Big Three Plans - Crisis is beyond Operations and Labor Relations

If you have the patience to read through them, I’ve provided the links to the Big Three bailout plans provided to Congress yesterday. The bottom line is that Ford is asking for 9 billion, GM 12 billion and Chrysler 7 billion.

I have focused a lot of criticism on the production and design side of the efforts made by the Big Three – especially in the light of providing what the customer wants – and have done this exclusively in the context of comparing them to Toyota. I’ve also been critical of the legacy costs induced by a less than amicable history between the unions and management. I don’t think this is unreasonable, but I have to remember that there is always more to the picture.

Like I said, we Leanies tend to (not exclusively – but are biased towards) focus on production and value added design – giving the customer what they want. How often do us Leaners talk about actually getting the cars into the owners’ driveway? I’m talking about dealerships. According to the NADA, the National Auto Dealers Association, there are 20,000 franchised automobile dealers in the U.S. So let’s take a look at the Big Three’s plans regarding their vast dealership networks:

Excerpts from Ford’s Plan:

“By year end, Ford estimates it will have 3,790 U.S. dealers, a reduction of 606 dealers overall – or 14 percent from year-end 2005 – including a reduction of 16 percent in large markets.”

After reading through Ford’s plan, they look profitable in 2011, but that means 9 billion in aid. That also comes at a cost to the dealers, suppliers, white-and-blue collar workers alike. In short, Ford may come out of this with some battle scars, but they will probably be best poised of the three to compete with foreign competition.

GM is less optimistic. Their financing arm, GMAC takes center stage in their report linking the effect on their 6,450 dealerships directly to their bailout plans. In fact, GMAC is seeking a path towards becoming a “full service, FDIC insured bank.” Of course, getting there will require bailout money according to GM.

From GM’s Plan:

“GM’s financing arm, GMAC, cannot effectively access the secondary markets today. One year ago, GMAC was able to provide either installment or lease financing for nearly half of GM retail sales. That number has fallen to 6% today. In addition, GMAC is no longer able to buy contracts for customers with a credit score under 700, which excludes roughly half the buying population."

"If GMAC is approved as a BHC, GMAC Bank would have an increased retail deposit focus, which is expected to provide a more stable and lower cost funding source to GMAC. As a BHC, GMAC would also have the ability, at the discretion of the Treasury, to participate in recent Government-sponsored liquidity and capital programs.”

GM also plans on reducing the number of dealers by 1,750 in the U.S. by 2012. This will give GM a total network size of 4,700 dealers.

So, GM’s plan is to reduce production capacity, increase productivity, reduce the burden dealers are putting on production and inject bailout cash into a newly created banking arm of GM in order to finance new sales. It makes sense, but will it solve problems in the long run? It sounds like it will get them through this credit crunch, but who knows? Shouldn't the Big Three have been trying to do these things all along?

From Chrysler’s Plan:

"At Chrysler, 75 percent of our dealers rely on Chrysler Financial to finance their business, and 50 percent of all customers finance their vehicle purchases through Chrysler Financial. With credit markets frozen, our customers – average working Americans – do not have access to competitive financing to purchase or lease vehicles…our dealers do not have access to market competitive funding to place wholesale orders for new vehicles…resulting in the constriction of cash inflows to the Chrysler."

Like GM, the center of Chrysler’s plan is around unfreezing credit, but their plan is a bit more digital in nature – either bailout us out or we will need to liquidate everything, production facilities, design centers, everything - including the 3,300 dealerships -through bankruptcy.

Bankruptcy

Despite requesting 9 billion in aid, Ford is far from discussing bankruptcy. GM and Chrysler have quite a bit to say about this option in their plan:

“Chrysler believes that the amount of DIP financing that it would need to remain viable even during a relatively short bankruptcy (just one year) would approximate $12 to $15 billion. And, even that estimate presumes that financing remains available for the company’s dealers and customers, which cannot be counted on given current market conditions.

“If financing for its dealers is unavailable from traditional sources during its Chapter 11 process (as Chrysler must assume would be the case), then Chrysler would need at least $5 billion of additional DIP financing just to support its dealers, pushing the expected total size of the year-one DIP financing need approximately $17 to $20 billion.”

Chrysler is asking for about USD 7 billion in its bailout plan. The company makes a good case that a bailout will cost less than bankruptcy. I don’t believe we will hear this bankruptcy financing fact in the mainstream media. If we do, many people will contend that the cost of bankruptcy is on Chrysler and not the customers. Just keep in mind that in our economy – ALL costs are ultimately passed on to the customer. Or, in the case of a bailout, the taxpayer.
Regarding bankruptcy, both GM and Chrysler are very concerned that a stigma will be attached to their products, they back this up with a study, rather than conjecture which the mainstream media specializes in (if you want a really sophomoronic article to read, check out Time’s article - they seem to be more worried if the Big Three are “sincere” [Chrysler predicts market penetration of 500K electric vehicles by 2013] about hybrid’s and if their private jets are being sold or not.)

“According to very recent market research (conducted by CNW Marketing Research), more than 30% of consumers who considered a GM vehicle and purchased a competitive product instead cited the possibility of GM bankruptcy as the top reason for not buying a GM product.”

So, this whole ball of yarn just keeps getting harder to unknot. The biggest problem at this point seems to be balancing demand with future production levels in order to compete with foreign competition – which is not out of reach - but in order to do so, the credit markets need to unfreeze.

It seems that thawing the credit market right now may provide a different short term outlook for the Big Three’s financing and dealership network. At the very least it will free up the credit needed for dealers to work with customers and perhaps stop the downward sales trend. But the bailouts do not seem to be slowing and with bailouts being thrown into the crowd like strings of beads at Mardi Gras, one has to wonder if there is any incentive to lend?

Sources:

NADA before Congress

Ford Plan

GM Plan

Chrysler Plan