backers.

The Administration is giving GM and Chrysler another 60 days to come back with a plan for viability, because he's now realizing what I've been saying for months - these automakers aren't going to last long and reorganization under the Bankruptcy Code is probably the best best for the long term survival of both companies.

Obama seems to think that another 60 days will give Wagoner's successor the time to force the unions to make concessions that will help pave the way to GM fiscal stability. Part of the problem is that when President Bush and now President Obama provided bailouts to the auto industry, it removed any incentives for the automaker or the union to proceed with the tough task of making the drastic and necessary decisions. They have only delayed those decisions, and have thrown billions of taxpayer dollars down that black hole, never to be seen again.

Obama or Bush could have saved GM and/or Chyrsler by ordering both to build thousands of new M1-A2 tanks and uparmored Humvees either directly or via license from General Dynamics not only to replace those that have been worn out through usage in Afghanistan and Iraq, but to restock and enlarge the military's capacity. They chose not to. That would have been cheaper than throwing billions at the automakers whose products aren't selling and which have production costs that exceed those of its competitors. It would have also improved the defense posture of the nation and incorporated the latest technologies and knowledge gained from years of combat in both Afghanistan and Iraq.

Instead, Chrysler is getting 30 days and $6 billion to complete a merger/restructuring with Fiat. If that effort fails, expect Chrysler to go the liquidation route.

UPDATE:
And because Obama is busy trying to destroy what remaining value the automakers have with his pronouncements and limiting his options for GM by sending Wagoner packing, he's now creating yet another huge bureaucracy to provide government backing of warranties for GM and Chrysler because those companies may not exist for much longer. These are the kinds of decisions that will not only spell doom for those automakers, but destroys what little residual value those vehicles have on the secondary market.

It also means that Congress will inject itself into the day to day operations of the auto markets - and can determine that warranties offered by foreign automakers are too long, and outlaw them in order for the domestic warranties to remain competitive. This is anti-business any way you cut it, and limits consumer choices even further.

It also does nothing to actually save the US automakers, but expands government power in this arena at a time when we're already seeing just how incompetent it is in handling the fiscal and monetary policy.

UPDATE:
MSNBC is reporting that Fiat and Chrysler have agreed to a deal to combine forces. Let's ignore the fact that Fiat hasn't been in the US market for 20 years and is coming off its own disastrous restructuring that nearly destroyed that company. Now, suddenly Fiat is the savior for Chrysler even after Obama's car task force found the merger wanting in January:

The planned Fiat-Chrysler alliance outlined in January may have been given a "fail" by the U.S. auto task force, but the companies at least can resit the exam in 30 days.

Documents released by the Obama administration show that Chrysler can't survive without merging with Fiat SpA. The U.S. government also has no plans to provide any additional funding to Chrysler unless it links with Fiat.

It's a position, auto industry analysts say, that Fiat isn't likely to pass up. For giving Chrysler access to its small car technology, research and platforms, Fiat would have a quick way to make and deliver its cars in the U.S. without starting from scratch.

Chrysler would benefit by getting access up to $6 billion in federal low-interest loans with the partnership and a way to sell its cars outside North America.

"It makes sense for them," said IHS Global insight analysts Rebecca Lindland. "The appeal here is that it is still cheaper for Fiat to come into the U.S. through Chrysler."

Under tentative terms worked out between the two auto makers, Fiat has agreed to give Chrysler access to technology, platforms and research worth $10 billion. In return, Fiat could take a 35% ownership stake in the company.

Fiat chief Sergio Marchionnne has already met with the Obama Administration's automotive Task Force and has voiced his approval of such a deal. He has also updated the committee on what would be done if Fiat were to partner with the company.

Chrysler CEO Nardelli is trying to keep people interested in buying his company's vehicles, even though people are going to shy away from those manufacturers who might no longer be there in a month's time. Extending warranty information isn't going to help that problem, but that's the tact Obama is taking. That's like using your finger to stop a leak in a dike when water is coming over the top and seeping underneath while turning the ground underneath into quicksand.

Now, Obama is saying that there are going to be painful givebacks? Where is the giveback to the taxpayer who has been taken on a multibillion dollar ride that still sees these same failing companies fail despite the "bailout" for bad business decisions and a refusal of unions to cut costs to be competitive with imports?

What we're witnessing are the death throes of a company that has been run into the ground, and given life support despite the fact that a DNR should have been put in place.

Life Support For GM and Chrysler

President Bush has gone ahead and put General Motors and Chrysler on life support. Each has gotten loans from the government to cover operations through March of 2009.

President Bush said, "Allowing the auto companies to collapse is not a responsible course of action." Bankruptcy, he said, would deal "an unacceptably painful blow to hardworking Americans" across the economy.

Some $13.4 billion of the money will be available this month and next, $9.4 billion for General Motors Corp. and $4 billion for Chrysler LLC. Both companies have said they soon might be unable to pay their bills without federal help. Ford Motor Co. has said it does not need immediate help.

Bush's plan is designed to keep the auto industry running in the short term, passing the longer-range problem on to the incoming administration of President-elect Barack Obama. The last $4 billion of the loans announced Friday would depend on release of the second half of the big Troubled Asset Relief Program fund.

At that point, if the companies have not turned themselves around, they will have to repay the loans.

I'm sorry, but does anyone believe that these two companies, which are all but bankrupt as I write this, going to have the capacity to repay anything, let alone billions of dollars worth of loans to the government? We are never going to see this money again and the only ones who will benefit from this is the UAW, who is busy watching as their workers are getting paid 85% of their salaries as the manufacturers idle their factories because the cars simply aren't moving off the showroom floors and need to reduce inventories drastically.

The mess will be left for incoming President Obama to deal with, and I'm sure he's going to have no better luck in getting the UAW to give up the ghost than President Bush, although Obama is much more likely to push for a government takeover of both companies and remake them in the eco-image.

Here's the offer sheet for Chrysler and for General Motors.

Thus far, Ford has said it does not need federal assistance. Kudos to them for not sucking taxpayers dry - for the moment.

I have extremely low expectations for either GM or Chrysler to turn around their business operations - with or without government intervention. They've had decades to do so, and have actually made their business even less profitable. It has nothing to do with the production of SUVs, but with operating costs that run higher than their competition to the point where the US automakers were losing money on every vehicle. They were making some money back on financing, but when the credit crunch hit, that last bastion of profitability unmasked the stark reality of a failed business plan.

Some question the automakers reliance on SUVs and gas guzzlers, but that misses the mark. The reason that the automakers went in that direction in the first place was that consumers - the people who actually buy and use the cars - wanted bigger vehicles to carry around their stuff and CAFE rules sent the automakers scurrying for a solution. It was in the form of truck-based vehicle platforms that could carry large amounts of items, and they quickly grew into the hottest selling vehicle category.

Now, as oil prices rose, some of those people sought cheaper alternatives and the US automakers couldn't compete with the hype of the Toyota Prius and other hybrids, even though the up front costs for purchasing a Prius would take years to repay even after taking high oil prices in to account. For all the success of the Prius, it is still selling only a fraction of the number of vehicles than the standard Corolla or many other brands, including many within the GM lineup. GM's problems are simply too numerous to catalog here, but the SUV isn't one of them - not when other manufacturers were rushing to get in on the category.

Chrysler's problem is even more dire - particularly since it had the brand that pretty well invented the SUV - the Jeep. The company has pretty much destroyed the brand credibility and its reliability and ratings are consistently in the dumps, despite its pedigree. Its minivans, another category that Chrysler grew and dominated in the early years, have become a wasteland because of a failure to modernize and upgrade its product line in comparison to Toyota or Honda's products.