President Bush's agreement to provide the $17.4bn bridge-loan from TARP coffers to GM and Chrysler has answered both company's previous Thanksgiving prayers. $4bn goes to Chrysler and $13.4bn to The General. To slightly confuse matters, the monies are split between December and February payments to both parties in similar amounts - $13.4bn now and $4bn later.
So, Christmas has indeed arrived in Detroit, providing everyone from CEO's to track-workers a reason to breath a temporary sigh of relief, George W. Bush acting as a much needed and awaited Santa Claus, giving provision for both companies to maintain operations whilst devising individual, or possibly inter-dependent, viability plans.
Santa has indeed arrived, but there is now much deliberation regards the level of conditional constraint tied to the low cost loans. There are Clauses to Santa's proposition, but exactly how onerous – indeed 'company & sector trans-formative' – are those clauses?
It has already been aired in the press that the primary intent of the out-going President's actions are to simply 'pass the buck' to the incoming Obama administration, having to deal with multi-stakeholder negotiations, and to provide enjoy the 'final days public glow' of such a action.
Although the deal is theoretically orientated around Congress' previous turn-around action and reporting demands, reported portions of the released wording of the loan agreement, and a summarised White House Fact Sheet, indicate a fair degree of leniency has been written-in to provide flexibility as to how GM and Chrysler report their progress paths to commercially viable entities. That, we suspect, means that deviation from the previously set-down quantitative targets will be permitted if sound reasoning can be proffered.
But, of course the real issue will be for Congress to understand every dimension of the business and its operational and sector inter-dependency. I has previously heard the rhetoric, but now it must investigate the numbers in detail. From the realistic operational limits of capacity reduction that still enable a sustainable supplier feed, to the impact of the still sizable labour & legacy cost content in UAW plants now that the last-in/first-out low-cost $14 UAW newbies are being retrenched, all of which along with general fixed and variable overhead creates the plant-operation break-even that is so important in determining the ex-factory per unit price and margin.
And this must be set against the benchmarks of other foreign automotive operations in the US and globally, both within the GM and Chrysler corporate folds and more importantly the productivity gap between the GMNA and Chrysler NA and the rest of the world.
Thus it will be the remit of Congress to request that Wagoner and Nardelli demonstrate the 'fair and true' 'economic floor' of GM's & Chrysler's innate business models within North America. For it is only be by highlighting the disparity between NA and RoW that rationality regards the sector's next steps can be undertaken.
Whether that inter-mediate wording is called 'Leeway' or 'Loopholes', the matter appears almost academic for now as the sector sits in effective suspended animation over the coming three months.
Wagoner and Nardelli will of course be in deep negotiation with UAW, supplier, creditor and investor stakeholders. Both are undoubtedly respected and determined men that have demonstrated resolve in their achievements to date, especially so with the UAW – which thanks to Gettelfinger's mediation efforts has recognised the problem and provided for steps of much needed change (such as the VEBA and its malleability).
The problem is that those steps are in real (ie globally competitive) terms too small too late – even if they appear drastic to conventional UAW expectation. Had they come earlier, during better times in recognition of the productivity gap that would be exposed during worsened periods, the industry would be in better health and better able to respond to this unfortunate economic turn of events. But of course the UAW are only one dimension of what is a seismic problem.
Creditors and Investors are the other other prime parties to convince that a sustainable turnaround is viable, ideally with their assistance by 'taking a (financial) hair-cut' and becoming more commercially integrated in the process with the issue of debt for equity swaps. This initiative ideally puts all parties in the same boat for the long-term, but in the short-term could be viewed as pitting the interests of present-day investors and creditors against each other as the common-stock bases of GM and Chrysler are diluted.
Ironically such a move could well see the re-integration of parts-makers with VMs as cross-shareholdings such as GM-Delphi initiate closer mutual interests. If that ultimately means a negotiation path to the creation of a new and broad Tier 0.5 supply-base, expanding the responsibilities of present Tier 1s to ultimately provide an independent low-cost vehicle assembly base...all to the good. But if it simply means the creation of expansive 'apparently synergy seeking' dual-control empires which invariably become self-centred, pressure-removed and uncompetitive then...all to the bad. The industry has been here before, and it is not a routemap with which investment-auto-motives can concur.
More than ever the US supply-base needs a transformation to a new lithe and intelligent industry structure, one that is investor transparent and trend-reactive, not a re-visit to the eventually failed mega-structures of the past, whether the Fordonian vertical consolidation of the 1920s or the British Leyland-esque horizontal consolidation of the 1970s.
Thus whilst Wagoner and Nardelli will undoubtedly work hard to align stakeholder interests, and endeavour to head an unofficial task-force for change comprised of sector CEOs, CFO's & COO's, we suspect the size of the challenge and the non-availability of critical turnaround levers to informally achieve such change (ie massive liquidity, UAW & dealer regulation, reformed supply-base structure and concordent investor confidence) means that it would be a Herculian task and miracle to do so by March-end.
It will be Obama's official economic task-force comprising of Volcker et al that will be ultimately handed the responsibility to oversee and question the autonomous re-alignment of Detroit's No.1 & No.3 players. And to importantly lay out an industry policy and plan that can attract domestic investment and critical FDI monies from massive US$ reserves held in the Middle_east and Asia. This would create a latter-day round of $ repatriation, once the currency's FX valuation vs the Euro, Rem nimbi, Yen & Rouble falls back to historic norms. Such an event also encourages greater international technology trade that will be so important to the Greening of Detroit, and encourage the public's conviction to believe in a much transformed US Autos sector and related automotive 'value' and 'growth' stocks.
That is some time away, but the sooner the size of the challenge is understood, and an Auto-Plan created and executed the quicker the sector's upturn can come.