Car Czar BS: Once Again DC Proves It Doesn’t Know The Facts

The Car Czar. A person tasked with overseeing the intricate operations of the Big 3. The Car Czar. A person, very likely with no car experience, who is tasked with insisting that GM and Chrysler meet what could be an unmeetable goal. A missed opportunity that could be revived by March 31, 2009 is presented at the end of this article.

Here’s the definition of success according to senior administration sources published in Comcast Business Daily (ABC reporting):

The agreement spells out a strict definition of “viability,” according to the official. The companies must have “positive net present value, including all present and future costs.”

Break that down to financial reality and it means all the legacy costs plus operating expenses plus car sales to dealers must be in a ‘positive net present value, including all present and future costs.”

  1. GM’s President at the last Congressional Hearing said GM was current on legacy costs as of 9.31.08. Since then sales to the public have plunged and credit requirements to buy or lease a car or truck have skyrocketed. Dealer flooring lines, the lines of credit that allow them to buy their inventory have been withdrawn or frozen. The dealers can’t sell many cars and can’t replace the one’s they sell.
  2. If GM and Chrysler can’t sell cars to their dealers they can’t create revenue that will allow for their operating costs and legacy costs to be met on time.
  3. The largest of the legacy costs has always been health care. The UAW has reached an agreement to take over those costs, thereby eliminating billions of liabilities from the car makers balance sheets, upon the payment, in the case of GM, $9 billion to the union. For $9 billion GM eliminates multiples of that expense. GM’s balance sheet will jump with the elimination of this legacy liability.
  4. The UAW take over is predicated on the payment of $9 billion to the UAW. Absent the ability to make that payment GM’s balance sheet will continue to look ‘unbalanced’. Where is the $9 billion going to come from if GM can’t borrow in the credit markets, create sales to their dealers or pledge assets, including stock and stock options, in exchange for an equity investment?
  5. Do we honestly believe that by March 31, 2009 we will have recovered from this recession and demand for cars, of whatever size, will boom? No thinking person, particularly one looking for a job or who is underemployed, would believe that’s possible.

This addresses GM only. Chrysler, fresh from a disastrous merger with Damiler-Benz, is in a worse position than GM. Chrysler has fewer assets to pledge. Yet if we look into the future only two model years we find that Chrysler will fill a minimum of two of their plants manufacturing two of Renault-Nissan’s models on the Chrysler assembly lines. Would having a minimum of two more plants operating at full capacity add to Chrysler’s balance sheet? Of course. Will it happen by March 31, 2008? Of course not.

(more on the Myth that Detroit only manufactures gas guzzlers on the flip.)

The Myth that Detroit only manufactures gas guzzlers.

Just using GM, here some some realities: (EPA Estimates)

  • 09 Chevy Aveo 34 mpg hwy
  • 09 Chevy Cobalt 30-33 mpg hwy
  • 09 Chevy HHR 20-32 mpg hwy
  • 09 Chevy Malibu 29-33 mpg hwy
  • 09 Chevy Malibu Hybrid 34 mpg hwy
  • 09 Chevy Impala 22-29 mpg hwy
  • 09 Chevy Corvette 20-26 mpg hwy
  • 09 Chevy Colorado Pickup 21-24
  • 08 Chevy Uplander 23-23
  • 09 Chevy Equinox 24-24
  • 09 Chevy Traverse 23-24
  • 09 Chevy Trailblazer 16-21
  • 09 Chevy Tahoe Hybrid 20-21 city 20-22 hwy (only hybrid therefore the city rating is important.)
  • GM has announced it will offer 12 Hybrids by 2012 and will have reduced it’s number of nameplates to just 40, from 51, by 2012.
  • GM has announced a $750 million investment in the electric Chevrolet Volt and has said it will is designing other cars that will use the Volts long range platform.
  • GM will offer 15 Hybrids by 2012. They also said they will cut dealership from today’s 6,450 to 4,700.
  • Over the next four years, GM said it plans on “introducing this [U.S.] market’s smallest four-passenger vehicle, achieving higher fuel economy than the two-passenger Smart Fortwo, the most fuel-efficient non-hybrid vehicle in the U.S. market today.” The EPA says the 2009 Smart Fortwo returns 33 miles per gallon in city driving and 41 mpg on the highway.

