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Chrysler is Bankrupt

Chrysler has filed for bankruptcy and will be reorganised with Fiat as a partner.

Chrysler LLC, the automaker that survived a near-death experience in 1979, filed today for bankruptcy protection to streamline operations and shed debt in a reorganization that includes Italy’s Fiat SpA as a partner.

The company, third biggest among U.S. automakers, missed a U.S. government deadline to come up with a restructuring plan by today that was rigorous enough to avoid bankruptcy and qualify for more bailout aid. The carmaker tried to negotiate an alliance with Fiat, reduce $6.9 billion in secured loans and cut $10.6 billion owed to a pension fund. Some lenders refused to slash the debt to $2.25 billion.

The carmaker and the government plan to use the bankruptcy process to revitalize Chrysler by putting its best assets, such as its Jeep and Dodge Ram brands, in a new company that wouldn’t be burdened by current costs and debt. A slimmed-down version of Chrysler, armed with Fiat’s small-car technology, would emerge from such a process, giving the carmaker a “new lease on life,” U.S. President Barack Obama said today.

Ah, the perils of living in a socialist land. First, the government is taking over to save a few jobs – jobs that shouldn’t have existed in the first place, not at Chrysler. The first time it was bailed out was in 1979, and in 2006 it made such a big hole in Daimler-Chrysler operations that it was quickly sold to Cerberus.

And why did it lose money? It made mediocre and expensive cars, because it had to make them at expensive United Auto Workers (UAW) staffed factories in Detroit, with the UAW bargaining hard for unsustainable wages, and the government making the company cave in.

Holman Jenkins at the Wall Street Journal has an interesting take on it.

Nearly 25 years ago, a Los Angeles Times reporter innocently and accurately invoked the “M” word in describing the domestic auto sector, noting that the arrival of Japanese auto plants was “threatening the UAW’s traditional monopoly on labor in the domestic auto industry.”

The erosion of the Big Three’s market share since then has really been the erosion of the market for monopoly labor-produced cars. The UAW standard tactic, “pattern bargaining,” which it pursues without embarrassment, would have gotten Bill Gates thrown in jail under the antitrust laws.

When the L.A. Times wrote, the labor cost differential versus a Japanese plant was about $2,000 per car. Twenty years later, the cost difference was about $2,000 per car. Today’s lament is, “The bankers have benefited from a bailout, so why shouldn’t auto workers?” But they have, they have — for decades. For the business model described above could not possibly have survived otherwise.

Chrysler was bailed out directly with government loan guarantees; the Big Three all benefited from Reagan era “voluntary” quotas on Japanese imports to prop up domestic car prices. But these were temporary fixes. For more than 40 years, a 25% tariff has kept out foreign-built pickup trucks even as a studied loophole was created in fuel-economy regulations to let the Big Three develop a lucrative, protected niche in the “passenger truck” business.

This became the long-running unwritten deal. This was Washington’s real auto policy.

For three decades, the Big Three were able to survive precisely because they skimped on quality and features in the money-losing sedans they were required under Congress’s fuel economy rules to build in high-cost UAW factories. In return, Washington compensated them with the hothouse, politically protected opportunity to profit from pickups and SUVs.

Our own government had the policy of only buying Indian made cars (Ambassador/Premier) and flying only the nationalised airlines. Only recently has that policy been relaxed, but you can imagine how one-sided it is, and who they end up saving. I only expect more in such times.

  • Google SEO 101 says:

    >The troubles at Chrysler and General Motors are a major concern for everyone in the United States and around the world. I do not know what the correct solution is but I hope that it will all work out for the better. I hope with all the government assistance and restructuring that the automakers can bounceback and become strong during the latter half of the year.

    Regards, homebizseo