Line-by-Line Analysis of the Obama Speech on the Automotive industry from March 30, 2009
GM/Chrysler and Obama
In the first place, Obama is right, though the rhetoric is decidedly populist, downplaying the performance of CEOs from the Big 3 (rightly of course), and promoting the efforts of ordinary Americans. Obama is right that the industry must stand on its own but he needs to address upfront that the industry is trying to operate using tired practices in tumultuous times. The Auto Task Force (or ATF as I will now call it) must realize that the problems the Detroit faces are only partly their own. It is still true that a person can only change their own habits, not others, but the ATF has a special task ahead of it, changing practices in a multi-industry downturn.
The next paragraph compliments GM for producing the Chevy Malibu, which right perhaps, received the nod for North American car of the year. But in the next sentence he go on to hail Buick of all entities as the most reliable car IN THE WORLD. You must be having a laugh. This web site has debunked these ratings in the past, but this author has never sat in a Buick that functioned properly. Something is always broken. The stereo. The windows. The suspension and ride comfort. There are a great many people who liked the bench seating in Buicks of old, but these tend to be the same people who would rather be sitting in a la-z-boy than a car.
The President goes on to discuss the decision to extend yet again the period for the automakers to restructure. GM gets two more months, while Chrysler gets 30 days. The problem with this approach is that it forces government to keep perpetuating the same failed leadership decisions. To deal with this criticism Obama notes that he has forced the departure of Rick Wagoner, GM’s Chairman and CEO, and someone who should have resigned some time ago, certainly before crisis hit in 2008. Then Obama does something, which should prove troublesome. He appoints an insider to run the company as interim CEO. Fritz Henderson gets the nod. A shrewder move would have been to insert someone with a record of accomplishment of success in breaking up companies. Henderson has served at GM during a time when the company got increasingly bloated, and the portfolio became a tangled mess.
What of this change? What good will brining in Fritz Henderson do for the viability of the company?
Next Obama goes on to ask the question, does the GM proposal do enough to consolidate the unprofitable marques. The answer is obviously “no”. In fact, the proposal generated by GM did nothing to immediately liquidate assets for any of the brands, including Hummer, Saab, and Saturn, which are the first to go. GM is undoubtedly looking for buyers, but what happens when they cannot find buyers? You guessed it, more bailout money.
Obama then goes on to say that a shakeup of large proportions must occur at GM and he is right. Beyond the KM will post an editorial on this later, but this will involve reshaping and axing some GM divisions. A GM of 10 million+ cars per year is not viable, and it certainly will not prove do be as-is even into the future.
Obama then speaks about the perilous situation for Chrysler, the other major American automaker propped up by government monies. Obama is giving Chrysler 30 days to come to a sort of co-operative agreement with Fiat. We know that Fiat is interested and Sergio Marchionne (and dual Italian-Canadian citizen) the CEO believes that consolidation is necessary throughout the industry, but he says there is only a 50 per cent chance of an agreement. Why? He says that it comes down to union concessions. He argues that for an agreement to become reconciled, the unions must change their way of thinking and agree to drastic concessions. Marchionne is right of course, but so what? Where is the willpower in Detroit to drastically reform the unions? How could this happen in the next 30 days? The answer is that it probably will not under the direction of Ron Gettelfinger, the current United Auto Workers union president. If the President of the United States can and has demanded the head of one party in a difficult financial negotiation, you can believe that the other side must also see change.
In the next section of his speech, President Obama addresses the stigma attached to bankruptcy. Specifically he lets us know that a GM or Chrysler bankruptcy will not lead to years of court proceedings. Indeed, such a scenario would effective ruin any chance of rebuilding cash flow as management will face difficulties in instituting change and consumers will not buy cars that have no sure footing.
Obama addresses this last issue by guaranteeing warranties for GM and Chrysler products, a move this is controversial if backward. The aim is to reassure buyers, but why would the government, and HOW would the government guarantee this? Would that not automatically mean that the government plans continued investment in the auto industry for many years to come?
Rightfully, bankruptcy seems nearly a foregone conclusion. The advantages are many, and it could lead to a strong corporation. Speaking of strength, a strong company will mean strong sales. GM’s new CEO Fritz Henderson said on Meet the Press after his appointment that he did not expect government to prop up sales, rather consumers should have choice in which car to buy, and it is up to the company to produce great products that people will want to buy. And it is this philosophy that may contradict with Obama’s who plans to accelerate government purchases of GM’s and Chrysler’s cars. Are these cars really the best? Sales are sliding, and that is an indication that GM and Chrysler are not producing the best cars out there. So why would government choose to buy sub-par products? Are GM and Chrysler cars good enough for government but not the consumer? The government needs to consider purchases more carefully.
Obama then announced a program to provide tax benefits for any car purchased between February 16h and the end of 2009. These benefits would potentially allow you to deduct the cost of any sales and excise taxes. It would seem this could save consumers a lot of money, though this does come at a cost. Perhaps a better plan would be to increase benefits for environmentally-friend purchases. Obama rightly points out that several members of Congress have proposed this, having seen a similar plan’s success in Europe.
In what is becoming Obama tradition, he has assigned a sort of czar to manage a new program. The title is Director of Recovery for Auto Communities and Workers. Former Deputy Labor Secretary Edward Montgomery will serve as Director. Obama specifically points to the program as helping those in Michigan, Ohio, and Indiana (the Rust Belt), and any other state that has auto workers, so that is most of the country.
Obama closes by asking America to return to ingenuity and resilience, and now is certainly the time to ask. Unlike the financial service industry, which in some cases has gotten a free pass, the automakers, the workers, and suppliers are all in this together. For that matter the country is in this as well. Billions of tax dollars at stake, and it is up for all of us, including this author to offer support and ideas for making the industry a viable one.