Posted by: David Welch on October 16, 2008
Have you ever seen the Sergio Leone classic, The Good, the Bad and the Ugly? At the movie’s end, The Good, played by Clint Eastwood, Lee Van Cleef’s Bad and Eli Wallach’s Ugly are standing in a triangle staring each other down, hands ready to quick draw their Colt .45s. Whoever survives the standoff gets a pine coffin full of Confederate gold. The loser just gets a coffin. Most of you know how it ends. If you don’t, stop and buy the video on the way home. As you might guess, someone dies and Clint’s “Man With No Name” splits the gold with the other survivor. Clint reckoned three is a crowd. He rides off in the sunset a rich man.
The auto industry is in a similar predicament right now. The business is rough and some players may not survive. What we do know is that every company is having talks of some kind with many others. Some are looking at huge endeavors like buyouts, mergers or alliances. Others just want to get together to split the costs of making engines or new technology. There is also plenty of fear that one or more of the Detroit auto makers might not be able to stay out of bankruptcy. We also know that however this shakes out, there may be fewer players, or at least some smaller ones. We just don’t know for sure who makes it and what they look like afterwards.
Buried in all of that is good news, for the survivors at least. For years, the carmakers have labored on with too many factories making fleets of cars that they could sell only with deep discounts, zero-percent financing or spiffs to dealers. Even Toyota is playing that game. That kept industry sales lofty, but profits eroded until finally the whole business scheme of cranking them out and foisting them off on an increasingly indifferent buying public broke down. The industry’s top executives (and even the bottom-level ones) now know that this is over. When it does shake out in a year or two, the surviving companies will produce fewer cars and make more money on them. They will live to see pent-up demand released. There should be prosperity. A veritable coffin full of gold.
This is what GM executives are hoping to hurry along by grabbing Chrysler. By taking over the smaller rival, GM could keep the good products and their customers and get rid of the rest. GM and everyone else benefits by getting rid of the rest because there are that many fewer cars coming off assembly lines to play havoc on pricing. That’s how consolidation works, if, and I mean a big if, it can be executed. Expect other deals to be discussed, if not carried off.
GM may not buy Chrysler. It may be too tough for GM in its miserable financial condition to buy Chrysler and its problems and work them out fast enough to reap the benefits. Maybe Renault-Nissan teams up with a Detroit carmaker and they eliminate some overlapping plants or car lines. In any case, you will see deals like that. The car biz drama will get ugly, but it must play out. So strike up that eerie Ennio Morricone music score and watch what happens next.