Monday, March 30, 2009

Detroit Woes

The United States auto industry has fallen down and it can't get up. Well, maybe that's not true for Ford, but General Motors and Chrysler are certainly on death's bed.

Today President Barack Obama announced he has rejected both GM's and Chrysler's reorganization plans. Together they were seeking an additional $20 billion in taxpayer financing. Instead, GM CEO Rick Wagoner was shown the door by the White House. The fact that this caused shock in some circles is puzzling because Wagoner should have been fired long ago by his feckless board.

Wagoner has been at GM since 1977, and in charge of the company since 2000. He comes out of finance, not product design, sales or marketing. The first thing he did when taking over GM was to emphasize the truck and SUV markets at the expense of hybrids. Under his tenure GM bled money and lost market share. Strike one. He flew to Washington on a corporate jet late last year to beg Congress for money, and was skewered by critics for his insensitivity. Strike two. Wagoner submitted a restructuring plan to Washington in which he requested an additional $16.6 billion in government loans. GM has already received $9.4 billion in loans from Washington. But the President's Task Force on the Auto Industry concluded that GM had not met its promises and its new plan would fail. Strike three.

The President represents the taxpayers who have stepped up to the plate on behalf of numerous failing companies. I applaud his strong action with GM. Now a stronger board must be put in place and further management changes are likely. GM will then sell or discontinue product lines like Saab, Saturn, Hummer and maybe Buick. The company will focus on Chevy, Cadillac and GMC. To remain viable under any scenario GM must get contract concessions from the UAW and address significant legacy costs.

The President's Task Force was harsher on Chrysler, concluding that that the nation's number three auto company could never be a viable company. It urged them to merge with a partner. Chrysler has announced there is a "framework" for a deal with the Italian auto maker Fiat, though details have to be worked out. Chrysler's biggest problem was market appeal, as every one of their brands rated in the bottom quarter of customer preference. If the Fiat deal actually goes through Chrysler CEO Robert Nardelli is likely to become a short termer. The alternative is Chrysler goes bankrupt and sells off assets.

How did the U.S. auto industry get so out of whack? Today few Detroit brands have strong market appeal. The industry is burdened by inefficient operations, costly production, onerous labor contracts, and enormous costs associated with employee health plans and other benefits. Detroit has gone from industry leader to global laggard in three decades.

Nothing will change unless the Detroit culture changes back to what it once was, entrepreneurial, creative, innovative, market savvy and cost effective. This calls for visionary and strong leadership, as well as a smart experienced board.

Where is the Lee Iacocca of the 21st century? I know, I can do a search on Facebook!

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