U.S. Auto Industry: Bankruptcy, Restructuring, Obama
Thursday, April 30, 2009; 3:30 PM
William Holstein, auto industry analyst and author of Why GM Matters: Inside the Race to Transform an American Icon, was online Thursday, April 30, at 3:30 p.m. ET to discuss today's developments in the Chrysler situation and the effect the economic downturn has had on the overall auto industry and what can be done about it.
William J. Holstein: Hello, everyone. It's Bill Holstein and I'm entering the conversation about Chrysler, GM and the auto industry. I look forward to your questions.
Tampa, Fla.: Who should run the Big 3: car guys or finance guys?
I read in the NY Times recently that, with few exceptions (such as Lee Iaccoca at Chrysler), people from the finance departments have run our auto companies since the 1960s. And this is about the time quality in Detroit started slipping.
The article gives as example of finance calling the shots that GM was working on minivans before Chrysler and on hybrids before Toyota. In each case the finance people killed the projects.
Should not the administration now put car people -- those who design and manufacture cars -- in charge instead of green eyeshaded bean counters (like myself -- I'm a CPA)? Should not design and production control, with finance merely helping the end result of reliability and performance?
William J. Holstein: Yes, it's true that GM, in particular, has put finance guys in charge. Overall, the Americans have favored those sorts of people to manage. They haven't trusted the engineers or designers or manufacturing guys, because each of those constituencies has their own agenda, obviously. I'm not saying it's good or bad. That's just the way it's been.
In the case of a Honda, for example, the engineers are solidly in charge.
Arlington, Va.: Will the refusal of bond holders to accept government dictated terms and force Chrysler into bankruptcy mean that a similar fate is more likely for GM, with bond holders being asked to take enormous write offs for only a 10 percent stake? What are the chances the Obama administration will wake up and go back to GM bondholders with a better offer in order to avoid bankruptcy?
William J. Holstein: Boy, this is the $64 billion question. It's my belief, on the basis of writing "Why GM Matters," that GM should be treated completely differently than Chrysler is being treated. Chrysler was not a viable, long-term auto company because of 10 years of failed management by Daimler and two years of financial focus by Cerberus Capital.
GM, however, is a viable company with a strong, attractive lineup of products, priced aggressively. They've made enormous progress in their manufacturing quality, productivity and dependability. GM should not be subjected to "the Chrysler treatment."
Washington, D.C.: It is clear that Chrysler (probably followed by General Motors) will emerge from bankruptcy much smaller in terms of product range and total output. Therefore, don't you agree that foreign transplants such as Honda and Volkswagen, which are building new plants in Indiana and Tennessee, respectively, have a wonderful opportunity to pick up market share?
William J. Holstein: We don't know for sure whether GM will go into bankruptcy, but yes, both firms will be smaller. We also don't know whether the transplants will pick up much share. If the market remains at the 9.5 million annual sales rate, everyone could be relatively flat. The Japanese also could be hit by the value of the yen, if it resumes its climb. So the answer to your question is, no one knows for sure.
Anonymous: Obama must be delusional when he says the automakers that survive will be stronger and there will be a demand for U.S. cars worldwide. Is this anything but hype because I just can't imagine a scenario where U.S. cars make much of a dent (no pun) in world markets?
William J. Holstein: Ford and GM have major presences in car markets around the world. GM is the largest vehicle manufacturer in China, for example. Both are huge in Brazil and Europe. So in this regard, no, Obama is not crazy. Making Chrysler into a global player would an entirely different order of difficulty. They operate only in the U.S. and Canada. That's one reason why I don't think they are viable for the long term, with or without Fiat.
Springfield, Mo.: What is going to happen to Chrysler Financial? They are not part of the bankruptcy -- Is the company just not going to exist?
William J. Holstein: Chrysler Financial is owned by Cerberus Capital Management, the private equity firm that also bought Chrysler itself and the one that simply wishes to wash its hands of Chrysler. So Chrysler Financial continues to exist, no matter that happens to Chrysler in bankruptcy.
Cameron, N.C.: These hedge fund holdouts that refused to take the deal, how much did they actually pay for their holdings? They were described as specialists in distressed companies. That says to me that they only paid pennies on the dollar and want to get face value from the government.
