Driving the Bond Markets to Ruin

GENERAL MOTORS bondholders have until 5 p.m. on Saturday to accept a parsimonious offer to exchange their loans for stock and warrants. Most likely, enough of the creditors will say no to force G.M. into bankruptcy. But there is no escaping the long-term damage that has been inflicted on credit markets by the Obama administration’s attempts to reward the United Auto Workers, one of the president’s strongest supporters in the last election, while trampling decades of legal precedent regarding owners of corporate debt.

The G.M. debacle is déjà vu all over again. In the Chrysler bankruptcy arranged by the government in April, bondholders also got short shrift, while the union, which might have received little or nothing in a normal bankruptcy, was awarded 55 percent of the company.

What’s my interest in this? I head a nonprofit group that encourages developing nations to adopt policies that will lead to prosperity — starting with transparency and the rule of law — and hold up America as a model. Yet in its high-handed dealings with Chrysler and G.M., the Obama administration reminds me of an irresponsible third-world regime, skirting the law and handing economic prizes to political cronies.

Under the complicated G.M. plan, bondholders — ranging from large institutions to low-income retirees — would receive just 10 percent of the reorganized company, plus warrants that would enable them to get 15 percent more should the company’s value reach certain levels, in return for their $27 billion in loans. The government, which could end up putting $70 billion into G.M., would initially get 72.5 percent of the company.

In return for money G.M. owes its health trust, the auto workers’ union would get 17.5 percent of its stock, warrants to raise that share to 20 percent, along with a $2.5 billion cash payout over eight years and $6.5 billion in preferred stock paying a 9 percent dividend. I agree with bondholders who feel the union is getting at least four times as much of G.M. in return for claims that are, at best, equal to those of the creditors.

Even if the courts were to reject the plans for G.M. and Chrysler, the administration’s actions in trying to force the deals may damage the credit markets for years to come. The treatment of the bondholders is a warning to investors that the federal government won’t hesitate to push them aside in a crisis.

Perhaps it’s no coincidence that in the wake of the Chrysler deal we have seen a decline in prices for long-term Treasury bonds and a sinking dollar. The Chinese, for example, could view things this way: If the United States is willing to skirt the law to help some of the president’s closest political supporters gain large pieces of two of the world’s biggest companies, will Washington necessarily stand behind any Treasury securities we own when it becomes politically inexpedient?

The hardball tactics, furthermore, are unlikely to save G.M. In a normal bankruptcy, the company’s assets pass from weak hands to strong. In 2008, a terrible year for the auto industry, G.M. sold 8.4 million vehicles worldwide, collecting revenues of $148 billion that placed it third among non-energy companies on the Fortune 500.

G.M. is a global business, with two-thirds of its revenues coming from outside the United States. While sales last year dropped 21 percent in North America, they rose 30 percent in Russia, 10 percent in Brazil and 9 percent in India. In 2008, G.M. sold more than one million vehicles in China, up 6 percent over 2007.

(The value of its global operations was made clear on Friday when the company reached a tentative deal to sell G.M. of Europe.)

Of course, the company’s problem is that its expenses exceed its revenues. But in strong hands, G.M. could be a going concern. Unfortunately, the new owners, with about nine-tenths of the shares, will be the government and the U.A.W. These are the same hands that shaped much of G.M.’s trouble in the first place. With substantial union co-ownership, labor costs won’t be contained; and with the government as the boss, politics may trump markets in decisions on such matters as where to put plants and whether to build big cars or small ones.

The deal would also put G.M.’s competitors at a serious disadvantage in the short run. Ford, which has been building better cars lately, prudently raised cash against a decline in demand, playing the ant to G.M.’s grasshopper. Now, Ford will face a G.M. buoyed by taxpayer dollars both for manufacturing and for cheap consumer and dealer financing.

The same holds true for the manufacturers that hold the key to future auto-making jobs: well-managed, foreign-based companies like Toyota and Honda, which, according to the automotive analysts at CSM Worldwide, will build more cars in the United States next year than G.M., Chrysler and Ford combined.

