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.

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.)

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.