Why Chrysler Represents the Ills of the New America

I entered the corporate world as a management trainee learning the trade from the bottom up. There was a common theme coming from the managers above – I was to take care of the people below me because they were more important to the success of the company than I was.

Yah, obviously it was true because my teamster foreman made three times my salary, and one of my technicals made twice what I did. In fact, of the 60 people in my first group – I was the lowest paid. Pay was based on relative contribution, not seniority, not org chart position.

In those early days of my career, I watched the head of my company (and one of the 50 richest people in the world) walk through and greet the ‘little people’. He knew many on a first name basis. He knew the profits were generated from the activities of the lower organizational levels.

I watch the goings on at GM and Chrysler and wonder if Richard Wagoner or Robert Nardelli knows the name of a single person on the assembly line. I know things are different today. Profits are now generated by senior management.

I have read a few articles comparing the elements of the financial disaster at GM to America’s economic ills. I believe Chrysler is more truly representative of the new America.

Cerberus Capital Management bought Chrysler in 2006 from DaimlerChyrsler AG. Cerberus had built a reputation as being vultures of undervalued companies and turning them into profit machines.

What the hell was in Cerberus’ head? The German owners of Chrysler did not know how to make them profitable – they understood cars and making money. How could the three headed dog guarding hell's gateway turn around a manufacturing company? Were they bringing new technology to the table? Did they have a vision for partnering with organized labor that would make them competitive with foreign car makers? Did they have a new car design? I think not.

According to some analysts, Cerberus only paid $2.2 billion for Chrysler’s car making operations. The rest of the $7.4 billion purchase price was for Chrysler’s financial services. $2.2 billion is chump change. But whatever the real breakdown was, Cerberus never intended to make the car making arm of Chrysler viable as that was impossible. They obviously were only after the Chrysler financing arm.

Was bankruptcy always in the cards? Was a sale of the car making operation to GM? You and I have fed this beast $4.3 billion of bailout money, and they want $5.3 billion more. They have submitted a recovery plan which must carry excessive risk because Chrysler’s owner’s Cerberus will not fund it.

Business believes the biggest profits go through sleight-of-hand – We have entered the wacky Bizarro world of business. Profits are no longer generated organically but through trickery and balance sheet manipulation. Cerberus represents the new way forward where you make money manipulating, not making things. Banks provide little to the economic engine yet were a significant percentage of the equities market. Banks found a way to get really profitable doing nothing. Cerberus owns 51% of one of our newest banks – GMAC (GKM).

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Big business views workers as overhead – Chrysler is working the pits. Playing organized labor off against organized labor. Workers are pawns in the money game. Chrysler is pitting Canadian workers against US workers. Traditional overhead in a goods production company is management and bean counters as they add nothing to the product. Today workers are a major cost element and are not controllable. They are either replaced with machines, outsourced, or the production line closed. Chrysler is doing all three at once. Money always flows to the sector which returns the highest profits. Sectors which make things are not sexy – and not very profitable.

Debt – Chrysler has a lot of it. So much so that it is probably bankrupt.

Honesty – Business today is no better than Facebook’s Yoville. Truth cannot stand in the way of making money. You lie, you cheat, you spin – amass the profits. If the rules don’t suit you – reprogram the game. We used to say in business that the agreement was no better than the handshake – now you know instinctively agreements are worthless. Absorb the words (.pdf) of Robert Nardelli as he explains to Congress why Chrysler should get taxpayer money. I wonder if we have become a world of actors.

The problems at Chrysler have intersected the American dream. The goods production base in America was abandoned for other ways to make money. We borrow; we look to the government for the next handout stimulus; and not telling the truth is okay as long as you make money and cannot put a face on those you screw.

We will import what we need. But wait – what will we export? Toxic assets? Debt instruments? Most probably we will not be able to export these again as a lot of world leaders seem to be blaming this worldwide recession on our last batch of toxic exports.

America has a structure failure. Peter Morici in testifying to Congress this week points to excessive imports being one of the primary culprits in causing this Great Depression. Hello, how can you stop importing when you don’t make stuff?

Disclosures: None

Comments

[DanielG:]

My GOD I thought I was reading an article in Salon, not Seeking Alpha!
Mr. Hansen you have hit the proverbial nail on the head WITH A SLEDGEHAMMER! THANK YOU!
American business has hit a new low and they don't seem to give a whit one way or another. Bernie Madoff is the tip of the theivery iceberg as ...shall we use the term BIG BUSINESS is in the Halls of American Government begging for a handout while all the time putting it to the American worker PAYING THE HANDOUT.
When will it end?
Dan in Rockford, Michigan

Mar 12 01:57 PM

[SeekingTruth:]

This fine hard hitting article is right on target, but, at the same time, begs the question:

What are the SOLUTIONS - short, medium, and long term?

