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GM and Chrysler Denied Additional Long Term Life Support

 March 30, 2009 07:45 PM

What makes the US Automotive industry so complacent that they believe that the government has a duty to bail them out time and time again? Do they think that the fact that they now support millions of employees and retirees gives them the license to take their responsibilities lightly? Do they think that social burden of supporting the unemployed and the retired (if they were to go bankrupt) is larger than the value that they have been destroying in the economy for the last multiple decades by not heeding to their primary call of operating a profitable enterprise?

First we had the spectacle of the CEOs traveling to the nation's capital in their own separate private jets, to beg for money. Then we were told that the CEOs didn't really had a clue as to how they will turn the companies around when they were asking for money. No business plan. Nothing! They were then given a few months to work out a business plan and the deadline is here. They still do not have a plausible business plan that has a chance to work. Maybe, they are so big, or maybe, this industry is so critical to the country, that they have a luxury of letting the deadlines pass without having to do the hard work of extracting tough concessions from the Unions and the debt holders. After all, Obama has been spending money left and right, they think, surely he won't deny them more bailout funds just because they do not know how to run a profitable company!

[Related -Tesla Motors Inc (TSLA): How Tesla Fares Against Upcoming Electric Cars]

Wagoner had to go. No one can preside over years and years of shareholder wealth destruction and expect to continue to hold his position. One wonders why the shareholders did not boot him out earlier. So in my opinion, this is the right move on the administration's part. The problem now is that the Union has dug their heels and is now the biggest obstacle to the survival of the big 3 US auto companies. There is no way the big 3 can return to a long term sustained profitability unless the Unions are busted and the legacy costs are restructured or eliminated. This can only happen through a bankruptcy process, controlled or not. And one of GM or Chrysler or both will ultimately find them self under liquidation if the Union  and legacy cost problem is not solved. Ford's decision to stay out of bailouts was a brilliant move as they calculated that these problems will be addressed for them when one or both of the other big-3 are under bankruptcy process. I assume that this is one of the war game scenario that has played in Ford's boardrooms many many times now.

[Related -General Motors Company (GM): How Q3 Earnings Will Fare?]

Fact of the matter is, when there is too much supply and declining demand, the capacity needs to be reduced. Since these automakers lose money on each car, reducing production is not going to help much unless they make significant moves to eliminate some of the fixed costs.

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