Sunday, March 29, 2009

Why Chrysler Must Die

It’s a lesson we all learn, sooner or later, usually as kids. Be it a bicycle, a skateboard, or simply trying to grow into feet already two times bigger than necessary for your body, a tragic fall occurs – right smack dab in the middle of a patch of concrete. As far as world tragedies, it doesn’t rank that high – a bloody knee and/or elbow. [Although, I am reminded of a Mel Brooks’ quote, which goes something along the lines of “Tragedy is when I cut my finger; Comedy is when you fall down an open sewer and die.”] The lesson is not how to prevent another fall. Rather, it deals with the dreaded Band-Aid removal. It’s gonna yank hair, and it’s gonna hurt like the dickens. So, pull it all at once, really fast.

Okay now, enough is enough. Brace yourself people. It’s going to sting, and maybe a good deal longer than just a bit, but it’s necessary. We have to let Chrysler wither and die. No more bailout, no more heroic rescue efforts. It’s a lost cause. No sense throwing good money after billions and billions of bad. It’s time to cut bait and fish elsewhere.

Letting Chrysler go the way of the Dodo bird and Pan Am airlines is no little lark. We’re looking at thousands of employees and families. But, does it really make sense to poor billions and billions of dollars into the company? Chrysler has already received $4 billion in bailout money. Despite that, they still have their tin cup out waving for an additional $5 billion just to survive – not thrive, mind you, but survive. I think it’s important to keep in mind that the owners of Chrysler, Cerebus Capital, only have $7.4 billion invested, the price they paid Daimler AG for the American icon of ineptness.

Pulling the plug on Chrysler is probably not politically appetizing, particularly for those seeking electoral votes in Michigan. Additionally, labor union membership across the country will be literally crapping their pants. However, when putting aside emotions for logical, rationale reasoning, some pretty compelling evidence pops up to support other possible options for economic recovery.

1) The Numbers. Chrysler auto sales are off over 40% year over year. 40%! General Motors is in the same boat. Ford and the other manufacturers are off another third. Simple supply and demand here folks. There’s not enough demand – not by a long shot – to accommodate the manufacturing capacity. Will there be demand when the global economy recovers? Good question. Here’s an answer for you. Did you like the economy of the past five years, up to October of 2008? Did you own shares of Ford, General Motors, or Daimler AG (owners of Chrylser up until the summer of ’07)? How did you like your performance vis à vis the general market? Ha! You didn’t, did you? If you’re lucky enough to not be familiar with those “returns,” you can find them graphed here – Ford, GM, Daimler AG. Note how the market felt about Daimler kicking Chrysler to the curb. C’mon, you weren’t surprised, were you?
2) The Cars. Are you kidding me? When was the last time Chrysler hit it big on design? Sure, they’ve had some big wins. Remember the Ram trucks and their Peterbilt-esque front ends? Yeah, that was the late ‘80s. The minivan? Even older. Durango? Jeep? Don’t think so. Sure, there’s little bumps of innovative design – the Viper, the Prowler, and the Magnum come to mind – but those cars were designed and built for niche markets, and were certainly not the financial cornerstones on which to prop up the business. About the best new car design related to mass appeal was the PT Cruiser. Puh-leeze. But, regardless of the outside of the car, there’s one thing common to all Chryslers, and that is the very cheap, u-g-l-y, you ain’t got no alibi interior. Comparable to a European car? Yeah, like a movie director compares Pamela Anderson to Meryl Streep – one’s made of plastic and good for a night or two of bouncing around; the other is a timeless classic, delivering outstanding performance year over year. [My wife is never going to believe that I compared my dream girl Pam less favorably to anybody. I’m getting old.] Let’s cut to the chase by asking this: When was the last time you heard of someone considering buying a Chrysler car? If it wasn’t for fleet sales to rental car agencies and corporate cars, I’d already be writing about something else.
3) The Terms. Okay, selling crappy cars means you better come up with some good promotions. Look at what Chrysler is reduced to offering today. “Employee Pricing Plus” is what they call it. The company is willing to sell the car for essentially no profit, with a money back cash bonus eliminating the need to put anything down. Not exactly a recipe for healthy free cash flow, now is it? They want another $5 billion to support this business model? Okay, now what will it really take to create some degree of sustainability? Give us a real number.
4) Robert Nardelli. Aside from the entire history of the airline industry, perhaps no one has been personally responsible for the erosion of more shareholder value than Mr. Nardelli. Don’t worry about Bob though, for he has a certain ability to land on his feet. With Home Depot crumbling around his autocratic throne, he slid out the door with a $200 million plus package. I can’t figure out what Cerebus/Chrysler was thinking, but for whatever reason they offered him the helm of Chrysler. Fast forward a couple of years to today. Whether Chrysler lives or dies, we should soon be rid of Bob forever. I do know this, if he gets another job at a publicly traded company, I’m immediately shorting the stock. I’ll do so on the mere rumor of that company beginning the recruitment effort. Oh, and please don’t evoke Bob’s experience with GE. Giving him credit for GE’s past growth is like giving the rooster credit for the dawn (with all due apologies to Ann Richards for stealing her quote referencing G.H.W. Bush). Advice to Bob: Next time you drive past a neighborhood lemonade stand, stop, look, and listen. Take it as your B-school education.
5) The Options. The U.S. government can give money to Chrysler. But, we’d be better off lighting a big stack of $20 bills and using the heat to provide energy for Detroit during the cold winter months. The best option for the company is Fiat leaping to the rescue. Yes, that Fiat of “fix it again, Tony” yore. You know times are bad for your car company when Fiat is positioned as your savior. What Fiat has going for itself is a variety of small car models, something Chrysler has a noticeable dearth of. Bad news is that it will take upward of two years to get Chrysler up and running stamping those out of U.S. factories. Two years? Yeah, at the rate of $9 billion a year, that’s not going to do.

Bailing out Chrysler just doesn’t add up. The company is doomed, plain and simple, and life lessons tell us it’s better to pull quickly, all at once. Better to take the $5 billion and pay it out to the employees right now – a super severance, so to speak. Or, maybe this: You know the real figure is more likely $10-15 billion to make Chrysler survive long enough to indebt the entire country, and still ultimately fail. How about using that money to seed new industry for Detroit? Maybe fund some software startups; a couple of biotechs perhaps? $10 billion is a lot of venture capital – a lot of innovation and creativity. At any rate, any option is better than a bail out rescue. The question is, “Will we have the guts?”

Hey, just this guy’s opinion.

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