Bailing out the Big 3, or easy ways to dispose of 25 Billion Dollars

Today we talk about saving the big 3(GM, Chrysler and Ford) and according to them, the US Economy.

I watched the hearings today and would like to make a couple of personal observations before I get into the meat of things. First Mr. Wagoner seemed to be following the age old cliché of: “If you can’t dazzle them with brilliance then baffle them with Bullshit” (forgive my French but that is the quote). Every time he was asked a question he danced around and tried to figure out the best answer he could give to make sure GM got at least enough money to cover his butt when the company goes belly up. This guy came off slimy and completely untrustworthy. Second Mr. Nardelli just came across as lost and helpless every time he went to answer a question. This could have been due to the fact that he didn’t want to lie through his teeth and get caught doing so later on, or maybe he really was just lost and helpless. Finally, Mr. Mulally, he came across as the brightest and most straightforward of the three, as well as the most honest and in the least amount of trouble.

When asked by the Congressional panel about why the Car Companies were in trouble, we heard all kinds of things, but really what came across was our cars aren’t fuel efficient (thank goodness they fought the Café laws years ago or they would be efficient), to a lack of consumer confidence.

Consumer Confidence… A small phrase with huge connotations. Break it down: Consumer – a person or organization the uses a commodity or service. - (In this case buys cars) Confidence – Belief in the powers, trustworthiness or reliability of a person or thing. So that phase, Consumer Confidence means in this case a person or organization that buys cars and has confidence in the reliability of the car and the company that makes them.

Psychologically, confidence is something that is built over time through the use or exercise of a commodity or service that is slowly proven that it won’t suddenly fail or if it does, it will be made right.

The testimony of these men state that part of the reason car sales have fallen is because the consumers lack confidence that these companies will continue to be around to support their goods. They ask for 25 billion dollars to keep them operating until the confidence in the economy comes back and the consumers regain their confidence in these companies. They expect that by 2010 they should have made enough changes and the economy shall have recovered enough that they can start paying this money back. When asked how they arrived at the amounts that they thought they needed, while throwing several financial terms around and talking about projections, what really came through especially from Mr. Wagoner was this was a W.A.G. (Wild Ass Guess). Mr. Nardelli just continued to look lost and repeated some of the terms that Mr. Wagoner used while stating his companies W.A.G. for what they would need. Mr. Mulally actually stated that while his company had enough liquidity to make it on their own assuming the economy doesn’t fall further, he was also honest enough to admit his company would use whatever was left over of the sum if it was needed. So without further ado, GM asks for roughly 12 Billion, Chrysler for 7 Billion and Ford whatever was left over assuming they actually need it.

There were further questions regarding the fact that they said their operating costs for the past couple of months had pretty much equaled the entire amount they were asking for. While this would be interesting to go into the only reason I mention it is because it affects that confidence that they think this Bailout, excuse me loan would build.

Remember confidence is built over time.

So now we come to the heart of the matter. Can these companies be saved or will they just subsist on life support until the money runs out? Should triage be performed and the needed excising or amputations be performed to save the most viable of these companies?

If we look at viability of the companies in comparison to the current market, we have to look at things like saturation, market share and innovation or generational shift (such as in the computer hardware industry). Something these three companies seem to have forgotten is that a market is a competitive place. These companies have ignored or forgotten that there are other companies competing in this market, companies like Toyota, Honda, Nissan and Volkswagen just to name some of the larger ones, not to mention the smaller ones like Kia, Hyundai, Saab, Volvo or even more niche companies like Porsche, and now Cooper etc. The big 3 seem to be stuck in the past, in which they battled for American hearts and minds, which means they are stuck in a time before the mid 70s in which Toyota and Honda started coming into play thanks to the gas crisis and then the recession in the 80s.

Those 2 companies created smaller, cheaper and more fuel efficient vehicles, because they understood the market at the time, whereas the big 3 were still competing and thinking they were in the high times. Admittedly they tried to enter into those markets with the K car concept and while the divisions did well, nobody looked at it as a sign of the times. They continued to produce smaller more fuel efficient cars from then on, but these were eventually out stripped by their Asian competitors. Instead these companies began the SUV wars and seemed to revive the idea of a large car renaissance all the while losing market share to the foreign imports, which eventually came along and competed with them for the SUV market by creating smaller, more efficient SUVs and eventually would create the crossover. The big 3 seemed realize a couple of years ago, they were losing market share and created their own version of the smaller SUV / Crossover, but they still failed to see the efficiency of such. While these weren’t really a problem then, between the loss of consumer confidence and fluctuations in the market created by the housing problem and then nails driven by rising fuel prices, the products of the big 3 have become unpalatable for many today.