As long as the business schools continue to teach that each manager should hire a manager dumber than himself immediately below him in order to protect his own job, there is little hope of progress. There are numerous ruinous modus operandi items of a similar nature embedded and spread thruout the business world in America.

Unless and until we break this cycle of self delusion and insanity, America will continue to suffer and lanquish. Looks like it will have to start in the schools ,so we're looking at a generation or more for any improvement, even if we started today, which we are NOT.

Mar 12 03:34 PM

[dw57:]

todays economic debacle was caused by what this article talks about. business requires customers that can afford their products. but wall street pushed business to keep wages of consumers as low as they can. which begs the question.

Just who is going to buy their products if consumers no longer can?

Mar 12 03:44 PM

[PainfullyAware:]

The Hand - With Another Truth Smackdown. You Rock Steven

Your initial description of "Knowing your people and pay for contribution" describes a "Company". "Humans as a Resource" is the description of a "Corporation". The effectiveness of a "Company" tends to wane shortly after 200 people/employees. I would personally like to see this as an upper limit - a kind of cellular division level. No more "Too Big To Fail" and better functionality.

Unfortunately, the "Tax" and "Regulatory" Structures do not incentivize this; It favors merger and conglomeration into un-vital behemoths. Pretty easy to see the dangers of this in our current environment.

Mar 12 08:26 PM

[Sentinel:]

" Business believes the biggest profits go through sleight-of-hand – We have entered the wacky Bizarro world of business. Profits are no longer generated organically but through trickery and balance sheet manipulation. Cerberus represents the new way forward where you make money manipulating, not making things. "

That statement should be nailed to the door of everyone of the SOB politicians who wake up every morning thinking of some new way to help businesses offshore our one time best of class manufacturing and to the doors of everyone of the Cornucopian Globalist shills at CNBC, Bloomberg, et. al. like Luther's 95 theses.

This article cuts like a laser through butter.

Excellent... and so terribly true.

Mar 12 10:03 PM

[growroe:]

When I first started out, my first job was with CitiBank, in Wall Street back office operations as an entry level manager. The Bank was in transition from the business-statesman Walter Wriston to the technocrats. One day, Mr. Wriston came to vist us, sat on top of a desk and talked, not lectured but talked, with us. Later, when a snow storm closed the City, only a handful of us showed up for work and a few days later, Mr. Wriston's office sent us company pens and a thank you note along with a day off, all as rewards for our dedication. We would have waled through Hell's fires for that man.

Then the technocrats took over, mostly McNamara's Ford Wiz-Kids. Absolutely the biggest bunch of liars, cheats and number crunchers I've seen to date as a group. They even lied to each other. Group EVP says lay off staff, and his direct reports dutifully laid them off and brought them back as consultants - a different P/L line item, all the while taking the cudos for being agressive with staff.

The culture of Corp America is 'what's in it for me'. In my opinion, it stated in 30 years ago when everything became a 'deal', no people need be considered. In B-School in the late '70's, we were encouraged to be 'lean, mean and keen', and so our current business leaders are from that school of thought. Now, our best industries are ponzi schemes and suing each other - pretty much like any society in entropy since the dawn of civilization. The good news is that offshoring cheat-schemes and suits is hard, so at least we'll have some viable economic activity around here.

Chrysler's takeover by Daimler was a culture clash - when you work for a foreign company with a strong identity in and to its 'motherland', if you're not from that country, you're a second class citizen and that's what happened to Chrysler's people and fortunes. Think colonialism.
More on my Blog, growroe.com, but you get the gist.

Mar 13 08:19 AM

[John Lounsbury:]

Steve - - -

Another thorough discussion. Thanks. You attracted a great comment stream, as well.

I want to bring up a related topic which has not been discussed here: Executive compensation. This is not directly related to vulture capitalism, as described in the article and comment stream, but I see it as a corollary discussion. For anyone reading this who finds my comments repetitive with other comments I have made, I apologize.

I believe people who build great businesses (or maintain them at a high level) should be rewarded handsomely. However, compenstation based on 1-4 quarters of performance is bound to come up with some problems. Why should a CEO emphasize building long term success if he can make tens of millions of dollars with one year's manipulation?

