The Case Against a GM-Chrysler Merger

Posted by: David Kiley on October 16, 2008

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General Motors executives and some Chrysler executives seem to want the two companies to merge. Though they are publicly mumm, privately reporters have gotten earfuls from the promoters boosting the idea of how successful it would be. I can’t buy it. Here’s why:

1. General Motors has been in a near constant state of restructuring since 1993. Think of that. Fifteen years of restructuring, write-downs, streamlining, plant closures, downsizing, buyouts, etc. It’s exhausting covering this company. From time to time, GM has seen a bit of daylight by earning some fleeting profit. But then the company falls prey to the next cyclical downturn, national event, etc. For the most part, the profits came when GM could crank out SUVs and pickups when gas prices were cheap, housing values were over-inflated, leading consumers to treat their homes like ATM machines. It didn’t take a lot of brains or savvy to make money this way. But these times, we think, are over.

It is the memory of those fleeting bursts of sunshine, I believe, that leads these GM executives to want to acquire Chrysler’s 10%-11% of the auto market, and get back to the broad restructuring it would take to rationalize the two companies. But if these same executives were much good at actual managing, why have they managed GM into the ground for fifteen years?

2. There is an idea that maybe the U.S. government will give the Big Three automakers an additional $25 billion in loans next year to survive the Recession. To get it, the automakers will need the cooperation of the next President and Rep. John Dingell, the automakers’ own Congressman from Detroit who is chairman of the House Energy and Commerce Committee. Just why would Dingell and either Obama or McCain support a strategy that would cut tens of thousands of jobs from an already economically fragile region of the country—Michigan, Wisconsin, Missouri, Indiana? By the way, the UAW hates this plan, and GM can’t do much without the union signing on.

3. The strategy seems to hinge on GM keeping Jeep, Chrysler’s minivan business, perhaps the Chrysler 300, Dodge Trucks, and punting the rest of the company and brands. Perhaps the Chinese automakers will want all or parts of Chrysler and Dodge cars? While I’m fairly sure the market would not miss Dodge Avengers and Aspens, or even the Dodge Viper or Chrysler PT Cruiser, I’d wonder if the exodus of customers from Dodge trucks wouldn’t out-run GM’s ability to restructure the whole company. “Why buy Chryslers if they are really GMs. If I wanted GM, I’d have bought a GM.”


4. The opportunity cost is frighteningly high. This is a time when innovation is needed more than ever to meet stricter fuel economy regulations. Chrysler doesn’t have any technology GM needs. Why doesn’t GM simply focus on restructuring GM, keep its focus on innovating, and take the additional loan money that is sure to be available next year. GM managers will spend 20-hour days trying to figure out how to shrink Chrysler fast enough for the whole mess pay off instead of making GM stronger and more innovative. It wants the $10 billon in cash Chrysler is reportedly sitting on? Take the Fed loans next year instead.

5. Could it be that GM is also thinking of this as a pre-emptive move? Keep Dodge Trucks and terrific minivans out of the hands of Nissan or the Chinese? Give me a break. GM management hasn’t earned the right to be that smug. There is nothing that would come from Chrysler, except minivans, that GM doesn’t already have. GM says it wants the Chrysler 300? For what? To sell as a Buick? Or in Buick-Pontiac-GMC dealerships as a Chrysler?

6. Why merge to save billions? Ford and GM saved hundreds of million by developing a six-speed transmission together. Both companies, I am told are deliriously happy with the outcome of the cooperation on what amounts to a commodity part. Analysts who know about these things say that GM and Ford, for example, could save billions upon billions more by entering into more of these global “co-opetition” arrangements developing engines and transmissions. Add other stuff like wiring harnesses, headliners, etc. that nobody views as a competitive advantage, and the savings are enormous.

7. Ford rebuffed GM in late summer about merger. Take that as a sign that maybe the idea stinks. Too, when was the last time you saw Toyota or Honda sniffing around to make an acquisition? Try, never. Ford executives say they are focused on integrating Ford globally, and making the company it has as efficient as possible. The sanity of this approach is crystal clear.

8. Just how many botched automaker mergers do you have to see before you get the message that these things don’t work very well. DaimlerChrysler? BMW-Rover? Ford’s buy of Jaguar and Land Rover? I know. I can hear it now. “We won’t make those mistakes.”

