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Chrysler makes a poor fit for GM

Prof. Peter Morici - 10/28/2008

General Motors Corp. is having trouble lining up the financing to acquire Chrysler LLC -- either by merging it into its operations or as a scaled-down subsidiary. Observers may blame the credit crisis and the present reluctance of banks to lend. While that makes GM's task more difficult, it certainly is not the central reason why the acquisition should not go forward.

Simply put, Chrysler has two good franchises that would complement GM's product mix, but those are hostage to an otherwise uncompetitive corporate structure. GM can't fix those problems easily.

Jeep and Chrysler minivans are great brands. Although these products are in shrinking market segments, these segments will continue to be large and important. Properly managed, the Jeep and Chrysler minivans could be the survivors that reap large profits. Moreover, their brands and architecture could be extended into smaller more efficient crossovers like the Nissan Rogue, which are sorely needed now in the U.S. market.

However, Chrysler products suffer from poor quality -- reliability issues and poor product appointments to compensate for high labor costs and clumsy management. Those issues might be better solved by a joint venture with a Japanese manufacturer such as Mazda or Toyota. I like Mazda best, because the Jeep and minivans complement its strengths in sedans very well, and it could get trucks from its other partner, Ford.

Ford sells the most pickups on the planet for a reason: The marketplace finds them the best!

The recently negotiated UAW contract does not adequately reduce hourly labor costs and/or remove the burden of legacy costs. It only potentially moves most of those to other corners of the balance sheet. If GM acquired the Jeep and minivan franchises, GM would still have to pay heavy severance bonuses to workers it laid off in streamlining operations. Similar payments would be required to shutter much of Chrysler's unattractive truck and car operations, and GM would still have to fund the union health care fund for retired Chrysler employees. Those costs are simply more than the Jeep and minivan franchises are worth.

The simple fact is that the best solution for Chrysler is Chapter 11 to remove the burdens of the UAW contract and scale down the company to something one-half to two-thirds its current size. That would serve GM's interests, too -- both Ford and GM would benefit from some capacity and cars going off the market.

Suggestions are emerging that Uncle Sam take a stake in the combined company. Rewarding two of the worst run companies on the planet makes little sense to me. It would be better to formulate a comprehensive strategy for the industry to encourage the build out of high efficiency vehicles.

Washington should require much higher mileage standards for automobiles than the 35 miles per gallon target set for 2020, offer incentives for consumers to trade in their gas guzzlers, and provide substantial product development assistance to U.S.-based automakers and suppliers. The latter includes Toyota and Honda, as well as the Detroit Three, battery makers and other suppliers to accelerate the production of high-mileage innovative cars.

The condition for assistance would be that beneficiaries do their R&D and first large production runs in the United States, and share their patents at reasonable costs with one another. The huge U.S. market would attract producers from around the world and rejuvenate the U.S. auto supply chain.