This uses just one of the Big 3 as an example of inaccurate ‘Conventional Wisdom’. GM is building high mileage cars. Or at least high mileage cars as defined by the current car building climate. Notice that the Chevy Tahoe Hybrid has exactly the same EPA mileage quotes as the Toyota Camry.

Yet the true commonly accepted nonsense is using the $15 billion loan to force the Big 3 to redesign their product line. They are already doing that at as high a speed as possible. It takes any car company, Honda and Toyota included, 2.5 to 5 years to create a new vehicle. If they are building off a platform that already exists then the time frame is shorter. If they are creating a new platform then the time frame is longer. Imaging creating a new platform with a new electric power source, with batteries that aren’t yet reliable, that hasn’t be used in nationwide distribution previously.

There is no doubt there has to be oversight of the two car makers that are going to take federal funding. Executive compensation and other issues have to be addressed and supervised. Yet demanding the impossible, designed solely but President Bush to push the car markers into bankruptcy, is misguided and self-destructive.

The Congress should have been in furious discussion with all the Wall Street firm that received hundred’s of billions of dollars to form a syndicate, as they routinely do, and offer the needed credit facility/equity investment agreement to Detroit. It is the lack of this credit/equity investment for the car makers, the dealers and the consumer that has lead us to the brink of a possible financial catastrophe.

Why wasn’t the obvious move started in November? Why weren’t the CEO’s of these Wall Street firm’s called to a meeting in Washington and slapped upside the head by all, repeat all, the leaders in Congress? I don’t know.

Yet there is time between Jan. 20, 2009 and March 31, 2009 to accomplish that very task. Banks, investment companies and Wall Street conduits could put together a longer term credit/equity facility that addresses all the issues on the table: Operating capital, dealer financing and realistic consumer financing so people can buy and lease vehicles. These types of multi-lender/equity investor syndication’s are routine in the financial world. With truly large projects a single lender/investor would not take all the risk. That risk would be spread around by taking in other partners.

Why hasn’t a syndicated lender/equity investment plan happened with the Big 3? The Congress hasn’t tried. It’s a viable plan. Someone should at least try and make it happen.

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6 Responses to Car Czar BS: Once Again DC Proves It Doesn’t Know The Facts

  1. Stuart

    I think what irritates most people about this “bail-out” of the big three is that they are years behind foreign cars in technology and quality. Yes in the past couple of years they have started working towards greater fuel efficency but only after years of lobbying towards that.

    Look at this list –

    There is only 1 American car on this list. We have a long way to go… the Big 3 should have listened to the calls for great fuel efficiency years ago and they would not be in this mess IMHO.

  2. When you’ve got 13 models listed above that get over 20 mpg and 5 that get over 30 mpg I think the product line is turning around very quickly.

    We can’t deal with the past only the present and future.

    Just GM has 15 Hybrid models out in 3 model years, (not the same as calender years). Ford has the Ford Escape Hybrid for 3 years I know of as a friend owns one. Even the Toyota Prius Hybrid doesn’t get as good a hwy mileage as a basic Honda Civic.

    Things are progressing and hindering them by destroying their financing is just a disaster waiting to happen.

  3. Stuart

    The Prius does get 48 CITY – 45 HWY and far out ranks the basic Honda Civic in HWY mileage.  

    The point of looking at the past is that the past is what got the Big 3 in trouble in the first place. They refused to move to the present and future are foreign automakers have.

  4. I repeat. We can only deal with what we have and move forward or we can focus on the past.

    I know 5 Prius owners. All are happy with their car except that guy that had to have a $3000 battery replaced on his nickel…But NONE of them have gotten the EPA mileage.

    And I don’t care. You can’t fit a family in the Prius. You can’t do anything that requires a .little space like go to Lowe’s.

    It’s a specialty product that does a fine job that it was designed to do. It’s not a product that can be useful for a majority of Americans.

    We need to build a line of cars that can have variety and multiple designs for multiple uses. That list above shows we are headed in the right direction.

    All the anger in the world at the past is ineffective in the present or the future.

  5. Stuart

    No anger towards the past from me, I just think the American car makers dropped the ball a long time ago and now they are suffering – better put the workers in the industry are suffering – the CEO’s aren’t wanting for a darn thing however.

    The Prius, is no smaller inside than a few on your list above, which I am sure you know. It’s great the Big 3 is now willing to play catch up. We’ll see how they do matching foreign cars for mileage, quality and value.