9. Good luck with the dealer consolidation. You are going to buy Chrysler, take the $10 billion it has in cash, and start paying Chrysler and GM dealers to go out of business? What kind of return-on-investment is that?

10. I’m sure there are reams of paper being generated that shows why this deal pencils out. Take all that paper and use it to start a fire. It’s going to be a cold winter.

Reader Comments

Terry Doyle

October 16, 2008 6:03 PM

Hey have you ever giving it consideration that alot of the reason gms and chryslers are having the problem competing with the japanese and germans is the fact that our goverment does the same thing for them. They give them tax free plants, land to build them on,tax free status for years on end as long as they provide a few jobs in low income areas. How smart these foreign automakers are. Dont forget that gm ford and chrysler started with investors,built there companies up and provided many to buy houses cars washmachines furniture,bank savings etc...

Tom Paine

October 17, 2008 9:11 AM

This commentary is spot-on. The takeover of Chrysler by GM (why are people using "merger") is so stupid you just couldn't make it up. For the questionable advantage of getting a line of minivans and the Jeep brand, GM would be even further distracted from its receding vision of profitablity. It has too many brands already, too much production capacity and too many high labor costs. Point 8 mentions the other mergers of the past, such as DaimlerChrysler and BMW-Rover but how about GM's own fiascos: Subaru, SAAB and FIAT? These were arranged by the same crew in charge of GM today. The first lesson of history is that nobody learns anything and GM wants to speed up its drive over the cliff.

Antonio311

October 17, 2008 1:07 PM

Agreed!

Schmeltz

October 17, 2008 1:41 PM

Agreed on all counts. The idea of a merger between GM and Chrysler ranks among the most asinine of ideas ever imagined. Poor Walter P. Chrysler must be dizzy from all of the rolling over he's doing in his grave. If both Companies would spend as much time designing the best Range Extender EV's as they do entertaining fool-hardy distractions such as this, they would be far better off.

JoeShmoe

October 17, 2008 1:56 PM

Hey, wait a minute...not fair...I thought Cerberus promised everybody that they were in it for the long term!!! That's what Bozo Bob Nardelli and Press-san said too!!!! I believed them!!!! Hey, I want my money back!!! Really, the Cerberus guys were never as smart as they thought they were...and neither were their bankers. This combo is stupid, from a business sense, but that has never been what drives Cerberus. They are not "business" people- they are simply smug, overpaid, greedy maniacs who will now punch the final nail in the coffin that is now Michigan.

Frank Loweser

October 17, 2008 2:07 PM

So far, Daimler bailed on Chrysler, and Nissa, Ford and the Chinese have passed on buying Chrysler. Since when is GM so full of brains. This deal smells like a loser.

Happy Dodge Owner (until 1 week ago)

October 17, 2008 2:18 PM

Agree as well....Though Jeep sales are not real strong,wonder what the lure to Jeep is?Mearly the name? And I cringe at the thought of a Chevy truck with a Dodge name slapped on it..its not a Dodge..I wont buy a Chevy with a Dodge logo.Or a Chevy Hemi..NO WAY !!Too bad I ever bought a Dodge because I fell in love with them power,reliability,good looks ect.. and driving them ever since.My 03 Ram and 06 Charger served me well with no issues,and now I am nervous at the fact I may never be able to get one again..I was hoping to buy a Challenger 2 years from now ,I asummed they would be in production before all this merger - buyout talk being a new model and all,not so much now.Was planning a new Ram in the summer of 09,now I have doubts they will be in production,too bad the hottest truck may dissapear,Im so distressed I cant think/spell anymore....Now I may be Hemiless..thats sad...

evjw

October 17, 2008 2:43 PM

Makes sense to me. Sounds like former Detroit Lions general manager, Matt Millen in the play-by-play booth.
Maybe we should make David Kiley the CEO of GM and let him run the company for seven years.

shahn

October 17, 2008 2:58 PM

I loved the tone of this article. Not cos i think the author hates GM, but probably because i do. Gotta love seeing these companies go down who made their money the wrong way. Hopefully they'll survive long enough to learn a lesson, then again, countries still go to wars...

