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What's Bad for GM & Chrysler is Good for Ford



March 30, 2009 – Comments (12) | RELATED TICKERS: GM , F


Yesterday news broke that the Obama administration is forcing General Motors to fire its CEO Rick Wagoner (see article: The Steady Optimist Who Oversaw G.M.'s Decline).  While I certainly don't think that all of the General's problems can be blamed on Wagoner, I have absolutely no sympathy for him.  He has been at GM for a loooong time, over eight years.  That's long enough for him to have to take responsibility for the company's current problems.  Chrysler's CEO Bob Nardelli received at least a temporary reprieve from Obama and friends, though I don't think that he's any better than Wagoner...he just hasn't been there as long.

So where do these two companies stand today?  GM has been given another 60 days to come up with a viable plan to repair what's left of its business.  Chrysler has been given 30 days to complete a proposed alliance with the Italian automaker Fiat. If Chrysler is able to reach a deal with Fiat, the government will provide it with another $6 billion in new loans.

For the life of me I can't figure out why Fiat would be in any hurry to merge with Chrysler.  It certainly shouldn't assume any of its debt.  What does Fiat stand to gain by hooking up with Chrysler?  Yes, it would be able to sell Dodge and Jeep trucks in Europe, but the key to this deal for Fiat is gaining the ability to sell its vehicles in the United States.  One has to look no further at the problems that small automakers have had over the years to see that size matters in the auto industry.  It is very difficult for small manufacturers to make it on their own.  Fiat knows this.  That's why they are interested in selling their vehicles in a large market like the U.S.

A merger with Chrysler would provide Fiat with access to a dealer network in U.S. through which it could sell Fiat and Alfa Romeo vehicles.  Let's be honest though, Fiat has been here before with both brands and things didn't work out very well for them.  And Chrysler's dealer network isn't exactly world-class.  Many, many Chrysler, Dodge, Jeep stores are pretty darn run down.  I don't see what the hurry is for Fiat.  What do they stand to lose if Chrysler files for bankruptcy?  Couldn't they just wait until it happens and then pick the bones clean, like what happened to Lehman?  I doubt that there would be tons of bidders beating down the bankruptcy court's door for Chrysler's assets.  To me, the longer Fiat waits to pull the trigger on an alliance with Chrysler, the stronger their bargaining position is.

Where do we go from here?  I can honestly say that I believe that it is complete coin flip whether these companies are forced to reorganize in bankruptcy.  In any normal world where Uncle Sam didn't feel the need to prop up every failing company, both GM and Chrysler would be complete toast.  Their existence outside of bankruptcy depends solely upon the kindness of government at this point.  One way or another, whether GM and Chrysler are forced to file for bankruptcy or not they are going to have to seriously reduce their production and get major concessions from the UAW and probably bondholders as well. 

No matter how this plays out, clearly GM and Chrysler have too much production capacity right now.  In order to survive or emerge from bankruptcy these companies are going to have to get leaner and meaner.  Substantial production cuts by its two domestic rivals is very good news for Ford as well.  Ford will be happy to gobble up whatever market share GM and Chrysler are forced to give up.

Furthermore, if GM and Chrysler are able to win major concessions from the UAW either now or after bankruptcy, there is a good chance that Ford will be able to negotiate similar terms without having to go through nearly as much pain. 

Increased market share and lower labor costs are a good thing for Ford.

What a mess.  As someone who earns his livelihood in the auto industry and knows countless people at both the manufacturer and dealer level, these events sadden me to know end. I can't say that I'm surprised.  My first two picks in CAPS were to give GM and Ford the red thumb.  I am seriously considering ending my Ford short pick in CAPS though.  As I just mentioned, much of the bad news that is out there about GM and Chrysler is actually good news for Ford. 

I'm not exactly saying that I am a raging Ford bull.  I still am very afraid of anything in the auto sector and I would never put real money there.  However, I see enough positives coming from GM and Chrysler's problems for Ford to consider ending my CAPS short of it. 

If one was to take a flier on Ford on the long side, the safer way to do it would probably be to buy its bonds.  It has some exchange traded debt out there under the symbol KSK that currently yields nearly 30%.  Be careful though if you are considering using real money on this trade.  The fact that its main competitors are having serious problems does not mean that Ford is out of the woods.  If the economy continues to worsen it is entirely possible that Ford will eventually be forced to negotiate some sort of haircut for its bondholders as well.


12 Comments – Post Your Own

#1) On March 30, 2009 at 10:10 AM, russiangambit (28.69) wrote:

My thinking exactly. But even Ford is going to sold off now with the rest of them. After the sell off subsides in a week or so, I plan to buy some Ford.

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#2) On March 30, 2009 at 10:31 AM, wolfhounds (66.10) wrote:

You're right on the money, but this is all prologue. In a blog I posted last May  , before the auto slowdown hit full tilt, I gave 35 years of reasons why the U.S. auto industry was doomed. It's now just playing out.

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#3) On March 30, 2009 at 10:36 AM, philippalmer (91.64) wrote:

Back in December, I gave it to Mid-March for GM and Chrysler to file for bankruptcy protection.  I guess they out did themselves.  I also said for anything positive to start happening at these companies, their CEO's would need to leave.  Looks like GM is the first to concede, eventhough he was pretty much fired by the "majority shareholder"....Uncle Sam.  I still think they need to do some brand overhauling.  I mean is it necessary to have a Chevy Tahoe and a GMC Yukon and a Cadillac Escalade?  Consolidation of the brands should be the starting point for cost-cutting.  It will cost quite a bit, what was it like $1B to fold up Oldsmobile.  If they are going to be taking the money, might as well use it smartly.  Hell, I will take a 100K salary and a weeks paid vacation and I will take a stab at being the CEO.  Thats cost-cutting at its finest right there.

