GM + Chrysler: So Crazy It Just Might Work.
In the past six months, we have watched the disintegration of at least 15 banking institutions, whether they were seized, collapsed, forcibly merged, or nationalized. We've seen consumer spending come to a screeching halt as 401ks have been halved by the stock market collapse.
The cause of all this? Credit markets which have frozen due to an inability to determine which debt is good and which debt is bad, who has the good debt and who has the bad debt; and the end result of those two questions is "if I loan to this institution will they be around to repay?" Fear, uncertainty, and doubt (FUD) isn't just marketing tool for IBM and Microsoft directed at IT Departments anymore.
So how does this effect the automakers:
- The automakers all have banks (GMAC, Ford Credit, Chrysler Financial) which they use to finance leasing deals and payment plans. Almost 20% of new car purchases are leases and the number of leases taken increases along with the cost of the car so it hurts GM's most expensive lines the most.
-An even greater number of people take out loans on their cars to spread the expense of a $15,000 or $20,000 or $50,000 dollar purchase over several years. GMAC now requires a FICO score of at least 700 to obtain a new car loan. With leases and easy credit to finance purchases going away, so will a large segment of the customer base the automakers depend on.
- The automakers need access to the credit markets to retool factories to build different (i.e. smaller) cars, buy parts, cover payroll, and do a whole host of other things. When they can't access the credit market, then they start having to use their cash reserves to do this. This is why GM has to have access to roughly $15 billion in cash to keep it's business running. Currently they have about $21 billion in the bank.
- The economic meltdown has drastically reduced consumer spending with the public reducing expenses wherever they can. If you think it's bad now, just wait until this recession (many expect it to be the worst recession since `81) gets into full gear with many economists predicting unemployment ranging between 8-10% (remember the official number always undercounts because of it's methodology by almost half in many cases, so the real number will be closer to 14-17% under or unemployment). People who don't have jobs or are scared of losing their jobs aren't going car shopping. Usually, between 15-16 million vehicles are sold in the US annually. This year that number is expected to be closer to 13 million and next year the number is expected to be sub-12 million, or the worst year since 1981.
- The contraction of the market means a dramatic decrease in the number of units that GM is able to move. Let's take the inverse of this situation, let's imagine that over the course of 18 months GM's market share had declined from 22-25% (they had 28% marketshare this past month) to 17-20%. That's the size of a decrease they are looking at in terms of units moved. The auto business, especially American Auto Companies, have to deal with extremely high fixed costs because of massive pension and healthcare liabilities, the high cost of supplies: steel that must be stamped, iron and aluminum cast into engine blocks, large quantities of plastic, leather and of course inelastic labor costs.
So why merge with Chrysler?
- Buying Chrysler immediately restores GM to unit shipments it would have had before the meltdown began plus some, giving the combined automaker between ~32-35% market share of the shrunken market. GM needs to move about 4 million vehicles a year to generate the necessary cash flow to prevent implosion due to high fixed costs.
An inability to do this would make GM the economic equivalent of a supernova, a star that no longer has the fuel (hydrogen and helium or in GM's case cash) needed to sustain fusion. So the star (GM) implodes with such force on itself that it creates a rebound effect, a mass explosion in other words, completely wiping out much of its surrounding system (or economy) and potentially creating a black hole (massive layoffs, the rest of the midwest becoming like inner city Detroit). I'll end the analogy there, but trust me, it fits on various other levels to.
Of course this doesn't factor Chrysler's massive legacy costs which when added on top of GM's would be like putting a missile launcher on top of the iceberg that sank the Titanic and lobbing a couple at the sinking ship for sheer entertainment.
- Buying Chrysler gives GM brands that work (in theory). Chrysler is significantly healthier in the US than Buick has been in at least a decade. Dodge is significantly healthier (as a brand) than Pontiac has been in at least a decade. Jeep is Jeep and nothing could ever really undo the image that brand has.
- It keeps new competitors out of the market. What is the last thing that GM wants to have happen during this economic downturn? To have a foreign (Indian, Chinese) automaker swoop in and snap up Chrysler. If this were to happen, GM would face a competitor with a significant cost advantage combined with significant access to credit markets (since these are usually state backed enterprises) in a market where they could ill afford it.