Patrick

October 17, 2008 4:57 PM

Ah, more arm-chair critics at the helm. Let us not forget that it was Daimler who ruined the Chrysler name by raiding their cash funds and cheapening the Chrysler vehicle lineup….not the other way around. GM is simply taking Chrysler in order to even out the entire industry....there are simply too many brands out there. GM will take Chrysler's stellar minivan lineup, which can make big bucks if implemented.

A few points:

-Chrysler also has flexible manufacturing facilities which could benefit GM. Chrysler led the way in the Harbour Report’s productivity report.

-Chrysler has an excellent design team headed by Ralph Gilles who will no doubt end up being a player at GM.

-Chrysler is the most popular “urban” brand so vehicles such as the 300 will remain.

-GM will keep the Hemi name, regardless.

-Jeep and Hummer could potentially be consolidated and sold outright to a buyer. Jeep has a ton of potential out there and I say good things in its future.

-GM will kill Pontiac….put it this way, the Toyota Matrix and Pontiac Vibe are the same car, yet the buying public will purchase the Toyo over the chief simply because of name retention/recognition.

-Bankruptcy will not happen

-Cerberus had this planned the whole time.

Hans

October 17, 2008 5:53 PM

The UAW might not like the merger idea. However, how much would they benefit from a bankrupcy. Maybe 50% fewer people making 14.00/hr with a 401k and no medical.

Tony

October 18, 2008 1:01 PM

Where is the integrity. What America does not need right now is another merger which will cause massive job losses and cripple the economy. Its time to take the hand off the panic button and wait for bank lending to improve. It's sad but while our competitors were investing in hybrid technology, GM was building the Hummer. Its time for leadership and responsibility. This is more than just a company, it's our Country and our future. GM ,put your reserves into creating new technology and improving your reputation and image and you will sell cars again.

diana

October 18, 2008 10:49 PM

Thought this might be interesting to you

Michael

October 19, 2008 3:33 AM

Perhaps they can combine the Hummer and Viper to create the stupidest vehicle ever made.

DRG

October 19, 2008 8:38 AM

You are right on with your thoughts. Leave Chrysler alone and let someone else deal with its mess.

1.)GM should start by making itself smaller (leaner) by getting rid of Pontiac, Buick & Saturn.
2.)Make only trucks with the label GMC, but sell them at Chevy dealers.
3.)Keep Cadillac as their luxury line.
4.)Saab cars only and dump its SUV line.
5.)Keep making Chevy Cars.
6.)Take the savings and invest it into what cars are left and make sure like Ford is doing 1 design for the world market. So if you rebrand a Cadillac as a Holden in Australia.

I like your thoughts of working together with Ford in making standard parts that can be shared, talk about huge savings. Maybe they should include Chrysler in a common parts sharing also, so that the big three have a better chance to stay alive.

Bill Collazo

October 19, 2008 2:16 PM

The merger is the best idea. I think Chrysler is doomed without a merger, and you'll witness another US company fail. Wake up, there is no other alternative. Look at railroad mergers. They have worked. Foreign competition is too strong in the auto industry for US automakers.

worthnew

October 20, 2008 1:10 AM

No, no, no. Nobody gets it. It all goes to the magic words of the moment. The magic words of the moment? What's that? It's .... too big to fail. A combined CGM (GMC is already taken) would be ... too big to fail.What president or Congress would dare allowed the US auto industry to be reduced to just Ford? Ford is what, #4, 5, lower? in the world by now?

William Abbott, CPA

October 20, 2008 2:07 AM

I agree with all the points. However, everyone seems to have missed a very important element of the whole deal. GM is probably being forced into a deal by Cerebus and their majority stake in 51%-owned GMAC. Cerebus is starving GM's dealers and customers by raising their credit requirements to the point that no one can get GMAC financing (unless you happen to buy a Chrysler). GM should ignore the buyout and just start a new captive finance subsidiary with the help of the biggest GM dealers and outlast Chrysler. Cerebus wants out of the auto business; let them fail and everyone else can pick up the pieces. Cerebus thought they could finance their way through a manufacturing company. Too many MBA's and CPA's (yes, I am one too) and not enough engineers. GM could offer significant employement inducements to Chrysler's engineers to come to work for GM. Chrysler's lack of competent engineers will destroy the company. Of all the people at Chrysler, who else would anyone want. After all, isn't business just another form of warfare? This would be a very low risk strategy for taking control of Chrysler - after all - what they really want is the sales. GM should also go back to the UAW and work out a new long-term strategy that benefits both - otherwise the UAW also loses big time. If that means serious management compensation limits (like no total compensation per year over $400,000 for anyone); then so be it. Can anyone back me up on my thoughts?

