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