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Can Washington Really Fix Detroit?

The big developments of Washington's edicts to General Motors and Chrysler hit Wall Street very hard on Monday, as investors like the idea of bailouts with no strings attached far better than they like the idea of bailouts with strings attached. So far today, Wall Street seems to be rebounding from the duo bad news from GM and Chrysler yesterday.edselclassic.jpg

In the case of General Motors, Washington tired of the ongoing leadership failures of CEO, Rick Wagoner who has been presiding over troubles for GM that started way before the current economic crisis. One of Wagoner's first acts as CEO of GM was to raise his own salary far beyond that of former CEO Rodger Smith, since then he has presided over the decline of what was once the world's largest automobile manufacturer. Now it is in second place to Toyota, and is on the brink of bankruptcy.

Wagoner spent massive amounts of money on new model designs that sold poorly as well as invested $1 billion in developing a hydrogen fuel cell powered car, which so far has extreme problems in development. Even rival Toyota doubted the viability of a fuel cell powered car based on current technology, and is betting on extreme hybrid automobiles as the best bet for new technology vehicles for the short term future.

Under Wagoner's helm, GM stock lost 90% of it's value per share and in addition GM also lost $82 billion dollars. While Wagoner gained some early praise as a cost cutter in some areas, he seemed to lack vision for the company in other areas. And some problems such as the high cost of pensions for retired union workers were a major cost problem for GM, adding as much as a $1,600 cost to each car. But perhaps the biggest shortcoming of Wagoner was his focus on fuel thirsty SUVs, light trucks and other lower mileage vehicles while Toyota and Honda moved ahead with hybrids and extreme hybrid testing of prototypes.

Wagoner had agreed to work for just $1 this year, which was substantially less than his former $14,415,900 total salary as well as compensation. All of this bad history for Wagoner as well as his lack of a real plan to turn around GM forced the White House to ask him to resign for the good of GM and to allow new leadership a last ditch attempt to turn around this ailing giant corporation around.

At Chrysler, things are also very bleak. German automaker Daimler dumped this company a few years ago and a group of private investors have attempted to manage the company through this tough recession environment. However, despite a number of very attractive model cars and trucks as well as the strong selling Jeep line, Chrysler in such bad financial condition that the White House is pushing the company to merge with Italian automaker Fiat within the next 30 days.

There are many problems with this. Fiat has historically been a marketing failure in the United States, where it was never a big selling brand name here ever. Further, a terrible reputation as a quality challenged brand makes many U.S. buyers very wary of buying Fiat products. Fiat often had to seek out partnerships with some of the worst of brands such as in the Soviet Union designing some of their old passenger cars. The dreaded Yugo from Yugoslavia was a Fiat ancestored product as well. However, Italy's modern Fiat cars do have many fresh and attractive models that could conceivably have some American market appeal traction if Chrysler could market them under their own names as Chrysler or Dodge products and American buyers could be distracted from the old reputation and history of Fiat.

It is understandable how the White House would like to see some real tangible results for the billions of dollars of ongoing aid that the government is pouring into GM and Chrysler. Compared To Ford, which has been far better managed and not seeking aid from the government, both GM and Chrysler are two very sick corporations struggling for their very lives.

Washington would certainly like to save both GM and Chrysler. But both GM and Chrysler have both dug themselves a very deep hole to climb out of. Now, even the best of intentions from Washington is almost a case of too little, too late. Both GM and Chrysler needed to be managed as well as Ford was very early on. Now things are almost a lost cause.


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Comments (6)

ke_future:

i'd argue that it is not washington's responsibilty to "fix" detroit. if these companies are failing, they should be allowed to fail. if that means a structured bankruptcy, so be it. government stepping in like this doesn't solve the problems, it only puts all tax payers on the hook with no real business plan for fundamental business change.

and considering how anti-business that most democratic politicians are, i'd be very concerned with any plans that the do come up with. if they don't respect business, business leaders, and the free market, how can they come up with a good plan?

i've mixed feelings on wagoner. did he have to go? maybe. but why didn't obama take such a hard line with the financial institutions and the mac's?

reagan:

Since corporations evolve into greedy and evil entities that are destined to victimize common folk, why are common folk okay with allowing our Federal Government to make itself the most powerful de facto Corporation in American history?

Allen:

Well why are we bailing out wall Street? Let every damn one of these failed companies declare bankruptcy. Doesn't matter what company, let them go under. Someone else will start up the same type of company, and that will be more efficent.

Paul Hooson:

Hello Ke, Reagan and Allen. I've always been a critic of the business leadership style of Wagoner. Few CEOs can take the most powerful automaker brand in the world and decline the stock value by 90% and bring that company to the brink of bankruptcy. For the good of GM and all the jobs involved, this company deserved new leadership.

Wagoner reminds me of the joke. "How do you make a millionaire? Well, he take a billionaire and put him in a business....".

GianiD:

Fauxbama will do for Detroit what Dems have done for so many big cities, drive em into an irreversible state of poverty and disrepair.

January 20, 2009: The beginning of an error!

Chad:

Giani, Please use the proper terms for the CinC. It's President Obama. I agree with Allen in this, those companies are failing for a reason. Let them die, as it appears to be their time. Learn the lessons from it, and the next guy that can make it work will do better. Capitalism is the ultimate "survival of the fittest" game. These companies obviously weren't fit, therefore they need to die, declare chapter 11, or figure out a way to come back with better business practices. I like GM cars, especially cadillacs, but if they can't stand on their own two feet, burn 'em down. The way I see it, the Unions are significantly to blame in this, driving up labor costs to the point where the companies aren't profitable. Nissan, Toyota, etc., build cars here, pay their people almost as much (take home), but aren't lumping in another $25.00/hour for the union cut. All of the issues unions were started for are now addressed under labor laws. They serve no purpose but to extort more money from the employers with the threat of a strike.


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Publisher: Kevin Aylward

Editors: Lee Ward, Larkin, Paul S Hooson, and Steve Crickmore

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