I would like to see more deferred compensation, maybe up to 10 years. If a CEO has a base salary of $1M (paid in real time), he could receive bonus compensation for that year's performance, but defer payment for 10 years. If the company fails to survive ten years, he loses the bonus.

There could also be conditional bonuses based on future performance (3-year, 5-year and/or 10 year). These also could be deferred past the 3-, 5- or 10-year windows before vesting to reduce the temptation to manipulate.

I think that executive compensation plans should be on the table for all corporations. We need a better system.

Mar 13 01:13 PM

[Amitabha Mu...:]

The opinion of the author is hundred percent correct. Actually I have also written in similar lines before. America as we know it today has become a soft power, it is no more a technology giant or a manufacturing giant. It has only emerged as a virtual giant whose only activity is in the areas of paper money. How to manipulate and how to create virtual profit. And it happened thirty years back since when the best boys and girls of America opted for the soft courses of literature, economics, financial management, medicine and law. America certainly would be a very technologically advanced country if it could produce hundreds of thousands of engineers and technocrats. The mathematical skills also of its students are below average.Compared to that in India still the best boys and girls go for engineering and technology.

Mar 13 02:33 PM

[john s. gordon:]

dw57 -

remember henry ford's revolutionary idea, pay the workers 5.00 a day so that they can buy the products rolling off the assembly line.
> jack

Mar 13 03:11 PM

[john s. gordon:]

interesting story in business week today about how auto parts suppliers are in danger of going out of business (some already have) because banks are not willing to make loans to enable the firms to conduct their business.

role here for government to provide specialized banking services, or guarantee loans made by banks for this purpose.

when the parts makers can't supply parts, the assembler factories shut down & the revenue stream shuts down. can't have a bottom line without a top line. the japanese/german transplants will be affected too, not just the 'big 3' (those were the days.)
> jack

Mar 13 03:17 PM

[Yohei:]

I remember my Dad telling me in 1965 that I should get a Harvard Business School MBA because that was the way to get rich and powerful.

He mentioned a lot of names of Harvard MBAs who had become big dogs. I didn't fall for it.

I never have known a Harvard MBA I could respect. Very, very few MBAs I know I respect - I can only think of one.

This rot goes back a lot longer than thirty years. Robert McNamara (Harvard MBA 1939)was born in 1918. He was a man of no honor or integrity and an unabashed suck up. McNamara was not the first of his sort, either.

Mar 13 03:31 PM

[Yohei:]

Actually Old Henry was getting way too much of his tooling destroyed by the line workers. He put the $5 a day program into effect to give the line workers something to protect. Worked for a while.

The business about line workers being able to buy a Ford had nothing whatever to do with it. The idea is a myth, part of the public relations of the time.


On Mar 13 03:11 PM john s. gordon wrote:

> dw57 -
>
> remember henry ford's revolutionary idea, pay the workers 5.00 a
> day so that they can buy the products rolling off the assembly line.

Mar 13 03:37 PM

[bthomas:]

The bankers must be reined in. We should start with rational regulation where responsible adults can trust the veracity of what comprises AAA rated securities. Those irresponsible parties must be held accountable. Conflict of interest is pervasive on all sides, from government to regulator to business . This seems to escape everyone's attention. It's all public money now folks, the public trust must be upheld. We are ten years hence from repealing Glass Steagall. Everything is in shambles now because greed overrode every other aspect of life. The Fed has too much power. congress should work to rein this in. Glass Steagall, or whatever replaces it, must be enacted to require people to do what greedy people cannot do for themselves: -the right thing. Split them up. Preserve the public trust.

Mar 13 03:38 PM

[samwise:]

If Cerebus bought the company for its debt and not its product, clearly it overpaid! if you have skin in the fight then complain. why not simply go to cerberus and ask them if 2.2 billion seems cheap now? literally the bottom line: only thing keeping this FINANCIAL company afloat is your taxpayer dollars and the Democrats visceral need for an "industrial policy" which right now seems more like fear of the failure of anything. Still, the numbers don't lie even if the government does: 17 million cars sold in N. America to now under 10 million AND FALLING. Painfully Aware has another great observation in the intrinsic value of "smallness" in an economic enitity. Clearly "downsizing" doesn't do what's going on now in the autos and finance justice! still--corporate america BECAUSE of Henry Ford all talked about one thing: SCALABILITY. That means one thing: MASS PRODUCTION. If you look at the boom in the 90's that really continued right up until this year it was all based on this concept. In other words "technology" is literally worth more than all the precious metals used to create it due to the fact that MILLIONS of them could be created--and that's factoring in a basic level of engineering incompetence into the technology (amazingly enough--witness Microsoft, right?) Bottom line: China as the "mass producer" has already "flattened" Germany "the speciality (small is beautiful) producer" in terms of economic power and might--so the win goes to Henry Ford and his concept of production and not "Teutonic engineering." That's in the space of consumer items, however. Once you get into military and "political" engineering however (in today's parlance--infrastructu... it's a whole new ball game. Can't just pump out Space Shuttles if you know what I mean. Clearly that's the Obama agenda and ironically very similar to Bush II and perhaps could be considered a "scaled up" version of that regime.

