RANTS #467

October 15, 2008

In The Land of Not Good, hysteria sets in.

By Peter M. De Lorenzo

Detroit. The swirling maelstrom of conjecture, rumor and fabrication that’s enveloping the Motor City (aka The Land of Not Good) right now concerning GM and Chrysler has spun completely out of control. So much has been said by so many people who know so little about what’s going on, that it’s truly breathtaking to contemplate. As a matter of fact, I have never seen anything like it in all my years in this business.

With that in mind then, I thought it would be good idea to take a deep breath and talk about what we know first, before we venture into how any future scenarios might play out.

The Cerberus Fiasco.

First of all, as I’ve been warning for quite some time, the Cerberus “miracle” planned for the resurrection of Chrysler was a flat-out disaster waiting to happen. And unfortunately for the people at Chrysler, my prediction is unfolding as you read this. That Cerberus was completely out of their league and unencumbered with the first shred of knowledge or expertise required to turn around a flailing, ailing and deflating American automotive icon is a known fact.

And on top of that, the unbridled hubris that they brought to the table, which deluded them into thinking that they actually could venture into one of the most challenging businesses in the world - at exactly the most crucial juncture in American automotive history - and emerge with a nice big payday in a couple of years, is beyond comprehension.

That Cerberus assembled a “dream team” (at least in their estimation) consisting of Bob Nardelli - a man who was such an abject failure at Home Depot that the company has taken years to recover - and Jim Press, the architect of the modern miracle that is Toyota in the United States today, and “assumed” that they could just throw a switch and it would all be good, makes me question the sanity of the powers that be at Cerberus.

That the Cerberus brain trust was that out of touch and that detached from the reality of the situation is simply scary. There’s really no other word for it. Needless to say, the fact that things didn’t go swimmingly well for the Cerberus “dream team” was no surprise in the least. Assembling a team of alleged all-stars on paper doesn’t automatically translate into a winning performance, and Cerberus proved that timeless adage once again, but with dramatically painful consequences unique to its self-inflicted predicament.

To make matters worse, Chrysler’s public pronouncements have consisted of a particularly insidious form of overpromise, underdeliver bluster from the very beginning. Nardelli’s obnoxiously-tinged arrogance combined with Press’s incessant habit of lecturing the media about how super things are – as opposed to how truly horrific things actually were – wore thin months ago. And it seemed that the grimmer the sales numbers were for the domestic auto industry - with month after month of catastrophic results led by Chrysler’s shockingly dismal performance - the more the rhetoric by Nardelli and Press was ratcheted up. And the more Chrysler's credibility plummeted.

As a matter of fact as recently as two weeks ago, Chrysler was at it again, this time led by COO Tom LaSorda – a nice guy who has unfortunately been turned into the “Baghdad Bob” of the domestic auto industry by this Cerberus-orchestrated nightmare – extolling the virtues of Chrysler’s future electric vehicle program, a program that has little chance of happening in a future scenario of a Cerberus-planned exit strategy from the auto business.

The fact that this embarrassing smoke and mirrors, “it won’t be long now” public disinformation campaign has continued along unfettered - without even the whiff of reality emanating from Chrysler - has been absolutely reprehensible, in my estimation.

With all of this in mind, then, let’s talk about the so-called “merger.”

A disastrous scenario by any measure.

Let me get this straight right off the bat: The reality of a merger between GM and Chrysler would be an unmitigated disaster of incalculable proportion, one that would decimate both companies. You can spare me with the “economies of scale” argument (the darling rationale of “expert” analysts by the droves), too, because as logical as those arguments may be the fact of the matter is that putting two companies together that are already slumped against the ropes and gasping for air is sheer lunacy.

When you have one company that has too many models, too many divisions and too many dealers, how could you possibly think that combining that company with another company that has too many models, too many divisions and too many dealers would be a good idea?

I just about choked in my cornflakes reading as some pundits were extolling the size of the newly merged company, as if that would somehow justify all of the negatives associated with these two companies coming together.

It doesn’t. Not even close, as a matter of fact.

Besides, the “size” of the merged company wouldn’t resemble any of the estimates, not if any rational thought came into play.

Cerberus waves the white flag of surrender, now the real maneuvering begins.