So where does that leave us? Well quite recently in terms of car development the big 3 and congress came together and finally some of the Café laws were enacted. Amazing, this simply states that by 2020 cars needed to get 35 miles per gallon, of course they say that this will raise car prices by approximately 4000 to 6000 dollars. Hmm, my wife’s Matrix already gets 35 MPG and it is the XR model, $19,000 fully loaded. Anyway, I digress, to help the big 3 with something they should have started doing 30 years ago and kept doing to compete with Asian cars, Congress allocated 25 billion for retooling and design which isn’t expected to be complete until 2020. Meaning that they can’t really compete for Market share until then, unless somehow our economy does a 180 and we suddenly go from where we are headed “rags” back to the “riches” and gas prices drop down and some new technology guarantees we won’t see 4 dollar per gallon plus prices again, they just won’t really be able to compete. They NEED a GENERATIONAL SHIFT. That is when they create a whole new set of cars that not only compete but also out do the competition in some way. (The best example of this is the Video Card industry and the play between NVidia and ATI. Generations for Nvidia being 6800, 7900, 8800, 9800, 280. Each of which represents a breakthrough in technology, being high speeds, more memory, greater throughput, a new type of memory etc. each created a new generation and made prior generation second best and the grand generation (2 generations back) pretty much obsolete).

This is not going to happen. Sure Chevy has the Volt, too little, too late and won’t even hit the market until 2011. They have all looked into Hybrid, Hydrogen and Electric Vehicles, but it was easier and cheaper to compete in the market then as opposed to saying how do we capture the market tomorrow.

I won’t say the Big 3 are doomed, but I think perhaps we need to look at which is worth saving and is the most viable in the shortest amount of time, because we the people are supporting these companies if the government gives them the loan.

Currently for Consumer Confidence Ford actually has a fairly high reliability rating, 4th over all I believe. The other 2 are fairly far down the list. Ford does seem to at least have an idea where market share is and has wandered toward the area with some of its recent cars. Not to mention they seemed to have been somewhat prescient and reduced overhead by closing plants that weren’t producing enough to justify them, at the last moment they seem to have seen disaster coming and quickly battened down the liquidity hatches and seem to have a plan.

I couldn’t begin to guess where confidence is in Chrysler. They are like the punch drunk fighter in a bar brawl and they are staggering from the blows and taken a slap that has somewhat cleared their head. In this they were sold to Daimler, some of the fat was trimmed, and then they were sold Cerberus Capital Management. Whether they had a plan or not, I don’t know, but I think it was more of an idea then a plan.

GM is in trouble. They are like the fat guy that is told to lose weight, get in shape, drop his cholesterol and is told they are borderline diabetic, with an enlarged liver and has Colon cancer. They have to keep eating, but don’t really know what to eat and how to plan their meals because they have 3 different conditions they need to eat for. Well their design for the market share is the Volt and it is part of breakfast and that is as far as they have gotten. We are still missing the rest of breakfast, all of lunch and dinner and we have no exercise plan what so ever. We won’t even talk about Chemo and Radiation therapy here.

Looking at this from the triage point of view Ford is savable, Chrysler might snap out of it, but GM it might be better off making them comfortable and maybe seeing that no matter how hard you try, they have so much wrong with them, that not only will it be very difficult to save them, but that you wind up wiping out everything they have worked for, or in this case realizing that the tax payers will probably wind up having to support GM for years and even then they might fail and the money then is just gone.

Quick rehash for consumers to regain confidence in the big 3, they would first need confidence in the economy, that includes lending. The Markets would have to stop yo-yoing. The big 3 would need a solid plan on how to be viable in the current market including what they plan for the generation shift, be it Battery, Hybrid or Hydrogen and they would need time. The last is something I think they are far underestimating. It took 20 plus years after the depression ended for consumer confidence to take off. It took 10 years for it to come back after the late 70s and 80s... too bad deregulation of lending lead us to today (thanks Bill). It will be at least a couple years coming out of this mess we are in today and then a few years while confidence rebuilds.

In the next amazing issue we will see what we can do to quickly restore consumer confidence.Thanks for reading.