Chrysler To File For Bankruptcy Protection

Automotive News reports that Chrysler will file for bankruptcy tomorrow (Thursday April 30th) in preparation for its agreement with Fiat. Even if this is all part of a plan it does not look good for the American auto industry. Next in line is GM.

Minimum Fuel Price

There needs to be a minimum price on passenger car fuel with a modest quarterly escalation schedule and possibly a cap (lots of scope for unintentional consequences here), perhaps a cumulative 5 to 10 percent price increase per year phased in every
quarter to minimize disruptions due to step increases in price.

Here's why there should be a price "floor". It is the best way to reduce fuel consumption, bring some semblance of stability to the auto industry and the economy at large, and allow for greater innovation. Bill Ford and John McElroy (auto industry writer) are two supporters of such a policy.

Think about it. If auto manufacturers know for certain that fuel prices will be at least $x per gallon then they can plan for the longer term about what vehicles to develop instead of fretting excessively (and indecisively) on what product mix to
make.

The market will simply buy fewer vehicles with poor fuel economy as it does now, and shift to far more efficient alternatives which will be available because the manufacturers will have confidence that those vehicles will sell.

The market will also use those vehicles more judiciously. Regulating fuel economy (i.e. CAFE standards) misses the point and only addresses part of the issue. It doesn't address how cars are actually used: Miles driven, idling, lead-footed driving, etc. All that is dependent largely on fuel prices. When they are very high consumer behavior starts to change. They conserve more. Witness summer 2008.

That would drive down greenhouse gas emissions, reduce oil imports, help our trade deficit, and also reduce the flow of U.S. dollars to unfriendly countries.

The problem is no one can or is willing to do it politically. It would be unpopular - unless it was positioned not as a tax (stick) but as a benefit (carrot). The right course of action is often difficult.

We've all exercised our "rights" to cheap gas so much for so long we no longer have the freedom to enjoy it, thwarted at every turn by environmental, economic, and geopolitical costs. It's time to raise the price of fuel in line with these costs
so that we as a society have solid incentives to alter our wasteful behaviors.

Further, since government is notorious for wasting obscene amounts of money there need to be controls and restrictions in place to ensure funds raised from fuel taxes should only be used for infrastructure and transportation related initiatives.

These are admittedly very high hurdles but I believe that a Federally mandated minimum light vehicle fuel price program (not tax), properly administered, would be a huge boon to the auto industry and result in far better vehicle choices for
consumers.

F1 2009 So Far

The Brawn team have won 3 of the first 4 races. But the other teams are closing the gap, and it's going to be a heck of a year.

The teams that develop KERS this year are going to be in an advantageous position later in the year and next season. Unless the "low budget" rules option goes into play next year and turns out to be better. So maybe the designs aren't going to
converge on the new diffuser and KERS.

Sebastian Vettel is doing rather well at the moment and his team (Red Bull) are on the up and up. They're already very competitive running a good, straightforward car without either KERS or a trick diffuser. When their new aero package is ready they should make another good step forward.

Renault is another team that will likely progress steadily. They'll probably pick up a few tenths of a second just as soon as they replace Nelson Piquet, Jr. How he's made it this long is a mystery to many.

A couple of innovations seen in the opening races are the driver adjustable front wing flaps are great for passing. Trim the tabs to lower drag and raise them up to increase front end downforce when following another car.

Toyota also used a nifty trolley for changing the front nosecone and wing assembly. Since many on track incidents cause front end damage which ends up requiring a front wing change, this trolley allows the team to quickly pull the old assembly off and slide the new one on. It's already at the right height and all the attachments just snap right in. Brilliant.

Coerced by his team or not, Lewis Hamilton is twice a liar; once for lying about the racing move in Australia. And then for lying about not lying. Quite shameful - especially for a reigning World champion. The McLaren team has shown over the past 2 years it is anything but a straight arrow. But the same could be said about the FIA. The whole concept of a legal system within motor racing is questionable. The way it's run is simply absurd. F1 somehow succeeds (for now) in spite of itself.

The pecking order has been turned upside down. Expect several new teams next year. The on-track racing has been awesome.

How About Some Creative Destruction?

Why is such a tremendous portion of the economy dependent on so few decision makers? So many great ideas, huge sums of capital, and tremendous skill and talent are concentrated in the hands of 3 giant companies.

Here's the problem. Automobile manufacturers control the pace of innovation because other than regulatory issues and whether the market will buy their products, they have the final say on everything in between: Engineering, manufacturing, distribution - the whole ball of wax.

What's more, senior management makes the decisions. Everything is funneled through the auto companies, and all the major decisions are funneled through to top management. If the people at the top are not good managers, and history indicates they haven't fared very well, then it doesn't matter how good their suppliers, their partners, and their employees are. Stuff just isn't going to get done right. And everyone down the line is affected, not just in those companies but among a much larger ecosystem of employee families, suppliers, dealers, and communities across the country.

The best way forward is to break GM and Chrysler up or let them fail. Remove the gatekeepers. The sum of the parts is worth more than the whole. Invest in new technologies and processes being developed by new companies.

Let investment flow to a more granular level. Rather than spending tens of billions of dollars trying to prolong the inevitable collapse, it would be more productive to create a new marketplace or exchange that would enable investors to put money into emerging green and safety concepts and technologies, lower the barriers to entry, and bring in new blood to the industry.

If cars were developed from more common building blocks rather than blocks unique to one company, ultimately there would be more and better vehicles to choose from, produced by more competitive companies, and greatly reduce the likelihood of having to rescue another one that is too big to fail.

White House Statements On Viability Plans

The White House basically told GM and Chrysler their plans won't work ("are not viable"). Both companies are uncompetitive, have too high of cost structures to survive and compete, and rely too much on large vehicles and SUVs. And both have overly optimistic outlooks on marketshare retention and pricing power.

Specifically, the summaries say GM's assumptions are break-even at best by 2014, with legacy liabilies reaching approximately $6 billion per year by then. This says it all: "Even under the Company's optimistic assumptions, the Company remains breakeven, at best, on a free cash flow basis throughout the projection period, thus failing the fundamental test of viability." Further, "Under its own plan, GM generates $14.5bn of negative free cash flow over its 6 year forecast period."

As for Chrysler, the statements included "...every single one of Chrysler's brands are in the bottom quartile based on JD Power APEAL scores", "... about 40% of quality issues (IQS/100 vehicles) are design related...", and "...in the first quarter of 2008, approximately 34% of buyers were subprime or near-subprime..."

The summary cited excessive costs due to a lack of scale, falling marketshare, overly optimistic assumptions, low quality image, and low odds of keeping up with CAFE standards.

Read the GM summary here.

Read the Chrysler summary here.

Finally, the White House goes on to back the warranties of vehicles purchased from these two companies during the restructuring period.

I'll leave you with this thought. Might GM and Chrysler products experience a decline in quality? Will it be hard to pinpoint if it's because low employee morale results in lower product quality, or struggling dealerships submit every little fault as a warranty claim? After all, it's backed by Uncle Sam. Just a thought.