RANTS #468

October 22, 2008

GM scrambles for cash as Cerberus turns to – big surprise - Carlos Ghosn.

By Peter M. De Lorenzo

Detroit. That the idea of GM trying to absorb Chrysler in the midst of the most severe economic crisis since the Great Depression is now officially looking ludicrous cannot be disputed at this point. Long term - meaning five years down the road - a GM takeover of Chrysler might have made sense - on paper or in some collegiate economics class - but short term it would have only spelled untold trials and tribulations for the company. Not to mention the fact that GM doesn’t have that kind of time. No one in this business has that kind of time right now.

Why? Despite the lure of Chrysler’s alleged cash stash of $11.7 billion, there is no way GM could have unwound Chrysler at the rate necessary to achieve even a modicum of efficiency, let alone success. And they would have burned through much of that cash - and consumed much of their time - in trying to jettison Chrysler’s nonessential assets and on resolving union issues instead of trying to make the whole thing work. In other words, absorption of Chrysler by GM would have been an unmitigated disaster in real-time. Not to mention the obvious fact that GM can’t even manage the brands they have now, so the whole idea was a train wreck of Not Good.

We have now learned a couple of things during this episode, however.

As I mentioned last week, the Cerberus infatuation with the auto biz is so done that they can’t wait to unload Chrysler, a humiliating admission from the self-proclaimed Masters of the Universe and an emphatic indictment of the formerly unimpeachable Cerberus brain trust/posse. That the automobile business is unlike any other in the world was completely lost on Cerberus managers. And the fact that they entered the fray at the exact wrong moment in history is indisputable. But more on that in a moment.

Secondly, GM’s foray into the idea of a Chrysler takeover exposed that company’s dire situation for all to see. Burning through cash at a prodigious rate – a little more than $1 billion per month according to estimates – GM’s search for crucial financing is getting beyond desperate at this point, and now everyone knows it. That alone is a stunning admission from the company formerly known as an American corporate icon. But it’s more than that, because GM’s situation grows more precarious by the moment, and if they don’t make a deal for that much-needed infusion of cash soon – in the next 12 months, preferably less – then we could be contemplating the unthinkable. And that means not only the end of GM’s 100-year reign as the largest American car company and one of America’s historical industrial touchstones, but the end of General Motors, period.

One thing we are certain in all of this is that Chrysler will cease to exist in its present form, and momentarily too. Carlos Ghosn is now the lead suitor for Chrysler in discussions with Cerberus according to reports, because GM simply couldn’t muster the cash quickly enough to facilitate the deal. Though Cerberus wanted to wash their hands of the auto biz and walk away completely - and they were oh so hoping GM would make that happen – they’re considering the link up with Ghosn because they just need and want a deal at this point.  Any deal.

In some respects Ghosn’s interest in Chrysler is somewhat of a relief for this area, because he’s approaching it not as a takeover but as making Chrysler LLC the third and North American part of his global auto alliance, joining Renault in Europe and Nissan in Asia. That arrangement might bode well for the people still at Chrysler - at least for a while - because even though there would be dramatic cuts, they wouldn’t be nearly as severe as if GM had absorbed Chrysler from the get go.

GM, on the other hand, would have had to take out 90 percent of Chrysler’s 60,000+ work force (estimates of 50 percent were ridiculously low), shutting down plants and facilities, and the ripples throughout the economy would have been devastating in the Midwest and Canada - and especially here in southeast Michigan - an area that has been in a recession for going on three years already.

But then again, I expect that if and when Ghosn makes a deal with Cerberus reality will set in, and in a hurry too. And reality means that Ghosn will see that Chrysler’s value to his global alliance would be highly selective – at best – and that he will end up having to gut Chrysler to the bone to make it all work.

At the end of all of this and no matter what scenario unfolds, Chrysler’s roller-coaster ride as one of America’s “Big Three” – which saw boom and bust cycles playing out with much Sturm und Drang over the years – is finally over. It may hang on as an entity called “Chrysler” for a few more years under Ghosn’s stewardship, but don’t kid yourselves, the U.S. domestic automobile industry is imploding at an alarming rate.

Chrysler will be the first to go, and GM – as unthinkable as that might be - is teetering on the brink of oblivion.

And Ford? Well Ford just may be the last American car company standing when this is all done playing out.

Thanks for listening, see you next Wednesday – if not sooner – depending on events.