What lesson does federal favoritism toward Chrysler and G.M. teach other businesses that play by the rules? How will our trade negotiators keep a straight face when complaining about subsidies to Airbus or Chinese steel makers? The government should have stepped aside earlier and allowed a normal bankruptcy that would have treated the union and the debt-holders fairly. Fortunately, if the bondholders stand firm, we’re likely to see that process begin on Monday.

James K. Glassman, who was under secretary of state for public diplomacy and public affairs in the George W. Bush administration, is the president of World Growth, a nonprofit economic-development group.

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Full article: http://www.nytimes.com/2009/05/30/opinion/30glassman.html?ref=opinion

Beat the Dealer

Is the Obama administration turning Chrysler into a patronage machine?

When people talk about the problems that have driven Chrysler to bankruptcy and General Motors to the brink thereof, they usually have in mind the companies’ excessive commitments to those who build their cars: the high wages, lavish benefits and irrational work rules written into union contracts. A less-discussed problem is the companies’ relationship with those who sell their cars. A 2006 Forbes article gave an outline:

General Motors still has 7,100 dealerships (some with multiple franchises, for example, Buick-Pontiac-GMC). That count is down from 8,434 ten years ago. Ford Motor has 4,400 dealers and Chrysler Group 3,900.

Contrast Toyota, with 1,215 franchises. These sell an average 1,613 new vehicles a year apiece. Chevrolet has 4,111 franchises selling an average 643 vehicles. Ford showrooms sell 696, and Dodge stores (Chrysler’s largest division) sell only 408. The situation is disastrous for the smaller brands: Buick franchises sell only 102 new cars a year, Jeep franchises 170.

Manufacturers can only watch as their dealers carve one another up by advertising giveaway prices. Worse, at least for the manufacturer, is that a lot of these dealers own competing franchises. A Buick dealer, that is, may also have a Toyota dealership down the road. Naturally, they shift their best salespeople and capital to the most profitable brands, leaving their Buick or Ford store looking shabby and staffed by inept or green sales agents.

Why don’t the weak dealers just fold on their own? Two reasons. They can still make money on service and on selling used cars. And the dealership provides jobs for the owner’s friends and relatives.

Car makers, however, have little ability to rationalize their dealer networks, because dealers have substantial political clout, which translates into laws protecting them. “Under state franchise laws car companies must show good cause to terminate a dealer’s franchise agreement,” Forbes notes. Since the dealers are constituents of the officials who make these decisions while the car makers are not, the bias in favor of the former is systematic.

Closing down dealers thus requires a big outlay of cash that produces dividends only in the long run:

It cost GM $583 million to compensate its 699 Oldsmobile dealers after it decided in 2000 to phase out the brand. That’s $840,000 per. . . .

When a company loses a dealer, its overhead costs stay the same and–at least in the short term–it loses a few hundred car sales. “There’s no immediate payback,” says Joe W. Eberhardt, Chrysler Group’s senior vice president for sales and marketing.

Things are different now, at least for Chrysler, which is now in bankruptcy court. As a May 4 Wall Street Journal editorial noted, the Obama administration “is hoping the judge will do little more than rubber stamp the restructuring deal it has worked out among the Treasury, the United Auto Workers and the Italian car maker, Fiat.” As part of the restructuring, the Detroit Free Press reports, has sent termination notices to 789 of its dealers:

Dealers no longer have protection from state franchise laws because Chrysler is in Chapter 11 bankruptcy, but they can contest the process by which Chrysler chose the survivors, said Scott Silverman, a Boston attorney representing four terminated Chrysler dealers in Massachusetts.

“What dealers need to do is look at the criteria Chrysler said it used and look at how you performed on those metrics,” said Silverman. Those criteria included sales volume, customer service scores, local market share and average household income in the immediate area.

But what if one of the criteria is partisan politics? Blogger Doug Ross raises that possibility:

A tipster alerted me to an interesting assertion. A cursory review by that person showed that many of the Chrysler dealers on the closing list were heavy Republican donors.

To quickly review the situation, I took all dealer owners whose names appeared more than once in the list. And, of those who contributed to political campaigns, every single one had donated almost exclusively to GOP candidates. While this isn’t an exhaustive review, it does have some ominous implications if it can be verified.