Doc

October 20, 2008 6:23 AM

What happened to the fat profit GM was making on all those huge SUVs & trucks over the last 15 years? Your greed is coming home to roost.

Adam D. Lee

October 20, 2008 8:58 AM

As a third generation Chrysler Dealer who also has GMC and Cadillac, I agree: this plan is moronic. The only redeeming aspect is that it will make Daimler's purchase of Chrysler seem slightly less dumb.

If either company wants a chance at survival they should save every penny they are paying lobbyists to fight higher fuel economy standards, save every dollar they are paying investment bankers to figure out how to get Chryslers billions into G.M.'s hands and get serious about cost savings, and product development. In Chryslers case, they should get serious about either an intelligent merger with someone who is not on the verge of bankruptcy or try to license someone elses' product that might sell.

Craig Tilleman

October 20, 2008 1:41 PM

Does GM need more manufacturing capability in the US? - N0.

Does GM need more white collar, union and contract personel? - NO.

Does GM have more product offerings and diverse enough product that it needs more distribution channels (ie dealers)? NO.

Will an independent GMAC have the same dedication to GM dealers insuring floor plan for the dealer to receive inventory? - NO.

Did Cerebus bite off more than they could chew with Chrysler? - Yes

Is Cerebus trying to bail out of the automobile business? -Yes.

Is this is the most likely way to get out of Chrysler? - Yes

Paul

October 20, 2008 2:29 PM

This is just a senario to have more global intervention into the American market. The big players VW, Toyota, Nissan-Renault/Fiat/PSA and Chinese/Indians all want a bigger piece of the pie. Since a GM/Chrysler merger (Cerberus bailout) will cause the buying public to move to the Foreign brands (after GM screws up the product unplanning/unengineering and non existent customer service policy the door is open for everyone else to divy up the spoils along with higher vehicle prices. Get rid of the UAW and everybody will be working for $14.00 hour and less. I wonder if this is a lesson from Harvard Business or Jack Welch Jr. school of business.

erd

October 21, 2008 11:51 AM

A Renault or FIAT alliance makes more sense in an economic perspective. Both companies want to get into the american market, chrysler competes in segments that those companies dont, chrysler could get car platforms from one of those automakers. Chrysler could become a subsidiary of one of those companies in the US and canada. If you take a look at history mazda, mitsubishi and nissan were at the brink of bankruptcy and those companies have made a comeback, most significantly with nissan and mazda, mitsubishi has brought some good cars lateley too.
A GM- Chrysler merger would make sense if the chrysler group brands could get access to GM`s technology and operate as it is, as a group. eliminating chrysler and dodge would be a total disaster and i hope that GM fails to acquire chrysler and that Renault buys a 30-40% equity stake in the company.

Chris (england)

October 23, 2008 7:21 AM

The USA has to realize that apart from Ford, your other auto manufacturers do not produce cars that the rest of the world wants anymore.

having indulged in a Chrysler, I have had my fingers burnt, as the dealership backup is appalling, the cars are so unreliable it makes running a yank motor very expensive.

Ford on the other hand make superb cars that are very reliable and economical to run. What puzzles me is that Ford do not sell these cars in the states, as I am sure you guys would love the option of a reliable 60 mpg car, instead of the big ugly gas guzzlers.

I believe Chrysler is the USA version of rover. The Germans raped it, and then threw it away where it will follow Rover in to the annuls of history.

jim

October 31, 2008 3:02 PM

It's all a part of GM's masterplan. For years they've been trying to get out of design and engineering here in the States, let alone manufacturing. The merger is only for capturing the cash to keep them afloat until 2010 when they benefit from the UAW deal. When that happens they will start moving what little they create here in the States(Trucks & Cadillacs) out. I also hate to see any government bailout given to this treasonous company so they can create and produce their products overseas like their brand new $370 Indian design center.

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