How To Save the Big 3 Automakers

Includes: AXL, F, GM, HMC, LEA, MGA, TM
by: Jason Schwarz

The clock is ticking.  The big three U.S. auto makers of GM, Ford, and Chrysler are bleeding cash.  Some estimate they won’t make it through February.  Deutsche Bank analyst Rod Lache lowered his price target on GM stock to $0.

“Even if GM succeeds in averting a bankruptcy, we believe that the company's future path is likely to be bankruptcy-like."  Also facing "major risks" are parts suppliers Lear Corp. (NYSE:LEA), American Axle Manufacturing (NYSE:AXL) and Magna International (NYSE:MGA).” (source: MarketWatch

The risk of losing one out of every 10 jobs and and the threat of breaking the backbone of American manufacturing is staring the Obama transition team in the face.  Creating a long lasting fix for the automotive industry has become priority numero uno.  The government is leery about throwing more money at a broken system.  A cash infusion to this group is like giving a drug addict more drugs.  Politicians are searching for real solutions.  

There’s only one way to do this if Obama wants it done right.  He needs to give restructuring authority to one individual, similar to the power that former Goldman Sachs CEO Hank Paulson has had with the financials.  This position must be filled by an individual who would be well respected by the other CEOs, someone who knows the auto industry but won't be bogged down by its mediocre past, and someone who understands the art of the turnaround.  

As a pre-condition to receiving survival funding, the automakers and the unions must be forced to concede their restructuring rights to this new automotive czar.  He can then act in the best interest for the industry rather than tripping over the individual self interests of turf protection that have caused this out-dated model.  All three companies are dealing with the same issues and the restructuring of the system needs to be streamlined. 

Statistics show that consumers won’t buy cars sold by a company in bankruptcy so let’s solve that by coordinating the bankruptcies to happen on the same day.  If the public knows that the three companies are in unison, and that the restructuring process will be relatively quick, I guarantee you sales won’t be any worse than they’ve been over the last few months. While under the protection of chapter 11, the czar will restructure debt and labor commitments while revamping the business structure to create incentives for innovation. 

Let’s face it.  The U.S. automotive industry has been run by a bunch of keystone cops.  GM’s model has been broken for 40 years.  Conceding the luxury market to Germany put us on a path of pinched margins that we have never recovered from.  The dominance of BMW, Mercedes Benz, Porsche, and Volkswagen (OTCPK:VLKAY); not to mention Honda (NYSE:HMC) and Toyota (NYSE:TM),  put our companies on shaky ground.  The oil bubble brought the final crushing blow.  $5/gallon at the pump caused a generational scare for consumers who never want to get burned by gas guzzling SUV or truck ownership again.  

Americans are expecting an Obama presidency of change.  With the industry at an alternative fuel crossroads this is an ideal opportunity to usher in a new era.  Enter Mitt Romney.  Mr. Romney has made a career out of orchestrating successful turnarounds.  He did it at Bain Capital, he did it for the Olympics, and he did it in Massachusetts.  His father turned around American Motors in the 1950’s.  The automotive industry runs in his blood.  Could Obama ever pull the trigger on such a dramatic move of bi-partisanship?  Absolutely.  I predict the legacy of the Obama presidency will be his ability to bring people together.   Give Mitt 100 days to restructure the big three and transform them into the alternative energy innovators to lead the world.  Mitt was born for this role.  He'd become the Steve Jobs of cars.   In a recent interview Mr. Romney remarked:

Q. Given your Michigan roots and what your father accomplished turning around the American Motors Corporation in the 1950s, what do you think is the future of the auto industry?

A. Right now, the auto industry is on life support, and its prospects look extremely dim. But they don't need to be. The industry could be turned around. There is no inherent reason why America can't build and sell cars to Americans at least as well as the transplants are doing. Any effort to help the auto industry has to be made as part of a comprehensive strategy. Before the government issues loans to the auto industry, as has been authorized by Congress, it should insist on seeing credible and independent strategies that will return the companies to long-term sustainability. Government should not finance ongoing losses and declining market shares (source: CNN Money).

We are in need of a return to quality and innovation.  Consumers are always willing to buy both.  Out with the keystone cops and in with some new blood.   An Obama/Romney ticket sounds pretty good for Detroit.  Investors should proceed with extreme caution through this process as it has become common for most government intervention to dilute or even dissolve current shareholders.  If a structural change happens, this will be a great sector to own at a later date.  Stay tuned...

Disclosure: None