However, I also found additional research online at Scribd (author unknown), which also appears to point to a highly partisan decision-making process. . . .

I have thus far found only a single Obama donor (and a minor one at that: $200 from Jeffrey Hunter of Waco, Texas) on the closing list.

It must be emphasized that Ross’s evidence is suggestive, not conclusive. It does not appear that anyone has yet conducted a complete analysis of Chrysler dealers’ political contributions. Ross’s post, published Monday, contains nine updates with supporting material from news sources and blog posts, but the whole thing ends up being rather disjoined and hard to digest.

This situation certainly bears watching. If Ross’s suspicion is unwarranted, we’re sure Obama’s many online defenders will be along soon with data to debunk it. If he’s right, though, it could complicate the bankruptcy proceedings by giving the jilted dealers a basis on which to challenge their termination. It would also demonstrate that political intervention in private business is an invitation for the most brazen sort of corruption.

James Taranto, Wall Street Journal

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Full article: http://online.wsj.com/article/SB124344262081759057.html

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See also:

The Scandal That Wasn’t

Last month we noted that some bloggers were suggesting that Chrysler, presumably at the Obama administration’s behest, was targeting Republican donors in its decisions about which dealerships to shut down as part of its bankruptcy. Kevin Hassett of the American Enterprise Institute has taken a thorough look at the data, and he writes at Forbes.com that the allegations don’t pan out:

Of the nearly 3,000 Chrysler dealerships in the country, we successfully matched the owners of 420 to political contributions, using data from the 2008 election cycle. From this list, we considered a dealership to be Republican-owned if the majority owner gave more money to Republicans than to Democrats. Of the 300 Republican-owned dealerships we identified, 77 were on the list of closed dealerships. A dealership was determined to be Democratic-owned if the primary owner gave more money to Democrats than Republicans. There were many fewer, only 120, of these. Car dealers, it turns out, tend to be Republicans.

For the Democrat-owned dealerships, 31 out of 120 were shut down. Comparing those numbers, we found that 25.7% of Republican dealerships were schedule to be closed while 25.8% of Democrat ones were.

That difference is utterly insignificant. Thus, the data indicate that the Chrysler closings did not systematically favor Democrats.

James Taranto, Wall Street Journal

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Full article: http://online.wsj.com/article/SB124638639349674763.html

Chrysler Plans to Shut One Quarter of Its U.S. Dealers

About a quarter of Chrysler’s dealers are receiving letters Thursday telling them that the company plans to eliminate them by June 9.

Chrysler, which filed for bankruptcy protection two weeks ago, sent letters to 789 of its 3,200 dealers revoking their franchises with the carmaker. It also filed a list of the dealers it is cutting in bankruptcy court Thursday.

Other dealers received letters welcoming them to the new Chrysler.

“It just says whether you’re in or out,” said Anthony Viviano, who owns two Dodge dealerships in Detroit’s suburbs and is president of the Detroit Dodge dealers association. “Some of my fellow dealers have already called and said they’re out. They got the poison letter.”

One of Mr. Viviano’s two dealerships was on the list.

But he said some dealerships could be saved by rulings from Chrysler’s bankruptcy judge or if other dealers decide to sell their franchises.

Chrysler said it needed to eliminate dealerships so that it can be viable in the future and the stores that remain can be more profitable.

On Friday, 1,000 to 1,200 General Motors dealers are expected to receive notices that they are being cut. Their franchises will expire in October 2010, a G.M. spokeswoman, Susan Garontakos, said.

Officials from the National Automobile Dealers Association are meeting Thursday with members of the Obama administration’s auto industry task force. The association is urging the task force to let G.M. and Chrysler keep more dealerships and argues that the cuts will cause the two companies to lose a significant number of sales in the months ahead. About 150 dealers flew to Washington on Wednesday to plead their case with members of Congress.

“We’re not objecting to consolidation. We understand the realities of the marketplace,” John McEleney, the N.A.D.A. president and owner of two G.M. dealerships in Iowa, said. “The situation’s going to get taken care of by natural market forces. To radically accelerate the process doesn’t seem to make sense in this environment.”

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Full article: http://www.nytimes.com/2009/05/15/business/15dealers.html?_r=1&hp

Chrysler and the Rule of Law

The Founders put the contracts clause in the Constitution for a reason.