Mar 14 03:26 PM

[Alfredo Mar...:]

How about addressing the elephant in the room.

Why are the Big 3 automakers the only automakers that are bankrupt?

Could it be they're the only car companies that use United Auto Workers Union (UAW) labor?

Even if Cerberus has never acquired Chrysler, they'd still be in the same situation as GM or Ford.

The attitude of entitlement in this country is pervasive along all sorts of workers, not just white-collar suits on Wall Street.

Who in their right mind thinks you can pay uneducated assembly line workers a six figure salary when your company is actually losing money.

Mar 14 03:46 PM

[11togo:]

"The new way forward where manipulating money instead of making things." Truer words were never spoken.
The corporate attitude where employees are liabilities
instead of assets, has been a key contributor to the current economic distress.
When did wage freezes-cuts, elimination of pensions, suspending contributions to 401K's, chopping benefits, escalating health insurance, become GOOD for a country?

Mar 14 07:26 PM

[PROXIMO:]

"Very,very few MBAs I know I respect-I can think of only one." MBAs as a group are no worse than any other group. Many fine people are MBAs and many jerks are MBAs.


On Mar 13 03:31 PM Yohei wrote:

> I remember my Dad telling me in 1965 that I should get a Harvard
> Business School MBA because that was the way to get rich and powerful.
>
>
> He mentioned a lot of names of Harvard MBAs who had become big dogs.
> I didn't fall for it.
>
> I never have known a Harvard MBA I could respect. Very, very few
> MBAs I know I respect - I can only think of one.
>
> This rot goes back a lot longer than thirty years. Robert McNamara
> (Harvard MBA 1939)was born in 1918. He was a man of no honor or
> integrity and an unabashed suck up. McNamara was not the first of
> his sort, either.

Mar 14 09:03 PM

[shure46:]

The solution is for us to get our manufacturing butts in gear , and our priorities straight .... I will use NIKE as an example .... They pay overseas workers 25 cents an hour to make shoes , but they pay Michael Jordan and Tiger Woods 60 million a year to wear 'em .... We have things ass backwards in this country

Mar 15 12:24 AM

[deodand:]

A refreshingly honest, critical and blunt analysis of the Wall Street rot at the core of this broken system.

These gangsters are deliberately gaming and looting the system, buying off politicians and capturing regulators, and funneling their ill-gotten gains into secret offshore bank accounts.

It's not accident that this ex-Federal Reserve tool acting as Treasurer is a tax cheat and a front runner of the banking cartel.

Mar 15 09:35 PM

[Jan Baker:]

Ít may well be that this article has 'hit the nail on the head,'but where is the practical application?

Do readers have any idea how difficult it is to inculcate a culture of ethics into civilization? And how easy it is to rid mankind of it? Our default is theft! Our default is murder! Incest! Lying!

It took the Church two centuries to establish a base of honesty, and it was always shaky and always depended on extreme vigilence. It began at birth and extended through life. It included the sacramental sign of baptism, and six other sacraments designed to offer sinful mankind the grace to rise above our instincts. Not one activity was without a standard, and the penalty for non-compliance was hell-fire after death, and social sanction during life. Divorce was heavily sanctioned, infidelity as well, since these two behaviors alone sum up the perfidy of shoddy business practices. (How many readers here are enjoying the trophy wife?)

How many of you would be willing to give up any of your favorite perversions, now ácceptable throughout our sick society, in order to return to the days when a handshake meant something?

Please. It's one thing to say our system is 'broken.'It's quite another to have the imagination to know what is necessary to fix it. You don't get honesty by wishing for it. Every single element of society must be focused on it, and then you sometimes get it. But it was enough, in the past, to make the system work. What we have now is the economics of paganism, just as we now have the morality of paganism. Changing that would mean getting down on your knees.

Mar 18 12:14 PM