Automakers Put the Pedal to the Metal
U.S. car companies are in for big changes at a breakneck pace, says Ross professor.
ANN ARBOR, Mich.—U.S. automakers worked hard to get a recent $17.4 billion loan from the Bush Administration, but now the real work begins, says Martin B. Zimmerman, the Ford Motor Co. Clinical Professor of Business Administration at the Stephen M. Ross School of Business. Automakers have no choice but to accelerate the pace toward a new business model in order to demonstrate they are financially viable by March 31, 2009, according to the government's terms. Fast-paced changes are required at nearly every level of the industry, from labor and manufacturing to suppliers and dealers. Zimmerman, former chief economist and group vice president at Ford, says President Bush was right to approve the loan – even after the Senate denied the bailout. And while some of the problems facing automakers are self-inflicted, Zimmerman argues that the extraordinary global financial crisis is what pushed the companies to the brink of near extinction. Q&A follows.
Even though the loan GM and Chrysler needed came through, it's clear these companies are going to go through major changes. What does the road ahead for these companies look like?
Zimmerman: If you go back, two things have coincided. One is the deterioration of the business model of the Big Three, which has been evident for a long time. To be fair, you'd have to say that over that last few years, they've made major changes. Even before they went to Congress, they shut a lot of plants, downsized their work forces, improved quality and productivity, and they negotiated a transformational labor agreement with the UAW. But what nobody saw was the intensity and the quickness of this financial collapse and the credit crunch. That means under any circumstance, they're going to have to pick up the pace and do things faster. They went to Washington for money so they can do that. Without it, they go into bankruptcy. The problem is that bankruptcy, in my view, would turn out to be a liquidation and not an orderly restructuring. I don't think the companies have received enough credit for the restructuring they've already done. Having said that, they're now really under the gun and they have to accelerate the restructuring.
Automakers have until March 31, 2009, to show they are viable. Are they going to continue more of what they've been doing, or will they undertake new strategies they didn't anticipate?
Zimmerman: Both. They're going to have to pick up the pace and probably do things they didn't anticipate. You already heard UAW President Ron Gettelfinger say he's willing to re-open the contract they just negotiated. GM is looking to trim some of its eight brands. The dealership issue is another thing automakers have to address. The market is addressing some of it because a lot of dealers are failing and going out of business. But I suspect the dealers themselves will be more willing to talk to the manufacturers about how to rationalize the dealership infrastructure and the shape of the dealer bodies and how they do that. The dealers are facing cash crunches. For shareholders there won't be dividends. Bond holders are looking at debt-for-equity swaps. Suppliers and labor also are looking at concessions. So you're talking significant changes coming at a fairly fast clip.
Were you surprised the Senate didn't get the bill through?
Zimmerman: I was surprised and I think that was a big mistake, both economically and, ultimately, politically.
After stating that it thought the Troubled Assets Relief Program (TARP) funds were for the financial sector only, why did the Bush administration reverse itself?
Zimmerman: The Bush administration reversed its position because it saw the high risk of letting GM fail under current economic circumstances. I suspect that both the Senate and the UAW stood firm in the end because they expected the Administration to act.
What kind of effect will the government oversight have, either in the case of U.S. Treasury Secretary Henry Paulson's oversight or another czar-type post in an Obama administration?
Zimmerman: Well, it's a necessary danger. I think it's only fair that if the taxpayers are putting up the money, they participate in a share of the gains if all of this works out. So I don't think there's a problem on that score. The question is, how deep does the government get into the management of these companies? In my mind, the way it should work is this: The government has the right to oversight, because the government is putting taxpayer money at stake. So that's fair. In a sense, what they should do with the auto companies is what rating agencies or banks would do in normal times. If you want this money, you have to lay out, completely, your financial situation and the assumptions underlying your business plan. Then we can evaluate whether we think those assumptions are good or not. You show us that plan, and if we think that plan is going to result in a successful business, we'll loan you the money. If not, we won't loan you the money. That's the kind of oversight I think could work. If they get down into making decisions and approving capital expenditures, I think it could be overkill.
You often see the "Detroit Three" lumped in together, but they all seem to be in a different position. Ford doesn't seem to need a government loan just yet. GM and Chrysler are in need, but some lawmakers wondered why Chrysler's private equity owner, Cerberus, hasn't stepped up. How does the government deal with that?
Zimmerman: Well, the immediate problem is that GM and Chrysler will be out of business by the end of the year unless they get a short-term infusion of cash. So you have to deal with that first. I think Ford isn't going to go for the short-term cash. Whether they ultimately have to access a government loan will depend on how the economy evolves. Right now the emphasis is going to have to be on keeping them going. I think transparency is clearly a requirement. GM and Ford are publicly traded and they have all these financial reports available. I think Cerberus has to come forward and present the same kind of transparent financial data. Some questioned why Cerberus was not willing to put up money. Cerberus and all the companies will have to give taxpayers warrants that will pay off if the companies are ultimately successful. Also, I think it is reasonable to put some risk sharing in for Cerberus. If Chrysler is forced to go into Chapter 11 ultimately, then Cerberus should share some of the risk involved in that. I think Congress was looking for a way to say that you have to share in some kind of downside risk here.
GM CEO Rick Wagoner is taking a lot of the blame here, with calls for his ouster from some if GM were to take government money. Why has it fallen on him and is it fair?
Zimmerman: I think it was John F. Kennedy who said that life isn't fair. Wagoner has taken the heat because GM is the biggest and because GM is in pretty dire circumstances at the moment. Also, he's been there the longest. The other CEOs, Alan Mulally (Ford) and Robert Nardelli (Chrysler), are new. Is it fair? I think what's getting lost in all of this is that Wagoner has been making a lot of progress in terms of shedding capacity and employment, getting quality up, and negotiating that deal with the UAW. I personally think this is such a complicated business that you want a guy who knows how to pull the levers and get it done and I think Wagoner does. I'm not sure the disruption of a new CEO right now would be a wise thing to do.
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