The rule of law, not of men — an ideal tracing back to the ancient Greeks and well-known to our Founding Fathers — is the animating principle of the American experiment. While the rest of the world in 1787 was governed by the whims of kings and dukes, the U.S. Constitution was established to circumscribe arbitrary government power. It would do so by establishing clear rules, equally applied to the powerful and the weak.

Fleecing lenders to pay off politically powerful interests, or governmental threats to reputation and business from a failure to toe a political line? We might expect this behavior from a Hugo Chávez. But it would never happen here, right?

Until Chrysler.

The close relationship between the rule of law and the enforceability of contracts, especially credit contracts, was well understood by the Framers of the U.S. Constitution. A primary reason they wanted it was the desire to escape the economic chaos spawned by debtor-friendly state laws during the period of the Articles of Confederation. Hence the Contracts Clause of Article V of the Constitution, which prohibited states from interfering with the obligation to pay debts. Hence also the Bankruptcy Clause of Article I, Section 8, which delegated to the federal government the sole authority to enact “uniform laws on the subject of bankruptcies.”

The Obama administration’s behavior in the Chrysler bankruptcy is a profound challenge to the rule of law. Secured creditors — entitled to first priority payment under the “absolute priority rule” — have been browbeaten by an American president into accepting only 30 cents on the dollar of their claims. Meanwhile, the United Auto Workers union, holding junior creditor claims, will get about 50 cents on the dollar.

The absolute priority rule is a linchpin of bankruptcy law. By preserving the substantive property and contract rights of creditors, it ensures that bankruptcy is used primarily as a procedural mechanism for the efficient resolution of financial distress. Chapter 11 promotes economic efficiency by reorganizing viable but financially distressed firms, i.e., firms that are worth more alive than dead.

Violating absolute priority undermines this commitment by introducing questions of redistribution into the process. It enables the rights of senior creditors to be plundered in order to benefit the rights of junior creditors.

The U.S. government also wants to rush through what amounts to a sham sale of all of Chrysler’s assets to Fiat. While speedy bankruptcy sales are not unheard of, they are usually reserved for situations involving a wasting or perishable asset (think of a truck of oranges) where delay might be fatal to the asset’s, or in this case the company’s, value. That’s hardly the case with Chrysler. But in a Chapter 11 reorganization, creditors have the right to vote to approve or reject the plan. The Obama administration’s asset-sale plan implements a de facto reorganization but denies to creditors the opportunity to vote on it.

By stepping over the bright line between the rule of law and the arbitrary behavior of men, President Obama may have created a thousand new failing businesses. That is, businesses that might have received financing before but that now will not, since lenders face the potential of future government confiscation. In other words, Mr. Obama may have helped save the jobs of thousands of union workers whose dues, in part, engineered his election. But what about the untold number of job losses in the future caused by trampling the sanctity of contracts today?

The value of the rule of law is not merely a matter of economic efficiency. It also provides a bulwark against arbitrary governmental action taken at the behest of politically influential interests at the expense of the politically unpopular. The government’s threats and bare-knuckle tactics set an ominous precedent for the treatment of those considered insufficiently responsive to its desires. Certainly, holdout Chrysler creditors report that they felt little confidence that the White House would stop at informal strong-arming.

Chrysler — or more accurately, its unionized workers — may be helped in the short run. But we need to ask how eager lenders will be to offer new credit to General Motors knowing that the value of their investment could be diminished or destroyed by government to enrich a politically favored union. We also need to ask how eager hedge funds will be to participate in the government’s Public-Private Investment Program to purchase banks’ troubled assets.

And what if the next time it is a politically unpopular business — such as a pharmaceutical company — that’s on the brink? Might the government force it to surrender a patent to get the White House’s agreement to get financing for the bankruptcy plan?

Mr. Zywicki is a professor of law at George Mason University and the author of a book on consumer bankruptcy and consumer lending, forthcoming from Yale University Press.

