I am very interested in the recent goings on at Chrysler. I think Obama administration has handled this situation incredibly well and it may even provide a workable model for other governments.
To briefly summarise the situation before last month; the outlook for ther US ‘Big Three’ auto firms was pretty grim. As I have noted there may be a structural fall in Western car sales, in addition cars can be made far cheaper elsewhere and the Detriot firms were hamstrung by ‘legacy costs’ of pension and healthcare obligations. Now the best way to remove many of these ‘legacy costs’ is with a functioning welfare state…. But that’s another topic. All Three were placed on government life support, in the form of loans, late last year.
The problems faced by each of the Three are different (and Ford looks like it will be fine), but Chrylser (80% private equity owned) was also weighted down by large debts.
Newsweek did a very good summary of the situation last November.
To many there seemed to be three realistic options.
- Allow it to go bankrupt. Supported by many free market types. Personally I don’t think such a large bankruptcy (with knock effects on the suppliers and dealers) would have been helpful, given rising unemployment is the core issue facing the US.
- Bail it out.This would have been achieved by large soft ‘loans’ from the government, probably dressed up as funds ‘to support the development of green technology’. I think this do, supported by many on the left, would have been a bad idea. It could have become a bottomless pit of public money (which could be better spent elsewhere) and the actual problems would not be addressed. Although I support policies aimed at holding down unemployment, I don’t support permenant life support for corporates.
- Find a buyer. Not realistic unless the buyer was given very large government loans on soft terms to support it. In other words the State takes the downside risk whilst the buyer takes the upside. Far from ideal.
What the Obama team have actually settled on is a fairly innovative structure. As the BBC summarise:
• Fiat will take a 20% stake, with the possibility of it rising to 35% if performance targets are met. It could reach 51% by 2016 if Chrysler’s government loans are fully repaid
• The Treasury will have an 8% stake, a union-run trust fund VEBA will take a 55% stake, and the governments of Canada and Ontario will gain a combined 2% stake
• Current owner Cerberus will forfeit its 80.1% stake
• Daimler will give up its remaining 19.9% stake in Chrysler
• Chrysler bondholders will receive $2bn (£1.35bn) in cash in exchange for forgiving their $6.9bn debt
• The new company will be run by a nine-person board, with six picked by the government and three by Fiat. The board will pick a new chief executive.
So, top management who were responsible are kicked out and new team from Fiat are put in place. Fiat has successfully restructured itself over the past few yearsand the team have a great record in achieving corporate turn arounds. Additionally Fiat has very good products – smaller, more fuel efficient cars but no distrubution and production netwrok in the States. Chryler has a strong production and distrubition and production netwrok in the States but no good products: the perfect match.
The Treasury keeps an 8% stake and partakes on the upside.
But the clever but is giving the unions a 55% stake, which they will presumably eventually sell to Fiat if things go well, to pay for healthcare/pensions etc.
The creditors are of course complaining, although this rings hollow to me. How much would they have got if the firm had failed?
Charlie is less impressed. I can see his point that workers should be less than happy when capitalists walk away and leave the obligations on them. I disagree.
If Chrysler succeeds then the unions will get what is due to them, if it fails then they wouldn’t have got it anyway.
Let’s be clear here, the US auto industry is too big and has to shrink. In the end jobs will go at Chrysler, but I am very impressed that the process is being effectively managed by government, the unions and Fiat rather than being allowed to happen in one ‘big bang’.
(And in the interest of disclosure, yes I do hold Fiat shares).