William J. Holstein: I understand that many of them paid 65 cents on the dollar and they were offered in the vicinity of 30 or 35 cents. They obviously want to make a project, which is why they rejected the government's offer. This is a big-time game of chicken.
Washington, D.C.: What is the likelihood that a new company owned primarily by a union will emerge as a profitable, aggressive, competitive, entrepreneurial entity -- rather than an organization which regards its survival simply as a jobs program?
William J. Holstein: This to me is highly suspect. The United Auto Workers has consistently fought for wage hikes, pensions, health care and the like. They have never really cared about the competitiveness of any of the domestic three auto makers. What will they do now that they own 55 percent of Chrysler? Can they make the transition to become responsible long-term stewards of a competitive Chrysler or will they just choose to keep milking the company? This is brand new territory for the U.S. economy and in the relationship between management and labor.
Charlottesville, Va.: I was surprised to hear that Chrysler is planning on discontinuing the PT Cruiser. It seems to me that it has been one of their few bright lights, even though it has never been as good as it can be/should be. I would think that Fiat would want to revamp and keep that one (better engine, lighter weight body). Same with the Crossfire, although I am admittedly not familiar with Fiat's current lineup.
William J. Holstein: They have made many bad decisions regarding products in recent years, and not building on the PT Cruiser franchise is one of them. The reason they discontinued it was because Cerberus wanted them to conserve cash and killing the brand was one way to do that. If they had been managed for the long-term, they would have kept it and introduced other variations on the theme. There clearly was a market for that.
Kentucky: Going into bankruptcy would force the naming of those lenders that did not want to agree to the restructuring terms for Chrysler. Could that allow a backlash against them? E.g. maybe they have been recipients of AIG backed credit default swamps.
William J. Holstein: Part of the problem in any kind of backlash is that the hedge fund people are friends with the investment bankers who are running much of the Obama administration's policy on cars and the financial sector. They are going to protect each other. But I agree with you, the hedge funds ought to be hung out and dried.
Bridgewater, Va.: What will happen to my Jeep Extended Warranty that I purchased from my Chrysler dealership in 2007. I believe it was through Chrysler LLC.
William J. Holstein: This is what everyone is asking. Obama says the government will guarantee everyone's warranty by paying into a fund to support them. But the government can't make sure every one of the thousands of suppliers will stay in business. Therefore, they can't really guarantee the continued manufacture of every part. I don't buy what Obama is saying here, because he and his team don't understand where the parts come from.
Arlington, Va.: What are your thoughts on basing the future of GM on the Volt platform?
William J. Holstein: I don't think GM is going to base its entire future on the Volt. They are talking about selling 10,000 of them next year and using those sales to drive down the cost of the lithium ion batteries, so that in the next wave, they can sell many more vehicles at lower price points. They might take the battery into other vehicles and in other geographies, but I don't think they have bet their future on it and it alone.
Fairfax, Va.: Is this whole filing bankruptcy thing overall a bad idea? What's it teaching our young people? Manage yourself/company badly and if things don't work out, then file for bankruptcy. Seems like an easy way out to me. Do the Detroit auto companies deserve what they're going through now?
William J. Holstein: Chrysler was mismanaged and also suffered from a bloated cost structure. It probably has to go through this. But in my view, GM was near the end of a transformation effort and was very close to getting it right. They were ambushed by the global economic crisis. Now the government persuaded them to adopt a tougher viability plan, Washington should get out of the way and let Fritz Henderson and his team manage their way through to profitability.
Arlington, Va.: I am a product of Detroit, and nearly everyone in my family (immediate and extended) drives a General Motors product. I am on my third Chevrolet.
As much as it pains me to think about it, I may make a trip to a non-GM dealer next time I'm in the market for a new car. I simply can't stomach the idea of buying a car from a company owned by Obama and the unions.
I suspect I'm not alone in feeling this way. Unfortunately, Obama's move isn't going to save the automakers, but rather is a large step toward their demise.
William J. Holstein: We hope that GM will avoid the fate of Chrysler, which, as you say, is now owned by the union and multiple governments. GM's viability plan is very realistic and their products are much better than ever before. The Chevrolet line up is particularly good. So don't give up on GM products, please.
Pennsylvania: Seems likely that Chrysler will eventually go under. How long would you say Chrysler will last after bankruptcy?