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Full article: http://online.wsj.com/article/SB124217356836613091.html

An offer you can’t refuse

In its rush to save Detroit, the American government is trashing creditors’ rights

NO ONE who lent money to General Motors (GM) or Chrysler can have been unaware of their dire finances. Nor can workers have failed to notice their employers’ precarious futures. These were firms that barely stayed afloat in the boom and both creditors and employees were taking a punt on their promise to pay debts and generous health-care benefits.

The bet has failed. The recession has tipped both firms into the abyss—together they lost $48 billion last year. Chrysler has entered bankruptcy, from which it may emerge under Fiat’s control. GM could soon follow if efforts to hammer out a voluntary restructuring fail. America’s government, keen to protect workers, is providing taxpayers’ cash to keep the lights on at both firms. But in its haste it has vilified creditors and ridden roughshod over their legitimate claims over the carmakers’ assets. At a time when many businesses must raise new borrowing to survive, that is a big mistake.

Bankruptcies involve dividing a shrunken pie. But not all claims are equal: some lenders provide cheaper funds to firms in return for a more secure claim over the assets should things go wrong. They rank above other stakeholders, including shareholders and employees. This principle is now being trashed. On April 30th, after the failure of negotiations, Chrysler entered Chapter 11. Under the proposed scheme, secured creditors owed some $7 billion will recover 28 cents per dollar. Yet an employee health-care trust, operated at arm’s length by the United Auto Workers union, which ranks lower down the capital structure, will receive 43 cents on its $11 billion-odd of claims, as well as a majority stake in the restructured firm.

The many creditors who have acquiesced include banks that themselves rely on the government’s purse. The objectors have been denounced as “speculators” by Barack Obama. The judge overseeing the case has consented to a quick, “prepackaged” bankruptcy, which seems to give little scope for creditors to argue their case or pursue the alternative of liquidating the company’s assets. In effect Chrysler and the government have overridden the legal pecking order to put workers’ health-care benefits above more senior creditors’ claims, and then successfully argued in court that the alternative would be so much worse for creditors that it cannot be seriously considered.

The Treasury has also put a gun to the heads of GM’s lenders. Unsecured creditors owed about $27 billion are being asked to accept a recovery rate of 5 cents, says Barclays Capital, whereas the health-care trust, which ranks equal to them, gets 50 cents as well as a big stake in the restructured firm. If creditors refuse to co-operate, the government will probably seek to squash them using the same fast-track legal process.

Chapter and verse

The collapse of Detroit’s giants is a tragedy, affecting tens of thousands of current and former workers. But the best way to offer them support is directly, not by gerrymandering the rules. The investors in these firms are easily portrayed as vultures, but many are entrusted with the savings of ordinary people, and in any case all have a legal claim that entitles them to due process. In a crisis it is easy to put politics first, but if lenders fear their rights will be abused, other firms will find it more expensive to borrow, especially if they have unionised workforces that are seen to be friendly with the government.

It may be too late for Chrysler’s secured creditors and if GM’s lenders cannot reach a voluntary agreement, they may face a similar fate. That would establish a terrible precedent. Bankruptcy exists to sort legal claims on assets. If it becomes a tool of social policy, who will then lend to struggling firms in which the government has a political interest?

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Full article and photo: http://www.economist.com/displayStory.cfm?story_id=13610871&source=most_commented

The Italian solution

Fiat’s chief executive, Sergio Marchionne, has gone merger mad

HIS company is among the smallest of the global volume carmakers. But right now Sergio Marchionne is without question the most talked-about car executive in the world. The chief executive of Fiat Group has been alone in seeing an extraordinary opportunity in the meltdown in Detroit. By seeking to take over the running of both Chrysler and Opel, the European arm of General Motors (GM), Mr Marchionne is attempting not only to transform Fiat into a car group almost of the scale of mighty Toyota and Volkswagen (VW), but also to change the face of a perennially troubled industry.

Last December Mr Marchionne said of his stricken industry: “What we are seeing is unprecedented. I have never seen the failure of so many systems at once.” Fiat was in a fight for survival. “We’re just going to slam the brakes on, use as many temporary lay-offs as needed, cut everything back to essentials.” He added an apocalyptic forecast. “By the time we finish with this in the next 24 months, as far as mass producers are concerned, we’re going to end up with one American house [Ford or GM, you presume]; one German of size [VW Group]; one French-Japanese, maybe with an extension in the US [the Renault-Nissan alliance]; one in Japan [Toyota], one in China [several possible candidates] and one potential European player [either Fiat or PSA Peugeot Citroën].”

