Detroit: The Road to the Final Two

Detroit is the center of the universe this week. The Final Four will take place there on Saturday and Monday evenings, with local team Michigan State fighting for the national championship. Yesterday, President Obama made a surprising announcement on the fate of the domestic auto industry.

Here is the Detroit Free Press this morning, Obama turns up the heat

WASHINGTON — President Barack Obama took charge of Detroit’s auto industry Monday, vowing to transform it into a world leader in fuel-efficient vehicles — but demanding a plan of action within two months.

Obama compared the decline of Detroit to a natural disaster, saying it deserved the same kind of emergency attention. But he warned that, within 60 days, General Motors Corp. and Chrysler LLC would either be on a path to independence or on their way out.

What kind of businesses are we talking about when it comes to GM and Chrysler? What are we looking to potentially invest endless billions in? The picture is pretty grim, according to Consumer Reports 2009 Auto issue,

Overall, the Detroit automakers build just 19 percent of our Recommended vehicles.

Consumer Report ranking of Top 15 automakers
#14. GM: “GM has made big strides wth good performers. But too many older models drag t down. Reliability is not consistent.”

#15. Chrysler: “Chrysler, which tied with Suzuki for last place in our 2008 ranking, fared even worse this year. No Chrysler, Dodge or Jeep vehicles are recommended this year.”

Back in December I wrote that, a managed bankrupcy is the only solution that makes sense. Yesterday, for the first time President Obama signaled just that,

President Barack Obama warned that saving GM and Chrysler — if it completes a deal to link up with Italy’s Fiat — may require using bankruptcy “as a mechanism to help them restructure quickly and emerge stronger.”

“Our strong preference is to complete this restructuring out of court,” GM said in a statement after Obama’s speech. “However, GM will take whatever steps are necessary to successfully restructure the company, which could include a court-supervised process.”

Glad to hear that, although I don’t quite believe it. Remember, with Obama, there is a huge difference between his words and deeds. David Brooks, who recently had his Obama awakening, is skeptical that Obama has this fight in him,

And yet by enmeshing the White House so deeply into G.M., Obama has increased the odds that March’s menacing threat will lead to June’s wobbly wiggle-out. The Obama administration and the Democratic Party are now completely implicated in the coming G.M. wreck. Over the next few months, the White House will be subject to a gigantic lobbying barrage. The Midwestern delegations, swing states all, will pull out all the stops to prevent plant foreclosures. Unions will be furious if the Obama-run company rips up the union contract. Is the White House ready for the headline “Obama to Middle America: Drop Dead”? It would take a party with a political death wish to see this through.

He is right to be skeptical. Obama has never stood up to powerful interests. He has never shown that kind of political courage. Those, like Brooks, who said Obama could be a transformational leader were doing so on the basis of one thing. Hope. There is simply no record of political courage on his resume.

One of conservatives biggest criticisms of bailout mania has been government interference in private markets. Many oppose this notion of protecting and propping up failed institutions. They argue that is a bad approach and the best way is to the let the market sort these things out. Sink or swin on the merits of the business. As Detroit is finding out, that philosophy is much easier to implement with a manufacturing company than it is a financial services company.

If President Obama is truly serious about a managed bankruptcy, Republicans should get behind him 100%. A managed bankruptcy means inviting an epic battle with the United Auto Workers. Obama, if serious, will be taking on the unions in a way no Democrat has done in generations. He would be allowing market forces to work. These company’s stink. Their costs are permanently misaligned and their products for the most part do not compete. This seems to me the best of a bunch of bad options. If Obama goes through with it, it is time to support him.

If he retreats in the face of withering criticism, well, that’s just Barack being Barack.

UPDATE: Holman Jenkins has a great piece in the WSJ today. He’s says no way will Obama stand up to the UAW and he expalins why.

A Toyota and GM compare and contrast

Yesterday’s Toyota Headline: Toyota Expects Its First Loss in 70 Years

Today’s Toyota Headline: Toyota to Change Leader Amid Sales Slump

Rick Waggoner was promoted to CEO at GM in 2000. Seven years later, he led “The largest annual loss in the history of the auto industry.” And that was last year! He is still CEO today.

GM stat of the day

Another mind blowing stat of the day from the outstanding blog Crossing Wall Street,

In 2007, Toyota sold 9.37 million vehicles.

