GM, Ford, Chrysler… Does the end justify the means?

Have you heard?  People everywhere (except Europe) are buying cars again.  Automotive News reports that June’s U.S. auto sales are up for six consecutive years. They project 16 million for the full year.  Further, they report that each of the Detroit Big 3 gained market share in the first six months of 2013. 

That’s a far cry from the reports out of Detroit a few years ago.

More interesting is that foreign manufacturers are locating more factories here in the U.S.  Is that a good thing?  You bet.  When companies from another country invest here it creates jobs no matter what the nameplate on the car.  Indeed, Nissan, Mercedes, Toyota, Honda, BMW and the rest are exporting cars from their U.S. factories to the rest of the world.

Bloomberg recently ranked the U.S. as the third most attractive country to locate a business behind Hong Kong and the Netherlands.  China? They’re number 19. 

How can that be?  Here’s how.  While it’s true that the weaker dollar has caused the effective labor cost to drop, what’s more important is that the U.S. is well integrated into the global economy through its transportation and communications systems, has the wealthiest consumer base and is a rules-based economy. 

Global investors – business owners, corporate executives, shareholders -- are more likely to put their money into a venture governed by a reliable set of regulations, taxes, policies, etc.  “The rule of law” is very important to them.

Rule of law is a confusing term and, used in other than economic contexts, can be construed as “rule according to law” or “rule under the law”.  Dictionary.com provides a concise definition thusly:  “the principle that all people and institutions are subject to and accountable to law that is fairly applied and enforced; the principle of government by law.”

Was the rule of law abandoned a few years ago when the automakers were circling the toilet for the third time?  Fearful that hundreds of thousands of jobs would be flushed along with the shareholders money, the government intervened, first under the Bush administration, to loan TARP money the automakers and, then under the Obama administration, to engineer a restructuring of both GM and Chrysler through bankruptcy proceedings.

Critics howled but fear ruled the day.  So, what would have happened if the government hadn’t stepped in?  Many of my friends and colleagues have speculated that private investors would have acquired the assets through a Section 363 sale in bankruptcy court.  GM could probably have been had for about $10 billion, chump change for the private equity industry. 

But, I am not so sure.  We were all in a panic in the first half of 2009.  No one was quite sure what would happen next.  Investors like a stable environment in which they can place their bets.  2009 was anything but stable.   Mike Jackson, CEO of AutoNation (NYSE:AN) the nation’s largest auto dealer, has often said, “it’s pains me as a conservative Republican to say this…” but the U.S automakers would not have survived if the government hadn’t taken action.  He goes on to support the oft-reported view that the a GM liquidation would have unraveled the supply chain and brought down many other companies in the industry, causing not only job losses but also disruption of the global economy.  And, this was at a time when the U.S. Federal Reserve was still putting the Humpty-Dumpty financial services industry together again.

Principles are important.  Our leaders, both Republicans and Democrats, violated so many sound principles of capitalism during the nine-month span between the Lehman bankruptcy and the GM bankruptcy that it’s hard to keep track.  The most prolific of the Austrian school of economics, Friedrich Hayek, in his most important work The Road to Serfdom, said, “nothing distinguishes more clearly conditions in a free country from those in a country under arbitrary government than the observance in the former of the great principles known as the Rule of Law”.

But, there is no line in the sand that can distinguish between actions that satisfy the principles of the rule of law.  Both the President and the Chair of the Federal Reserve are given a great deal of discretion.  Here’s what George W. Bush told CNN in December 2008, a month before he turned the reins of government over to his successor.  "I've abandoned free-market principles to save the free-market system, to make sure the economy doesn't collapse."

We’ll never know what might have happened if the government hadn’t exercised its discretion.  But, no President wants to preside over the collapse of the economy.

WHO WILL LEAD?

Bailouts and Bankruptcies: What’s the Right Thing to Do?

I’ve started to wonder if this blog is still about LEADERSHIP – its original mission – or if it’s about cars. My last entry (Clint vs. Karl: Yeah, But What About the Cars?) focused on the validity of Chrysler’s claim in their "Halftime in America" ad on the Super Bowl. My assertion – that cars manufactured by the Big 3 are every bit as good as the foreign competition -- has since been borne out J.D. Power & Associates. Their most recent survey of the reliability of three year old cars ranked four American brands in the top 10 (Ford, Lincoln, Buick and Cadillac) and clearly observed that there are no more poor quality cars sold in America. Even those at the bottom of the survey’s list report very few problems and their reliability was not significantly different (statistically speaking) from those at the top of the list.


Most respondents to the posting told stories of cars they have owned for a long time, ranging from an ancient Land Rover Defender to a classic 68 Olds to a late model Chrysler 300C. Others lamented the fate of GM, a once great American manufacturing company.

One response, from my old friend Bob Cannan, stood out because it addressed the GM and Chrysler bankruptcies. While Bob conceded that the Chrysler ad was just that (an ad to sell cars), he continues to be disturbed by the government’s bailout of 2 of the Big 3.

“I think what I and others worry about is the idea that the American people, who understandably would mourn the loss of the American auto industry, will now come to believe that the ends have justified the means. The government, in other words, saved Chrysler and GM.” Said Bob. Going further, he protests:

“But this could have been done, and should have been done, by conventional bankruptcy.

“In conventional bankruptcy, a judge could have called all contracts into view, including the union’s. I’m sure that a restructured GM, emerging from the court of a skilled bankruptcy judge would have been much stronger than the one we see today. And the process would have been legal.

“Instead, the rights of bondholders and existing stockholders were violated. It’s grand larceny in my opinion. Repugnant. Reprehensible. The stock was distributed to the unions. Directly.”

