I like the fact that President Obama has drawn a line in the sand and signaled that no more funds will be given to U.S. automakers without their presenting a viable long-term plan for restructuring. Ultimately, the automakers cannot survive merely as a result of government largesse, but through the discipline of a competitive auto market.
In my view, the American automakers are viable companies which can produce cars that sell well. It is their poor operating cost structure and disastrous balance sheets which make them bankrupt organizations. This should mean they are prefect candidates for restructuring.
Nevertheless, other aspects of Obama's treatment of the automakers are troubling. The dichotomy between how the big three automakers are being treated and how the big banks are being treated plus the sacking of a CEO at a critical juncture leave a lot of questions.
First, as to what Obama has done.
- The Obama Administration used the threat of withholding bailout funds from General Motors to induce that firm's CEO Rick Wagoner to resign and its board to seek replacement members.
- GM has received 60 days to come up with a viable restructuring plan or they will face Chapter 11 bankruptcy. Chrysler gets 30 days to forge a deal with Fiat or they too face the same fate. The Obama Administration has indicated that it will help the companies with liquidity during this time, but will not give them any ‘bailout' funds.
- Any bankruptcy will be heavily ‘directed' by the Obama Administration to mitigate any fallout in terms of jobs, suppliers, regional economies or the broader American economy.
- Meanwhile, the Administration has indicated that it would guarantee any vehicle warranties offered by either firm on existing and newly purchased vehicles if either firm were to go into bankruptcy.
- The Administration has also made green car production, federal car purchases, an tax breaks for buyers a large part of helping increase demand for domestic vehicles. Very smart. The green emphasis is something the Germans have also done.
In short, the Administration is credibly threatening to withhold support for GM and Chrysler unless those organizations can create a restructuring plan that Obama's people consider viable, the penalty for failure being bankruptcy.