- Furthermore, this economic meltdown is going to take more excess dealerships out of the system
Integration: (i.e. What the hell to do with all these brands).
Remember that with GM obtaining 30-35% marketshare in this new environment would make GM roughly the same size in terms of vehicles sold before the economic meltdown. If brands had to go before, they will certainly have to go now. Which ones stay and which ones go is always a source of great controversy on GMi.
Cadillac and Chevrolet will both stay regardless of what happens. Chrysler offers nothing that competes with Cadillac in terms of product (300C isn't a CTS competitor) or Chevrolet (you could make the case for Dodge). So the issue once again lies in the "murky middle ground" of GM brands.
Chevrolet -> Pontiac/Buick/GMC/Saturn/Chrysler/Dodge/Jeep/Hummer -> Cadillac
Does your head hurt yet? Good, mine does too. All of these brands compete for largely in largely the same price bracket offering largely the same products (except for Hummer and Jeep). So what do you do with all of those brands? First let's rearrange the grouping for the pre-merger positions
Chevrolet -> Pontiac/Buick/GMC - Saturn -> Cadillac/SAAB/Hummer
That's an approximate linear mapping of where GM and Chrysler's brands fall in terms of pricing. I wish whoever is cursed with trying to clean this mess up god speed and good luck. I'll also send them on their way with a few ideas.
- Moving Saturn upscale has abjectly failed. Why do we know this? When GM contemplated bringing over the Opel Insignia, GMNA balked because of the losses that would be incurred. The cost could not be recouped at a MSRP one would expect from a Saturn sedan. So instead of getting the more expensive European car, Saturn will be getting a stripped down, Americanized version of a fabulous car while Buick (in China and Canada, yes Canada) gets the real deal presumably because it could sold with a higher price tag with the TriShield badge. Whether it is a failure of marketing or a failure of product or just Saturn is too ingrained into the American conscience as the "cheap plastic compact car," is for others to determine. I just know that it's not working and so does GM, because if it were Saturn would have the Insignia no questions asked.
- Pontiac has zero brand value left save the nostalgia for days of old and GTO's gone by. Today the brand consists of exactly two unique products (G8 and Solstice) that could be easily gifted to another brand. The G6, G5 and Torrent aren't even competitive in the marketplace and all of them have become fleet queens (more than 80% of G6's were going to fleet before the economic meltdown). Furthermore, the MSRP and the average transaction price (judging by incentives offered) is substantially lower for Pontiac than it is for Chevrolet.
- Hummer is completely duplicative with Jeep, GMC Yukon line and the Cadillac Escalade line. It's a huge marketing expenditure which does nothing but give GM massive PR headaches. Would you spend a hundred million dollars a year on a product which is destroying GM's brand image? It's time the brand either dies or is sold.
**Kill Hummer, the H3 lives on as a Jeep or GMC**
- Buick used to be just one step down from "The Standard of the World" (which I won't talk about to spare everyone the inevitable Mgescuro rant on Cadillac). Today, that one step down can be found with cloth seats, power nothing and everything extra? Why? So those cars can be dumped to rental fleets. GM has to start taking Buick seriously here in the states. Either it can become the product equivalent to what is offered in China or it can keep ending up on Hertz lots. Pick one, and one answer is a whole lot more profitable in the long run than the other.
**Move Buick further upmarket. Bring the Statesman/Caprice over from Holden and slap a Buick badge on it. To make up for the loss of Pontiac, recreate the old Buick Grand National, which has more sporting pretension to it than anything Pontiac had in the past decade**
- Saab isn't working as its currently structured. Pull the brand back to the places that it sells well (the Northeast and the West Coast) and focus advertising and distribution efforts there. This should significantly reduce outlays in the North American market for SAAB while allowing
-GMC is a luxury truck brand for people who want toys to play with. The average transaction price for a GMC truck is higher than that of the average Chevy truck. The average transaction price for a Yukon before the economic meltdown was higher than that of the Escalade. GM would be nuts to shut down this money printing machine.