The details of this vision may be wrong. Despite its present travails and imminent bankruptcy, few believe that GM will vanish and leave Ford as the sole American-owned champion. France’s PSA Peugeot Citroën, though unwieldy, is not about to disappear either. The strength of Hyundai-Kia in emerging markets and North America should ensure that the South Korean producer makes the cut. And in Japan, however great the cull of smaller outfits such as Mitsubishi and Suzuki, Honda and perhaps Mazda will still be around to challenge the dominance of Toyota in its home market. So will Renault’s partner, Nissan.

But if the shake-up is likely to be less dramatic than Mr Marchionne expects, that is only because much of the industry remains addicted to wildly unrealistic market-share forecasts and value-destroying investments. Mr Marchionne thinks it has been living beyond its means for too long. “Out in front,” he says, “this business is glamorous like Las Vegas. But behind the scenes, the industrial machine is complex and chaotic. We just look round at what to invest in and it’s hard to justify the economics. To sort it out, you have to go back to the industrial machine and fix it.”

Critically, Mr Marchionne says, you need to sell in sufficient volume—about 1m a year on each platform—to drive down costs. Take the platform for the VW Golf, which yields sales of more than 1.5m a year because VW also uses it for the Skoda Octavia, the Seat Leon and the Audi A3. About 75% of the cost of a car is in its architectural underpinnings. The rest goes on giving it a distinctive body and cabin, while honing the brakes, steering and suspension. Fiat gets sales of about 600,000 from its city-car A platform (the basis of the Panda, the retro-styled 500 and Ford’s new Ka). But none of its other platforms comes close to what is required: the whole group sold only 2.15m cars last year (see chart). Mr Marchionne reckons the minimum for a volume maker competing in every sector is about 5.5m—leaving Fiat far from safety.

In the past Fiat has tried to get around this problem with various alliances. A tie-up with GM lasted for five years until 2005, when Mr Marchionne extracted $2 billion from the American firm to extinguish a put option that would have forced it to buy the then-sickly Italian company. Mr Marchionne believes that alliances are all very well, but they react too slowly and require too many compromises. Without speed, he believes, you are doomed.

Over the past year he has been developing a more ambitious strategy, at first constructed around Chrysler, but now including Opel. Cruelly mismanaged by Daimler during its decade of ownership, and too dependent on pickup trucks and an ageing line-up of SUVs, Chrysler was in no condition to withstand the storm. Its increasingly desperate management sought help from a host of other carmakers, including Fiat. It reached a tentative agreement in which Nissan would have made a small car for Chrysler and Chrysler would have built a pickup for Nissan. But that was the limit for Carlos Ghosn, under pressure as boss of the Renault-Nissan alliance.

Mr Marchionne came up with a plan that might win Chrysler the federal loans it needed to stay alive while getting Fiat much of what it wanted. In exchange for an equity stake of around 35%, Fiat would make available to Chrysler its small and medium-sized platforms and advanced, fuel-efficient powertrains. Chrysler would give Fiat some of the scale it was seeking for its platforms, joint purchasing of parts, some expertise in producing large cars, a distribution network in America and manufacturing capacity to build new Alfa Romeos and perhaps the Fiat 500 for the American market. As Mr Marchionne put it: “They have everything I don’t have (including some I will never need) and I have everything they don’t have and need.”

But Mr Marchionne’s scheme, which won the backing of the Treasury’s car-industry task-force, went further. Although Fiat would initially get only a stake of 20% (rising to 35% after fulfilling criteria set by the Treasury) and would have to repay all Chrysler’s federal loans before taking majority control, the Treasury accepted that Fiat should take over the responsibility of managing Chrysler and integrating the two operations as closely as possible.

Having presided over a near-miraculous turnaround at Fiat since being appointed in 2004, Mr Marchionne saw in Chrysler an opportunity to apply the same lessons. At Fiat he saw a sluggish organisation that lacked leadership and had become accustomed to management by committee. But he also saw, buried within the company, a new generation of leaders.