William J. Holstein: I would predict that Chrysler will never come out of bankruptcy. The fight in bankruptcy court is going to be so intense and so long that no one will want to buy their cars. The idea that they can go into bankruptcy and out in 30 to 60 days is just nuts. Look at Delphi, GM's largest parts supplier. They went into Chapter 11 in 2005--and still haven't been able to emerge.
This is brand new territory for the U.S. economy and in the relationship between management and labor.: In 1994, United's pilots, machinists, bag handlers and non- contract employees agreed to acquire 55 percent of company stock in exchange for 15 percent to 25 percent salary concessions. Isn't this a similar situation?
William J. Holstein: I guess you're right about that. The United ESOP plan. But it didn't work, did it?
Northern Virginia: What do we know about Fiat and will they be better managers? Or are they not really in charge, so their corporate culture doesn't matter? I'm confused by their role here.
William J. Holstein: The whole Fiat angle is such a joke, and it's not really clear if and when they will actually manage the company. They don't want responsibility for 60,000 employees, old factories, old models, old dealership networks, etc. Or else they would have put up the money and taken a clear leadership role. I frankly can't tell you who is going to run this company. Bob Nardelli is apparently out. Cerberus is washing its hands of Chrysler. The UAW has 55 percent of the shares. And the Italians are playing their own theatrical games. The danger is that a management vacuum is created, which would be fatal.
washingtonpost.com: Photo Gallery: Chrysler's Road to Bankruptcy
Washington, D.C.: How much are the unions responsible for what's happened to the Big Three?
William J. Holstein: It's easy to blame just the unions. But I think the more intelligent response is to that that both management and labor failed to create a relationship of trust and they failed to safeguard the fundamental competitiveness of these companies. It's not and either-or choice.
Philadelphia, Pa.: How are payments to retirees and employee health care being managed? Are there sufficient funds to maintain these payments?
William J. Holstein: For now, they seem safeguarded. But in a bankruptcy court, it's anyone's guess what a judge will decide to do.
Washington, D.C.: Isn't the administration trying to tear up established bankruptcy precedent by trying to strong arm the TARP senior secured lenders into accepting way less than they would receive in a liquidation? It seems to me from a precedent standpoint, we should be cheering on the holdouts. Why should the UAW get such preferential treatment vs. practically any other stakeholder in any other bankruptcy?
William J. Holstein: Yes, they are trying to strong arm the banks and they appear to have succeeded. And you're right that the Obama administration has tilted in the direction of the UAW, by giving it control of Chrysler. But it's hard to have any sympathy for the hedge fund holdouts. They have absolutely no regard for the long-term viability of Chrysler or for what's in the national interest. I hope they lose a lot of money in Chapter 11.
Annapolis, Md.: Who drives a Fiat anymore? Used to be you'd hear about them and a few people had them but to most Americans, it's a foreign car that hasn't been around a while. Are they taking over Chrysler? How popular a car will then be manufactured?
William J. Holstein: No one drives a Fiat. The company withdrew from the U.S. market (with the exception of Ferrari and Maserati) because they couldn't compete here with the Fiat product or the Fiat brand name. We don't know whether they are actually taking over Chrysler or just want to use it as a channel for the sale of their vehicles, in some 18 months. But the notion that they are some kind of saviors is just nuts.
Arlington, Va.: Is there any chance that an auto company could emerge (whether it be GM, Chrysler, or an upstart) which isn't beholden in any way to union pillaging? The choice seems simple to me: either American workers have to sacrifice cushy benefits for long-term viability, or watch their jobs go offshore.
William J. Holstein: Arlington is very busy today, judging from the multiple questions. LOL
The phrase "union pillaging" is too loaded. Suffice it to say, the UAW kept winning in every round of contract negotiations and one result was the emergence of an American middle class. People with high school educations could own homes and cars, put their kids through college, and retire to their cabin on the lake. Now we are saying to those people, No, we want you to have the same wages and benefits as someone who works for Hyundai in Alabama. It's not so much a question of these jobs going offshore. It's a question of them leaving the North for the South. In some senses, it is shades of the Civil War!