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#4) On March 30, 2009 at 10:46 AM, EHoyle80 (< 20) wrote:

Q: Why is President Obama’s administration bailing out auto suppliers to the tune of $5 billion “in advance of reaching a final decision on whether it was going to approve Chrysler and GM’s respective restructuring packages”?

A: “The U.S. Administration in the end has no interest in seeing GM and Chrysler being pushed into Chapter 11 proceedings.”

Via Stock Research Portal

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#5) On March 30, 2009 at 10:48 AM, FoolishChemist (92.08) wrote:

Yes, it would be able to sell Dodge and Jeep trucks in Europe...

I doubt the Europeans would be buying a bunch of trucks.  Gas is still very expensive over there and they are not going to be jumping at SUVs.

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#6) On March 30, 2009 at 10:50 AM, Gemini846 (34.19) wrote:

I made some quick money when F went under $1 briefly. I'll be waiting this dip out but I expect to be able to get some for under $2.

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#7) On March 30, 2009 at 11:21 AM, falang1 (< 20) wrote:

I agree.  Chrysler would be bad for Fiat, the death of them.  Don't do it!  Maybe the administration has dangled enough of a carrot for the merger that it will happen but I think it's a bad idea. 

It's too bad about Wagoner.  It simply wasn't his time.  He had the ship moving in the right direction.  He reminded me of Japanese management.  Slow and sure.  Which seems to win the auto race.  I fear the next monkey-boy will jump through hoops and wave a bunch of hands in the air, piss off all the suppliers, unions, etc, come out with 18 electric cars that die after 3 years because they were rushed and the whole thing will go up in a plume of smoke.  Ugh.

 Ford I'm not so sure on.  Didn't they basically borrow a bunch of cash beforehand so now they don't have to beg for it?  It's not like they are raking in the profits.  They still have to prove they can make money.

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#8) On March 30, 2009 at 12:07 PM, saunafool (< 20) wrote:

I was thinking this morning as I read about Wagoner's ouster that Ford was looking pretty smart these days. They raised cash by selling off Jaguar and Land Rover when the getting was good and refinanced their debt so it is due in the future at low interest rates.

GM could have sold off Hummer (the civilian brand, not the Humvee military vehicle) and should have consolidated to about 3 brands a long time ago. They pulled the plug on the electric car and said that flex-fuel vehicles were their answer to $3/gallon gas until the market clearly told them that consumers wanted the Prius--much of the technology for which must have been available to GM through their electric car program.

Wagoner always talked a good game, but after 8 years, GM is still totally dependent on SUV's and trucks. In Europe, they have been introducing the Chevrolet brand, essentially competing with their Opel brand--and creating a bunch of overlap in models and car categories. It doesn't make any sense.

Politically, I think they kicked him out so that when they go to the unions asking for concessions, they can show that they took some blood from the top as well.

As to Fiat, their small cars and Alfa Romeo sport cars are not your father's budget car. They are nice. Having access to the American market would be good for Fiat, but I don't see how it would be good for the American manufacturers. More competition? Just what they need. I just don't see what can be done with Chrysler. Do they make any product that isn't available somewhere else?

The only car they have that does OK in Europe is the Chrysler minivan.

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#9) On March 30, 2009 at 2:46 PM, Matt8265 (24.84) wrote:

I think F is a buy of a lifetime and bought 24.3K shares today. The pipeline for Ford is full. Surveys now show people are already turning from DCX and GM BEFORE today's news.

Ford will enjoy bond business that is no longer going into GM. It looks Great for Ford. 

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#10) On March 30, 2009 at 5:08 PM, TMFDeej (97.46) wrote:

FYI for anyone who is interested enough in the auto sector to have read this far:

Ford Bonds Rally as Automaker Seen Least Likely to Go Bankrupt


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#11) On April 02, 2009 at 2:53 PM, Melaschasm (69.58) wrote:

A very well thought Blog.

 I want to add one major note of caution for people investing in Ford.  From rumors I have heard if Chrystler liquidates, it could bankrupt a bunch of suppliers of Ford, and if GM goes under, it would be even worse.

I to would like to buy Ford at bargain prices.  This might be the time to buy.  However, I am holding off until after things settle down a bit. Because I tend to be cautious, I suspect that it will be 6 months before I would be comfortable taking a risk with Ford, by which time their stocks and bonds may have already made big gains, and not provide the chance for monster returns.

Good Luck to all of you investing in Ford, as well as to the Big Three. 

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#12) On April 02, 2009 at 4:26 PM, BSHumphreyII (73.35) wrote:

I've thought this for some time.  It certainly seemed to be against Ford's interests for Mulally to be sitting next to Wagoner and Nardelli advocating for GM and Chrysler to be given bailouts.  Propping up one's competitors while at the same time being smeared and barked at alongside them seems counterintuitive to say the least.  The only thing I can think of is that Ford fears that Chapter 11 will give their competitors a head start in restructuring their labor contracts.

I do like Ford in the long run as the relative winner among the US auto companies, but I certainly don't think now is the time to buy.  I still have doubts as to their ability to become profitable by the end of 2010, though increased market share will help with that.

As for Wagoner, I honestly don't think anyone could have saved GM.  Until they find some way to offload their crippling pension and benefits expenses, they'll remain a broken company.  Wagoner, unfortunately, was never really in a position to do that.

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