In 2007, General Motors sold 9.37 million vehicles.

In 2007, Toyota made $17.1 billion.

In 2007, General Motors lost $38.7 billion

A managed bankrupcy is the only solution that makes sense.

What exactly are we bailing out in Detroit?

In the mail this week, my Consumer Reports 2009 Buyer’s Guide. I took a look at the auto section and a few things were clear immediately.

Best of the Best 1998-2007

Acura Integra, Acura MDX, Acura RL, Acura RSX, Acura TL, Acura TSX, BMW M3, Buick Lacrosse, Honda Accord, Honda Civic, Honda Civic Hybrid, Honda CRV, Honda Element, Honda Odyssey, Honda Pilot, Honda S2000, Infiniti FX, Infiniti G35, Infiniti I30, Infiniti I35, Infiniti QX4, Lexus ES, Lexus GS, Lexus GX, Lexus IS, Lexus LS, Lexus RX, Lexus SC, Lincoln Continental, Linsoln Town Car, Mazda Millenia, Mazda MX-5 Miata, Mazda Protege, Mazda3, Mitsubishi Endeavor, Mitsubishi Outlander, Nissan Altima, Nissan Maxima, Nissan Murano, Pontiac Vibe, Porsche 911, Scion tC, Scion xB, Subaru Baja, Subaru Forrester, Subaru Impreza, Subaru Legacy, Subaru Outback, Toyota 4Runner, Toyota Avalon, Toyota Camry, Toyota Camry Solara, Toyota Celica, Toyota Corolla, Toyota Echo, Toyota Highlander, Toyota Land Cruiser, Toyota Matrix, Toyota Prius, Toyota RAV4, Toyota Sequoia, Toyota Sienna, Toyota Tundra, Volvo S60

Out of 63 “Best of” cars, only four were American-made. That’s 6.3%.

Worst of the Worst 1998-2007

Buick Rendezvous, Buick Terraza, Chevy Astro, Chevy Blazer, Chevy Colorado, Chevy S-10 Pickup, Chevy Uplander, Chevy Venture, Chrysler Town & Country, Dodge Grand Caravan, GMC Canyon, GMC Jimmy, GMC Sonoma, GMC Safari, Jeep Grand Cherokee, Kia Sedona, Land Rover Discovery LR3, Lincoln Aviator, Mercedes SL, Nissan Armada, Olds Bravia, Olds Silhouette, Pontiac Aztec, Pontiac G6, Pontiac Montana, Saturn Relay, VW Cabriolet, VW Jetta (turbo), VW Jetta (v6), VW Touareg

Out of 33 “Worst of” cars, 22 were American-made. That 66%.

Cerberus’ Snow Job

So GM and Chrysler are next in line with their hand out, asking for $10 billion from the taxpayers to fund a merger between the two companies. I sure don’t see the logic of combining one crappy company with a really crappy company but nobody asked me.

Should the government help the auto companies? Not Chrysler, which is owned by Cerberus Capital Management LP, a private equity firm run by former Treasury secretary John Snow. Cerberus’s portfolio companies generate revenues of more than $60 billion a year. They put up only $500 million of the $12 billion they paid for Chrysler, the rest was put up by investment banks.

Cerberus takes control of Chrysler today

August 3, 2007. Today is the day that Cerberus Capital Management LP takes an 80.1% controlling stake in Chrysler, leaving DaimlerChrysler a minority 19.9% share. The “merger of equals” that took place back in 1998 has officially ended, and Chrysler is now a privately-held company with a wide open future. Much ado was made about the difficulty in financing the deal and Chrysler’s turnaround effort, but it appears the original amount of $12 billion has been secured. Around $10 billion will come from investment banks, while Cerberus will throw in $500 million and DaimlerChrysler $1.5 billion.

Actually, it was an even better deal than that for Cerberus,

Cerberus’ winning bid is, rather than the highest price, more like the proposal that will cost Daimler the least. “DaimlerChrysler is paying Cerberus to take Chrysler off its hands,” says David Healy, auto analyst at Burnham Securities.

And now they want you and I to take Chrysler off their hands? This is really another bailout of Wall Street investment banks. I’m sorry fellas, but $700 Billion will have to be enough for now.