If executives from General Motors Corp. (NYSE: GM), Ford (NYSE: F) and Chrysler can make it from Detroit to Washington in their hybrid vehicles by tomorrow, they’ll plead for $34 billion — up $9 billion from two weeks ago. You should not give them what they want. Instead, I recommend you let GM and Chrysler merge — if you can convince Nissan CEO, Carlos Ghosn, to run the combined company. Ford will be fine on its own — you should grant it the line of credit it requests.
A few weeks ago, I proposed a six step restructuring plan that would save $16 billion and help a combined GM and Chrysler to survive. To put that plan into effect, there is no question that the managers of GM and Chrysler must be replaced by an auto executive with a track record for turning around an ailing competitor. That’s what Ghosn did when he took over Nissan after it merged with Renault in 1999, where he was a VP. Ghosn won many small victories against an entrenched Nissan bureaucracy to revive the Japanese automaker. Ghosn is just what GM/Chrysler needs.
Make no mistake, this is not an industry to which it makes economic sense to lend money. Bankers need to get repaid from the cash flow that a business generates either from operations or by selling assets. With sales plunging — GM’s fell 41.3%, Ford’s tumbled 30.5%, and Chrysler’s crashed 47.1% — there is no operating profit likely here. And demand for purchasing their assets — such as GM’s Saab or Ford’s Volvo — appears to be weak.
Nevertheless, I think you should consider Ford’s proposal more seriously than the ones from GM and Chrysler. Ford wants a $9 billion line of credit. This would give Ford the option of drawing on the money which it does not plan to do. Ford seems to have the cash needed to get to profitability by 2011. A line of credit is risky because there is a chance that Ford will draw down the money if its projections prove overly optimistic. But Ford seems to have managed its business more conservatively and thanks to the push from its executive Chairman Bill Ford, it is further along in fuel efficient vehicles.
As for GM and Chrysler, the first thing is to replace their managers since neither CEO has accomplished much beyond driving the companies into a ditch and trying to scare you into giving them money without proposing a credible path to profitability. GM’s demand for $4 billion and Chrysler’s bid for $7 billion to enable them to survive December indicate just how badly their respective CEOs have managed these companies.
A CEO such as Ghosn could merge GM and Chrysler and move aggressively to cut unprofitable product lines and dealerships. He could also negotiate a labor contract that would set wages at a level competitive with Japanese auto manufacturers. Ghosn would be a better steward of taxpayer’s money than the incumbent CEOs and he has the best chance of making a combined GM/Chrysler into a viable competitor.
Bottom Line: You should turn down the request from GM and Chrysler until a new CEO with the needed skills has been lined up to take over the merged company. And you should grant Ford its request for a line of credit.
The Big Three is dead. Long live the Big Two.