PrintMay 12, 2009
The Politicization of the Auto Industry
The American automotive industry will not be nationalized under the Obama administration; it will be politicized. With Chrysler in bankruptcy, and General Motors soon to follow, we are provided with an opportunity to view the future of the automotive industry where the federal government not only sets the rules, but is also a major player. President Obama has said that he wants to remake the auto industry, and now he will have the mechanisms in place to do so.
To look at the automobile market moving forward, first we should look at the past of the automotive market and why General Motors now approaches an existential crisis. Alex Taylor, who has covered the automotive industry for three decades, details the root causes of General Motor demise in his Nov. 21, 2008 article in Fortune. In short, he identifies the causes for GMs failure.
- General Motors culture and entrenched management saw the world as it was during GMs heyday and not as it currently is. General Motors was insular and operated in the 21st century much as it did for the last fifty years.
- General Motors negotiated union contracts in the 1970s that provided lavish benefits for employees and started GMs a legacy of a high fixed cost producer of automobiles.
- General Motors did not provide innovative, high quality automobiles that appealed to consumers. The aftermath of the oil shocks of the 1970s coupled with GMs poor quality compared to the Japanese imports resulted in GMs business in North America primarily dependent on trucks and SUVs and conceding significant parts of the passenger car market to its competitors.
If the reorganization planned by the federal government for GM and the proposed bankruptcy for Chrysler go through, the ownership of two of the big three auto makers in the US will be concentrated to the UAW and the US government.
UAW (healthcare fund) | 55% | US gov't | 50% |
US gov't | 8% | UAW | 39% |
Canadian gov't | 2% | Existing GM shareholders | 1% |
Fiat | 20% | Secure debt holders ($27B) | 10% |
Fiat - earn out | 15% | ||
Secured debt ($6.9B) | $2.2B | ||
The US government and the UAW will control Chrysler and GM. The UAW would retain a controlling interest in Chrysler as a result of putting the UAW employees health trust, an unsecured creditor, ahead of secured credit holders. This will serve as notice to investors that the government can and will override contractual terms in bonds offered and issued according to law in order to offer preferential favors to political allies like the UAW which supported Obama for President. In the 2008 election, the UAW spent $1.98 million to elect Democratic candidates and that does not include the $4.875 million in independent expenditures to elect Obama president.
Industries in trouble tend to consolidate as this concentrates pricing power and specialized manufacturing and product capabilities that are critical to business execution. We are witnessing this consolidation as:
- Fiat plans to bid for Opel from GM in addition to obtaining a stake in Chrysler.
- China's Geely Automobile Holdings Ltd. bids for Saab
- Germany's Daimler Benz and BMW are discussing ways to reduce costs
- Porsche and Volkswagen plan to merge.
More consolidation should be expected. With the US government and UAW expecting to be in control of Chrysler and GM, cooperation here may be expected. And, if such cooperation were to occur, could the Ford Motor Company file suit against the UAW and the federal government under the Sherman Anti Trust Act? The federal government could claim exemption from such suits, and such a suit would matter if Chrysler and GM were viable in the market.
The chances for Chrysler and GM to thrive are not good, based on the way this Administration is structuring GM and Chrysler.
For Chrysler, Fiat gets a call on its future by providing its engine technology to Chrysler and puts up no cash. Fiat still needs to turn around Chrysler with the UAW and the federal government as its partners. Fiat can expect Uncle Sam to continue to pay the tab until it becomes a political nightmare for the Obama administration. For the near term, there is no real pressure on Fiat to turn Chrysler around. Fiat has planned to manufacture 2.8 million cars per year in 2010, but Fiat and Chrysler have excess assembly capacity.
This Administration has stated that it wants to build alternative fuel cars in the US. The strength of the GM and the Chrysler product lines is found in the SUV and the pick-up truck market. Fiat and GM will need to compete with Japanese automakers, Toyota, Nissan, and Honda, as well as the other foreign owned car companies selling in the US. Fiat has little presence in the American market. Its website doesn't even have a country page for the United States. Fiat will face fierce competition, unless the US tilts the playing field in favor of it, for example, by instituting punitive tariffs on imported vehicles which will drive up the cost of cars in the US, and most likely provoke retaliatory tariffs from our trading partners.
To complete Obama's vision for the American automotive industry, he needs to create the demand for alternative fuel cars, since the price signal from the cost of oil will not create sufficient demand for these vehicles. This is part of the rationale for a carbon tax or cap and trade system. The other part of the rationale is to raise lots of money on broad new taxes which Obama does not want labeled as a regressive tax, although that is indeed what a carbon tax is.
Stacking the deck in favor of GM and Chrysler, and using new taxes to create demand for alternative fuel vehicles which Obama wants built in the US, won't be enough to guarantee success for Chrysler and GM. The Politicized auto industry will still need to compete with the strongest players in this market. GM and Chrysler will need to have excellence in design, and to manufacture cars that are high quality to attract buyers.
As we see in the banking industry, having the government as your investment partner creates huge disincentives to attract and retain top, capable, and motivated management. This is the fatal flaw of Obama's politicization of the American automobile industry, and it will be shown that the money from the US Treasury was a poor investment, and the better outcome would have come from a regular Chapter 11 reorganization without the Obama's heavy handedness.