Northern Virginia: I heard someone call into a public radio show yesterday who said he was an automotive engineer, out of work, who believed he could never again find a job in the state of Michigan. Meanwhile, he can't sell his house because of all the foreclosures. Aside from his particular question about that situation, I suddenly pictured large areas of housing subdevelopments that literally are not needed anymore and may actually sit empty, like ghost towns, in the decades ahead. Are things that bad around Detroit, or is it just that the housing prices will drop until buyers return?
William J. Holstein: Yes, Michigan is in a complete stake of shock, with unemployment far higher than the national average. Places like Flint are deciding to destroy entire neighborhoods of homes and replace them with parks, to prevent abandoned homes from being used for drug or prostitution activity. And Detroit has been losing population as well. This is just a taste of what could spread to other parts of the industrialized economy if the Chrysler intervention, and subsequent handling of GM, are not successful.
Fairfax County, Va.: Regarding the questioner from Arlington, since when is any American car "owned by Obama and the unions"? Obama isn't the queen of England, who apparently actually does own Windsor Castle, etc. He's the president of the United States and a salaried employee thereof.
We the American people own that federal stake in each car company and bank where such a stake exists. Obama sure doesn't. And if the other questioner can't stomach buying a car from a company that the United States is temporarily helping out, I am mystified.
William J. Holstein: I agree that we Americans need to rise above regional differences and philosophical/ideological differences (like the one centering on the role of unions) and ask ourselves: what kind of economy do we want? Do we want to be a First World industrialized nation in control of our destiny or do we want to merely send our children to work in factories owned by companies from other countries?
Bethesda, Md.: Your analysis of Chrysler's future makes me think that the UAW has just circumvented putting their pensions into the PBGC pool...thus keeping the generous pensions for their members, and having tax-payers foot the bill. Here's how: when Chrysler gets the cash from the U.S. and Canadian governments, it will immediately shore up the pensions....then the company will really go bankrupt. Might it work out like this?
William J. Holstein: You're right that the UAW seems to be getting preferential treatment. They haven't been asked to take a hit like management did (the dismissal of Rick Wagoner) or a hit like bondholders are taking. I'm not sure what restrictions Chrysler will face when it gets more governmental money. If the UAW just salts it away and lets the company fail, that's an absolute outrage.
Arlington, Va.: What is known about the holdouts that pushed Chrysler into bankruptcy? From the limited news I've been able to read at the office, it seems as though they thought 30 cents on the dollar was too low a return. But surely they weren't expecting to get more than that if Chrysler filed for bankruptcy. Or are they insured against Chrysler's bankruptcy and will now get 100 cents on the dollar out of their insurance? What were their motivations for acting as they did?
William J. Holstein: What I heard is that many of the hedge funds that bought these bonds got them for 65 cents on the dollar. They're being asked to take 30 to 35 cents. So that's why they're holding out. But now that Chrysler is going into bankruptcy, they may be simply out of luck. They overplayed their hands.
Arlington, Va.: If Chrysler was going to end up in bankruptcy anyway, couldn't this have happened before we dumped a ton of taxpayer funds into the company?
William J. Holstein: It was never clear, until today, that Chrysler would actually go into bankruptcy. So it seemed to make sense to try to help them to keep them out.
Rockville, Md.: I want to know the names of the 40 hedge fund companies -- and their CEOs -- that held out to the end, effectively driving Chrysler to bankruptcy. I want the government to investigate their tax returns for past the 10 years to see whether they have benefitted from any tax loopholes. In addition, I want the government to ensure that these companies don't get a dime of the stimulus money.
William J. Holstein: I don't know their names, but I'm guessing they are publicly available. And I agree that the government ought to hang them out to dry and subject them to at least a measure of oversight. They have been gaming our economic system for years.
Anonymous: How will this affect retirees pensions and health care benefits?
William J. Holstein: To be honest, we don't have all the answers yet. For now, they look secure. But we can't anticipate what a bankruptcy judge might do.
washingtonpost.com: This concludes today's discussion with William Holstein. Thank you for joining.
President Obama blamed a "small group of speculators" for Chrysler's imminent bankruptcy filing today, but said agreements forged by the administration during the past month will help provide the troubled automaker "a new lease on life."
Shortly before the president's remarks, a group claiming to represent the holdouts on the deal released a statement claiming that they had been "systematically precluded" from direct negotiations with the government.
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