No, the real meat of the GM-Chrysler talks revolved around Cerberus wanting out – and wanting out right now – of Chrysler. And if everyone would step back and let that thought percolate for a minute, then there might, and let me say that word again – might – have been some logic to a GM-Chrysler deal. But that deal wouldn’t have been a merger. Instead it would have been a takeover, with GM relieving Cerberus of control of Chrysler.

The important thing to remember in all of this is that Cerberus is privately admitting for the first time – despite its tediously embarrassing pronouncements to the contrary – that they are done with the car business.

The Cerberus obsession with Chrysler was akin to the dog in the neighborhood that liked to chase cars all day, until one day that dog actually caught a car. But then after finally catching a car, the dog doesn’t have the first clue as to what to do next. Cerberus caught its “car” in the guise of Chrysler, and armed with zero cumulative knowledge about the business, it demonstrated its relentless cluelessness and utter futility at every turn.

If there had been any agreement at all between GM and Chrysler, it would have revolved around GM taking control over Chrysler’s assets in exchange for the rest of its stake in GMAC. That way Cerberus would walk away with 100 percent of GMAC and GM would be left to sort out what to do with Chrysler’s existing operations.

GM’s interest in Chrysler: Why? And would it have been workable?

Why would GM have been interested in doing this if its situation is already beyond precarious? There are three reasons from GM’s point of view, actually (beyond the usual mention of cost savings). 1. To gain control of the Jeep brand, so it could be merged with Hummer (that is until Hummer is sold). 2. To gain control of Chrysler’s minivan franchise, and its engineering and development expertise in that segment. And 3. To prevent a major global competitor from gaining a major foothold in the U.S. market by taking over Chrysler and its dealer network. (Analysts have also mentioned Chrysler's $11.7 billion in cash on hand as a lure for GM, but even if that cash is verified, I remain highly skeptical that it's enough given the horrendous task at hand in figuring out what to do with the parts of Chrysler that GM doesn't want.)

It should be obvious that under any takeover scenario Chrysler would be gutted of people and nameplates. After all, the last thing GM needs is more truck and SUV capacity – or more cars to sell for that matter - so the likelihood of GM hanging on to the vast middle management bureaucracy of Chrysler, or its mediocre product portfolio, is slim and none. In short, GM would “cherry pick” only what it wanted from Chrysler, which means that the impact in terms of human capital would be absolutely devastating. How bad would it be? I estimate 80 percent of the current Chrysler workforce would have to be eliminated for any of it to work.

Even if GM had gained control over Chrysler and only took interest in Jeeps and minivans, would it have worked? From where I sit, no, because GM has been operating with a divisional structure that grew obsolete 25 years ago, while refusing to acknowledge the reality of its too many models-too many divisions-too many dealers conundrum. So, with GM already teetering on the edge of corporate disaster, why would they have wanted to add to the confusion?

Chrysler’s fate now etched in stone, as GM’s fate takes an ominous turn.

With Cerberus being “done” with Chrysler, the fate of the auto company based in Auburn Hills has been set. Within six months, Chrysler will be taken over or “parted out.” Either way, Chrysler will cease to exist as we know it by next spring, if not sooner.

As for GM, the fact that the company’s management is exploring all options at this juncture is telling. Yes, the national and global financial crisis and the paralysis in the credit markets have been brutal to Detroit in particular, but GM’s “talks” with other automakers smacks of desperation, there is no doubt about it. Especially with the news that GM approached Ford on the idea of a more formal, large-scale partnership (beyond the small technical partnership they already share in a few engineering areas) even before the Chrysler discussions, according to Bill Vlasic, reporting for The New York Times. Those talks went nowhere, as Ford wants to go on its own path.

As hard as it may be to believe, GM may be next up behind Chrysler to face elimination, consolidation or ruination. The first 100 years for GM blew by in a blur. The next twelve months, on the other hand, are shaping up to be an excruciatingly painful siege that could determine the very existence of the company.

Simply incredible.

And one final thought: To demonstrate just how crazy things are getting in the Motor City, I will bring forth a new scenario that’s emerging, and that is that the GM-Chrysler talks have ended for good (the word was that they were only put on “hold” due to the burgeoning financial crisis). Instead, GM has already moved on to renewed, serious discussions with Carlos Ghosn about the possibility of merging GM’s global operations with Renault-Nissan.

Needless to say, we have a developing situation here in the Motor City. I just hope we can survive the hysteria long enough to sort it all out.

Thanks for listening, see you next Wednesday.