**Keep GMC as is, it only really costs in marketing.**
- Chrysler has always been considered a near luxury or luxury brand, much in the same vain as Buick (regardless of product, that's the image the brands project). Chrysler also has a total lack of product outside of the 300C and the "Town and Country" (aka, the nicer Caravan). The Sebring, PTCruiser, Pacifica and Aspen are just all horribly uncompetitive.
So how hard would Chrysler be to fix? Not that hard. The last major Chrysler advertising campaign focused largely on how German engineering had influenced their upcoming product. There was only one problem with this ad campaign... It hadn't. But the groundwork has been set up for Chrylser to sell European styled products (again, the Sebring doesn't count.) So why not make it Opel's US Division as was tried with Saturn? Chrysler has several advantages that Saturn didn't have:
1) It wouldn't require changing the entire image of the brand because it's perceived as a luxury brand instead of an economy brand.
2) Allows charging higher prices without having to re-adjust the brands entire image. It's easier for a luxury or near-luxury brand to demand a higher retail price than it is for Saturn, a car company best known for cheap plastic compacts.
**Replace the lower end of Chrysler's product line with Opel's/Saturn's products and supplement them with Chrysler's existing minivan, 300C. Also, when Pontiac is killed move the G6 Coupe and Convertible to Chrysler and eventually replace them with the Insignia coupe and create an Insignia convertible.**
Dodge: Fleet sales are notorious for killing resale values. American automakers have been hurt much more by this than German and Japanese automakers because of their habit of dumping into fleets to meet monthly sales quotas. Because resale values are calculated by brand and by model, this could be avoided by designating one brand as a fleet brand. Dodge is already seen as a down market brand, such as Pontiac, at best it's viewed as a largely blah, at worst it strikes up memories of mullets, ******** and a certain General Lee. Since Dodge sells trucks, cars and SUV's, it would be easy to create a full line of fleet vehicles. This saves on marketing, saves on resale values making GM's other brands more attractive, and it helps to bolster the image of GM's other brands because they are no longer dumping cars into rental fleets.
**Make Dodge the fleet brand**
So this is how the dealer structure would work under my proposal.
Chevrolet -> Chrysler/Jeep -> Buick/GMC -> Cadillac/SAAB.
From 11 brands to 6.2 (the .2 is SAAB) or a near reduction by half. Dealer reductions will happen courtesy of the current economic meltdown. GM just needs to be proactive in making sure the dealers they don't want to/or can't fail, don't.
Platform Integration and Brand Product
- Subcompact- Gamma/Gamma II - Aveo/Chrysler Corsa
- Compact- Delta/Delta II - Cruze, HHR, Chrysler Astra, Chysler PT, Dodge Neon, 9-3
- Compact RWD-Alpha - Cadillac ATS line
- Midsize - Epsilon/EpsilonII - Malibu, Insignia, LaCrosse, Avenger, 9-5
- Midsize RWD - Sigma II - CTS line
- Full Size RWD- Zeta (LX and LY replacement): Chevy Caprice (old G8), Dodge Charger, Chrysler 300/300C, Buick Statesman/Roadmaster, Cadillac Fleetwood.
- Midsize Crossover - Theta/ThetaII - Chevy Equinox, Chrysler Vue,
- Full Size Crossover - Lambda- Traverse, Chrysler Acadia, Chrysler Town and Country, Buick Enclave, Dodge Caravan.
Someone with greater knowledge of MoPar's truck and SUV platforms can fill in the rest.
Potential Significant Problems:
- Above, I referred to the massive long term obligations faced by the Chrysler Group. They aren't any different from the ones faced by the General Motors. GM isn't so stupid as to not have taken this into account. Cerberus wants GMAC and they want to unload Chrysler, GM is in position to demand a good price for the rest of GMAC, as well as demand Cerberus assume partial liability for Chrysler's long term expenses, in exchange for taking Chrysler off of their hands as well as keeping Chrysler's liquidity, plus an injection of Cerberus liquidity (totally something close to $15-20 billion, not counting assumption of long term liabilities). Government aid will probably be provided once a new administration is formed.
Sidenote and disclaimer:
I was the news editor at LLN for a period a couple of years ago. Before that I covered politics and crime for the college newspaper (and it's actually more than a dozen Associated Press Pacemakers for Excellence). I've also written about environmental issues and their effect on the automakers. These views are mine as are the inevitable typos.