“The single most important thing was to dismantle the organisational structure,” he recalls. “We tore it apart in 60 days, removing a large number of leaders who had been there a long time and who represented an operating style that lay outside any proper understanding of market dynamics.” In their place he promoted a group of younger executives, many with a background in consumer marketing, who understood and could provide what he wanted: accountability, openness, rapid communication and impatience with hierarchy and internal politics.

Marchionne may 8

Sergio Marchionne

Some doubt that Fiat’s lean management has the resources to spread itself across Chrysler, let alone Opel too. Mr Marchionne understands the concern, but rejects it. He believes he already knows who the new leaders at Chrysler will be. He is confident that the same will apply to Opel, should that too fall into his lap.

Chrysler is essentially a done deal, although some uncertainty remains, not least because a few senior debtholders chose to push the firm into bankruptcy rather than accept the Treasury’s offer of $2.2 billion on the $6.9 billion they are owed. Fortunately for Fiat, the bankruptcy court judge, Arthur Gonzales, this week rejected the lenders’ argument that they had been treated illegally and cleared the way for Chrysler to emerge as a going concern within a couple of months. Mr Marchionne is preparing for the day: “We must act very quickly to cut overheads, lighten everything, speed up new models.”

Nor has Mr Marchionne been twiddling his thumbs in Europe. Having insisted for weeks that he had made no direct approaches about GM Europe, on May 4th he went to Berlin to present the German government with a plan that would give Fiat control of much of Opel (which includes Vauxhall in Britain) and possibly Saab, GM’s bankrupt Swedish unit. GM, which can no longer fund the lossmaking operations of its European arm, has been looking for a partner to take a majority stake in Opel since March. If it cannot find one, the German government will be loth to provide bridging finance. Fiat’s main rival is a group consisting of Magna, a Canadian car-parts and engineering business, and Oleg Deripaska, a Russian oligarch.

As with Chrysler, Mr Marchionne will have to win over both government and unions. He says that the deal depends on the willingness of European governments, but chiefly Germany’s, to stump up €5 billion-7 billion ($6.6 billion-9.3 billion) in bridging loans. In return, Mr Marchionne has promised to keep open Opel’s three main assembly plants in Germany, although there are fears for factories in Belgium and Britain. Over time he intends to reduce combined capacity by 22%, but he says he will do so by slimming factories rather than closing them. It is, he says, the preferred way in Europe—but it will mean forgoing savings of about €250m a year.

Even so, combining Opel and Fiat could save at least €1 billion a year. Partly because of Fiat’s shared history with GM, Mr Marchionne says that Opel fits perfectly. GM lacks an A platform, which Fiat has. They already share a B platform (for the Corsa and the Grande Punto) and Fiat would be happy to use Opel’s excellent new C and D platforms. “We can achieve convergence on all the big platforms by 2012. Ultimately, I need to do this with Chrysler, but Opel gets me there much faster and with more immediate returns.” Mr Marchionne adds: “I’m offering the German government a car business that will be effectively debt-free and I will take on Opel’s liabilities, including pensions. I told them: if you have a better offer, take it.”

If Mr Marchionne pulls it off, he will create a new company consisting of Fiat Auto (without Ferrari and Maserati or the rest of the Fiat Group), Chrysler and GM Europe. Among the probable stakeholders would be the Agnelli family (which controls Fiat), the United Auto Workers union health-care fund (until it cashes out) and GM. The rest of the equity would be sold in a public offering. In a normal year that combination could expect revenue of $100 billion from the sale of 6m cars—just above Mr Marchionne’s viability threshold.

Others think that amalgamating three different cultures and several less-than-stellar brands is beyond even the formidably self-confident Mr Marchionne. The tale of Mr Ghosn is not wholly reassuring. It is now pretty clear that his heroic rescue of Nissan came at the expense of taking his eye off Renault, which in recent years has produced a succession of mediocre cars. This week Martin Winterkorn, the boss of VW, pointed out that his company had been applying its vaunted platform strategy since 1992. “I wonder if he will be able to succeed,” said Mr Winterkorn, “because successfully managing several brands and obtaining true synergies is really difficult.”

