Does this Worry You?

I‘m one of the first folks to argue that government intervention is necessary in a failed market and is usually a positive thing.  There are several US markets that need rebooting and government oversight and participation is the only way.  In my opinion, the markets for health care, financial services, and transportation are all pretty messed up.  There’s always this fine line, however, between rebooting a market so that it works again and booting the failed market deeper into a hell realm.  That’s why I’m concerned about the auto industry.  While the financial markets have been assigned to limbo, the automobile industry appears to be waiting in purgatory for the final blow.

I have to say that I’m mostly displeased about the way government has been handling the auto industry in this country.  They have ignored the foreign owned plants which also contribute to our GDP and create local jobs and suppliers.  They initially wanted to drag Ford, which is relatively healthy, into the bailout equation.  They extended loans in the fall with nearly everyone knowing that they were stopgap at best.  I believe this was because of the election and neither party wanted to compromise seats in states with UAW, creditors, and small businesses dependent on the industry. The Bush administration punted.  The Obama administration has a fair catch but appears unable to to move the ball forward.  They’ve called a time out. They’ve replaced one of the coaches, mid-game. They’ve put in referees that primarily represent creditors.  I own some Ford stock so I have a bet on this game and I can’t stand it when the rules and the players are changed while the action is still on.

The car business  just appears to be getting worse.  We’ve learned that investment bankers have generally screwed the pooch in just about every recent endeavor, yet Obama has put one  in charge of the GM and Chrysler ultimatums.  The first move, seen last week, was quite investment banker-like.  Chrylser is being married off to a perceived white knight, Fiat.  GM’s CEO was told to walk the plank.  At first I wasn’t sure if POTUS was just trying to challenge Donald Trump’s standing in TV ratings with the District version of  “You’re Fired!” or trying to remove public attention from AIG anger.

Obama also announced (Treasury Secretary Geithner by his side) a series of initiatives meant to calm potential US auto buyers.  Will these cheer up already nervous American consumers?

He also announced several steps to reassure consumers, and improve the chances that U.S. automakers will be able to sell their cars and trucks. The president said the government will now stand behind warranties issued by the carmakers, a sweeping new guarantee that some in Congress had sought.

He also noted that the economic stimulus legislation he recently signed allows the purchasers of new domestic cars to deduct the cost of any sales and excise taxes.

Obama said this provision could “save families hundreds of dollars and lead to as many as 100,000 new car sales.” He also said funds ticketed for the purchase of new vehicles for government agencies would be spent as quickly as possible.

It will be interesting to see exactly how the market handles these moves.  Today’s Market Watch announced that both Ford and GM had experienced Sales declines in excess of 40%.  Chrysler, Honda and Toyota also experienced declines but not to that extent.

“Despite some improvements this month, we just don’t expect to see a big recovery this year,” Edmunds.com analyst Jesse Toprak said. He added, however, that there’s now more upside to his 2009 sales target of 10 million vehicles than there is downside.

The monthly results, no matter how promising, take a back seat to further speculation as to what’s next for GM. With the CEO Rick Wagoner gone and a new deadline imposed by the White House, viability concerns are again dogging the company.

“Bankruptcy risk is real and running higher than ever for GM and Chrysler, even though the automakers and the government will do whatever it takes to avoid it,” Toprak said.

Still, President Barack Obama reportedly said he believes a “quick and surgical” bankruptcy for GM is most likely the next step.

So, that’s what we’ve seen to date, but what worries me is what comes next.  We’ve just had the US government basically remove a CEO and several board members of one of the largest companies in the US.   What role will the US government play in the future?  How will they influence the pick of a new CEO and new board members?  What exactly will be their priorities?  Will it be corporate governance changes?  More efficient operations?  Payment to creditors above all us?  Fair dealings with the unions?  This is unprecedented territory and I’m not sure we can actually speculate about this.

Today’s Washington Post has brought the topic up.  What does it mean to give the government control over a major US manufacturer?

The president’s auto task force plans to consult with the company as it replaces a majority of its board, a White House official said. The board today largely consists of the current and former chiefs of major U.S. corporations such as Coca-Cola, Ernst & Young, Pfizer and Eastman Kodak. It is not known which of the 12 board members will leave.

The president said Monday that “the United States government has no interest in running GM.” But in practice it is already exerting tremendous influence over it, a situation that has triggered fierce debate over how much power the government should wield over the companies that it aids.

Kent Kresa, 71, GM’s new chairman, said yesterday that company officials will seek to replace a majority on the board by August, as the automaker moves to restructure operations.

Downsizing GM means downsizing supply chains and dealer networks.  It means deciding which small town keeps its

Goverment Motors?

major employer and which small town dies.  It means one little league team will keep its sponsor and another one will have to look for another.  I’m the daughter of a retired Ford dealer raised in small town, middle america.  My dad was head of the local chamber of commerce at one time.  He also served as chair of the United Way Fund drive.  We employed a large number of people in our small little Iowa town.  I was trained by Dr. W. Edwards Deming in the 1980s to go around and help auto suppliers in small town Nebraska and Iowa implement SPC to keep their GM and FORD contracts.  These are towns that are totally reliant on one or two little manufacturing units.  Which town will live and which town will die?  Who is going to decide and on what basis?

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