Chrysler/GM Merger Proposal Confirms Folly of Auto Bailout

The Wall Street Journal recently reported that Fiat Chrysler Automobiles CEO, Sergio Marchionne, has been pressing for a merger with General Motors. Marchionne has been appealing to hedge funds and activist investors in a move that seems to verge on desperation. The main takeaways from the appeal are that the government bailouts of GM and Chrysler were not a long-term fix for the industry and that Mr. Marchionne is one of the few experts on the industry who is honest enough to admit it.

Marchionne has had a history of speaking his mind on topics that are not politically palatable to other auto industry executives, such as GM CEO Mary Barra. In 2014 Marchionne asked consumers not to purchase Fiat’s entry into the money-losing electric car segment, the Fiat 500e. Unlike Barra and GM, who refuse to admit to the struggles of electric cars like the Cadillac ELR and Chevy Volt, Marchionne prefers not to lose more money for shareholders by continuing to reduce prices at the expense of profitability. Here are some quotes from Marchionne as reported by Reuter’s in May of 2014:

"I hope you don't buy it because every time I sell one it costs me $14,000," he said to the audience at the Brookings Institution about the 500e. "I'm honest enough to tell you that."

"I will sell the (minimum) of what I need to sell and not one more," Marchionne said of the 500e.

"If we just build those vehicles, we'll be back asking … in Washington for a second bailout because we'll be bankrupt," Marchionne said of electric cars.

One does not need to delve deeply into Marchionne’s latest statements regarding a merger to understand the present situation; the auto industry is as competitive as ever and the inevitable end of the current cyclical sales strength will bring trouble to one or more major automakers. That may just lead to Washington once again sticking its nose into the auto industry at the expense of taxpayers.

While I have often given a contrarian view to the perceived financial strength of GM, it has always been Chrysler’s car division which has been the weakest of the bailed out entities. I emphasize “car” division because Chrysler’s trucks and Jeep models have always outperformed the car segment, particularly pertaining to profitability.

Marchionne separated Dodge's auto and truck segments not long after the Obama Administration gave Chrysler away to Italian-owned Fiat. This was an early indicator that he was very aware of the differences regarding the likelihood of long-term viability for Chrysler cars compared to its trucks.

We now are faced with the speculation of what the auto industry will look like once car sales drop off. And yes, they will eventually drop off. That is particularly likely considering that consumers are stretching finance terms and relying upon aggressive lease deals to drive current sales.

Considering that Mr. Marchionne is more proactive and shows more honesty regarding the risks to the industry, I would expect Fiat Chrysler to be more likely to be the first to address concerns to long-term survival than would the politically-trained minds at GM.

I don’t see a scenario where GM would be interested in a merger with Fiat Chrysler. They would rather deny that GM and the industry have anything to worry about. It is possible that the Obama Administration (if the downturn happens during present term) will work behind the scenes to encourage a deal, if the alternative is to see Chrysler’s car division disappear. That would be a major blow to the perceived success of the Obama auto bailouts.

So, if Marchionne is smart, which he is, he will entirely split off and kill the Chrysler car division if history repeats itself and UAW labor costs start to further bury profitability at the company. The Jeep and truck divisions then would have value to be spun-off, or retained. Of course, American taxpayers will first be asked to contribute to the cause to prevent any loss of jobs in America.

It still comes down to the fact that the auto bailouts were not the raging success that voters were led to believe they were. The industry is as competitive as ever, profit margins are thin and increasing EPA standards weigh on profits. Add to that the individual millstones around the necks of GM and Chrysler which are UAW labor costs.

One does not have to look further than share price performance for GM to accept the above conclusion. Hedge fund types (like former Obama Auto Task Force member Harry Wilson) who orchestrated the auto bailouts fail to realize that the auto industry needed consolidation, rather than taxpayer money, for long-term strength. Companies like GM and Chrysler need to limit labor costs and build vehicles with the most value and appeal to the mass-market to survive.

Wilson recently proved that his knowledge of the auto industry is limited as his pressure to have GM spend billions of dollars to repurchase shares has done nothing to drive up share price while diminishing the financial strength of the company. That recent move alone is enough to bring into question whether or not the right people were placed in charge of bailing out the auto industry.

America would have been better served if auto industry experts were consulted with to best determine how to assure long-term survival of the industry rather than allowing legal and financial minds to spend billions of taxpayer dollars to achieve political goals. Sergio Marchionne’s calls for consolidation should open a dialogue as to where the auto industry is headed. It should also bring into question the perceived success of the auto bailouts, a perceived success that helped President Obama win a second term in office.

Mark Modica is an NLPC Associate Fellow.