Some see Mr Marchionne as an empire builder who has come to believe his own publicity. The charge exasperates him. “It’s just nonsense,” he says. “Fiat Group employs 200,000 people, but I’m going to carve out the car business and let the rest of it go its own sweet way. Look, I really hate the personal issue. It’s not about me, let’s just fix the industry. I’m only a conduit for change. You can’t just have Toyota on its own, we need this to guarantee survival. Now it’s up to others.”

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Full article and photos: http://www.economist.com/opinion/displayStory.cfm?story_id=13610819&source=hptextfeature

G.M. Is Said To Seek Stake in Fiat

Four years after paying $2 billion to extricate itself from a partnership with Fiat, General Motors is seeking a stake in the Italian automaker in exchange for its Latin American and European operations.

General Motors is eager to cede control of its money-losing Opel unit in Germany. But Fiat has also expressed interest in G.M.’s other European operations as well as its historically profitable Latin American business, though the possible terms of such a deal have not been discussed publicly.

G.M., despite its precarious financial position, now feels it has a bargaining chip with its Latin American unit, and is negotiating with Fiat over what it might get in return.

According to two people close to the negotiations, the companies are far apart. Sergio Marchionne, Fiat’s chief executive, has indicated a willingness to give up less than 10 percent of Fiat to General Motors.

But G.M. executives are holding out for at least 30 percent of the Fiat Auto Group, according to these people, who said they were not authorized to comment publicly because the discussions are fluid. A Fiat representative declined to comment on whether G.M. was seeking a stake, as did a spokesman for G.M.

The discussions are the latest development in Fiat’s multipronged bid to grow, almost overnight, into a dominant global auto company, by acquiring Opel and a 20 percent stake in Chrysler.

On Wednesday, Fiat confirmed that Mr. Marchionne would be chief executive of Chrysler when it emerged from bankruptcy, while remaining chief executive of Fiat.

Even analysts who admire Mr. Marchionne’s stamina say they question whether combining the three companies is feasible.

“You can’t get a meeting room big enough to fit all these companies together,” said Arndt Ellinghorst, an analyst with Credit Suisse in London. “A person has to sleep, and unless he’s got a strong management team, there is a significant execution risk.”

The White House has set a June 1 deadline for creditors, unions and General Motors executives to come up with a plan to avoid bankruptcy.

Besides negotiating with G.M., however, Mr. Marchionne is seeking financial aid for Opel from the German government. He was able to persuade Washington to provide billions of dollars in support for Chrysler.

The Latin American operations of G.M. could prove profitable for Fiat well before the Chrysler deal begins yielding dividends. That is why it makes sense for General Motors to negotiate a stake in Fiat, despite their tangled history, according to Philippe Houchois, an analyst with UBS.

“It lets Fiat do the hard work of scaling up Opel, while giving something valuable to G.M. in the long run,” said Mr. Houchois.

Because G.M. in Latin America is dependent on Opel for its product line, divorcing the two operations would be difficult, a fact that strengthens G.M.’s hand leading up to the June 1 deadline.

Fiat and G.M. frequently clashed during their five-year partnership, which began in 2000. Fiat engineers said G.M. was too cautious and unwilling to embrace new technology that would have created cleaner, more fuel-efficient engines. In Germany, meanwhile, Opel engineers became convinced that Fiat didn’t share its focus on detail or quality standards.

The Chrysler bankruptcy proceedings continued Wednesday with the disclosure of the names of creditors who opposed an administration-backed plan to sell nearly all Chrysler’s assets to a new company held by the United Automobile Workers union, Fiat and the United States and Canadian governments.

The list named nine investment funds, several apparently managed by the same firms, down from 20 that had criticized the sale plan while protected by a veil of anonymity.

On Tuesday, the dissident creditors, who have been criticized by President Obama as “speculators,” asked the bankruptcy judge overseeing the case, Arthur J. Gonzalez, to allow them to remain anonymous. The judge declined, observing that the comments by the president and others did not sound like serious threats.

“It’s just their opinion,” Judge Gonzalez told lawyers. “How much more is it than that?”

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Full article: http://www.nytimes.com/2009/05/07/business/global/07auto.html?hp