For the most part, I agree with Bob. Indeed, I would take it a step further. The seeds for the current public expectation, that government will step in, were sown by the original Chrysler bailout in 1980. If Chrysler had been allowed to fail then, how much stronger might the rest of the industry have been in 2008? That bailout was the first step on the proverbial slippery slope.

That said, I think that the period of time between the Lehman bankruptcy and the GM bankruptcy -- a period of about 9 months -- was one of the most extraordinary of our lifetime. I believe it was George W. Bush who said, "I’ve abandoned free market principles to save the free market system." It's now easy to analyze the mistakes of the 9 month period in question. However, when we were in the middle of the storm, the fear of collapse dominated everyone's mentality.

What about the assertion that it was not legal?

We often hear that our nation is governed by the “rule of law”. The founders ensured that the elected legislature made the rules and not a sovereign. In the minds of many, “rule of law” conjures images of criminals going to jail. However, its most common application is the execution of contracts. In the case of GM and Chrysler, those contracts were loans, corporate bonds, supplier purchase orders and union agreements.

A Bankruptcy Court is not a court of law; it is a court of equity. In simple terms, the judge gets to decide what’s fair and equitable. It doesn’t matter what the contracts say. In a sense, they break the law by setting aside existing contracts.

In the GM bankruptcy, there was no commercial lender – bank, private equity fund, non-bank lender – who could or would step in to finance the company’s continuing operations. So, rather than let GM fail, presumably taking down much of the supply chain with it and putting hundreds of thousands of people out of work, the government stepped in as the Debtor in Possession (DIP). Were it not for their loan during the GM bankruptcy proceeding, GM would have ceased to operate. For most companies, that would have meant liquidation.

Would a willing buyer have stepped up to acquire the Buick Division or Cadillac? Not likely. Not then anyway.

More often than not, the DIP is also the ultimate buyer. And, the buyer’s desired outcome is usually the key factor in determining the final deal that is approved by the bankruptcy judge. So, the government structured the outcome.

When the government gets involved in business, the results get distorted. In this case, the distortion took the form of an allocation of a significant share of GM to the UAW. Believers in free market capitalism find this reprehensible as do I.

So, what do you think? If the government hadn’t stepped in to save GM and Chrysler, would the economy have collapsed? Moreover, was the GM bailout an example of extraordinary LEADERSHIP in a time of crisis or a nail in the coffin of the American free enterprise system?

Clint vs. Karl: Yeah, But What About the Cars?

Clint Eastwood

I watched the Super Bowl on a Huge Screen TV. It was about 9 feet high and 16 feet wide, planted in the ground across the swimming pool from the projector and its audience. There were 40 or 50 people at the party so I saw few of the plays and heard even less of the audio. When Clint Eastwood’s "It's Halftime in America" Chrysler ad came on, I heard very little of Clint’s speech. What I did hear was the woman behind me, whose husband grew up in Detroit, express her empathy for the plight of Michiganders. That said, she isn’t about to give up her S-Class Mercedes.


By the next morning, of course, Karl Rove was on Fox News politicizing the ad. Has Clint Eastwood --America’s tough guy and the former Republican Mayor of Carmel, CA – gone soft in the head? Or worse, become a Democrat? Never mind that Clint is an actor who probably got paid bazillion dollars for reading a speech for 2 minutes. For the same money, I would have dressed up as Bo-Peep and sang Deutschland, Deutschland Uber Alles. This debate (over nothing) has gone viral since.

Lost in all this discussion is any analysis of the validity of Clint’s (and Chrysler’s) claim. Are the Detroit Big 3 producing cars that can compete on a global stage? More importantly, are they competitive in the world’s most important market, the U.S. of A?

2012 Buick Regal

I wouldn’t qualify as an expert; however, I am a car nut. I read about, drive and buy a lot of cars. And, I am here to tell you that products from GM, Chrysler and Ford are every bit as good as those from Japan, Korea and Europe. Maybe better.

Last year, I blogged about Bob Lutz’ book, Car Guys vs. Bean Counters (They Don't Write Songs About Volvos). It’s a great book even if you’re not a car nut. Lutz spent his life working in the industry and was largely responsible for Chrysler’s comeback in the 90’s. The book is well written and Lutz is a great American character, a former Marine Corps fighter pilot whose treatise offers terrific lessons in leadership.

While Lutz’ book may be self-promotional, he also goes out of his way to say the he doesn’t believe anyone, including him, could have saved GM from its 2009 bankruptcy. However, the changes in cost structure brought on by that event coupled with his decade long focus on design and engineering have resulted in a great product lineup from Chevy, Buick, Cadillac and GMC. Ditto, Ford and Chrysler.

2012 Chrysler 300C

But, public perception lags reality and GM did great damage to itself by producing mediocre automobiles for a generation while Toyota became the world’s largest auto maker by focusing on quality and products that people wanted to buy.

However, if you are in the market for a new car, you owe it to yourself to check out the American competition before you make your final choice. Before you buy that Lexus, stop off at a Buick dealer. That’s right. Buick!

2013 Ford Fusion

Interested in a BMW 3-series or 5-series? Check out the Cadillac ATS or CTS. A high performance coupe like a BMW M3 or Infiniti G37S? You owe it to yourself to test drive a Camaro ZL-1 or a Mustang Boss 302. Porsche? Try the new Corvette. Mercedes E-Class? Drive a Chrysler 300 first. Honda Accord? Ford Fusion.

In each case, you will find the American car offers similar (or even better) performance, utility, ride and handling – at a lower price!

As for the S-Class Mercedes? Well, not yet. But, then it’s only half time.