Exhaust Notes #32: More Detroit Merger Talk

Are we nearing the end of Chrysler? Or the beginning of a new blended family? Or just another day at the rumor mill?
Late on Friday, the first stories began appearing about GM and Chrysler in possible merger talks. And at least in Detroit, dominated the weekend news cycle. GM’s stock went up this morning, but given that the Dow was up 5.6% and GM went up only about 3%, the stock bump might have happened without merger talk. GM closed on Friday at $4.89, a number some say is actually less than the company would be worth in capital assets alone.

All of this merger talk, whether these deals are realistic or not, does nothing good for public perception. The economy is weak, last week’s events on the stock market don’t reassure anyone, and talking about GM and Chrysler perhaps needing to merge to survive only further erodes confidence in American business. While GM and Chrysler LLC, as well as any other maker in trouble right now, needs to consider even unthinkable options and test our common assumptions as they get out of this trouble, this merger does not inspire hope.

Merger talks not new, for GM or for Chrysler
In recent years, GM has been in talks with Renault and with Ford. The Renault-Nissan conversation was sparked by perennial meddler Kirk Kerkorian, and sucked up a few months of GM’s and Renault’s time before everyone walked away. The Ford conversation was more recent, but Ford wants to stay independent.

Across town, Chrysler LLC is working hard to hook up with anyone they can, for one project, for a few projects, for the whole deal. Any hookup is better than no hookup. Along with the known VW, Nissan, and Chinese projects, and without actually saying that anyone has started talks, Chrysler LLC CEO Bob Nardelli commented on ways buy Chrysler LLC could be good for Renault-Nissan or for a Chinese manufacturer. Cerberus says Chrysler isn’t for sale, but you wouldn’t know that for the speculation in the air, or for the near-desperate search for a soul mate.

Whatever the intention was fourteen months ago when Cerberus stepped in, contemplating a sale to GM and talking publicly about strategic advantages one buyer may see over another sure makes it look like Cerberus is willing divest themselves of the automaker.

Cerberus might even still have hope for reviving Chrysler LLC, but to do so requires cash, products, time, and a will to push forward in uncertain times. All are in short supply for the near term. Cerberus is a financial company, this foray into carmaking notwithstanding, and the Cerberus corporate will to weather this storm may not be as strong as GM’s or Ford’s.

Merging might simply create one very large mess
GM and Chrysler LLC face many of the same issues, but the GM giant is both better and worse off for being the larger. Larger means more tools at hand, but also means more resources necessary and a bigger fall if the company did fail.

Merging backroom activities will take time and money to implement, has risk of poor execution, and may not reduce costs to the point of profitability. Both have concerns as to whether they have enough cash to hold out, both have overcapacity, both have internally competing brands (a bigger problem for GM), and both are seeing falling sales. A sharp rebound in car sales is not in the cards.

While Chrysler LLC is going through reorganization stress and shrinking pains, GM has invested much time and energy getting their global network together at a product level. That work has resulted in stronger products, and will continue to help ease costs. For GM to add three more brands, none of which are currently stars in the marketplace and include products that go head-to-head with GM products, does not seem wise. Merging these two companies would have result in the dissolution of some brands, eventually.

Advanced powertrain work also looks to benefit Chrysler more than GM. GM appears further along and has more products available to put this advanced tech into. Chrysler LLC doesn’t have the available brands, markets, and products worldwide that GM does. Chrysler products might benefit, but GM might be better off using the brands they already have to create economies of scale.

After all, with eight U.S. brands already in house, shouldn’t GM already have enough outlets to see strong economies of scale (assuming enough batteries can even be built)? Chrysler LLC is already part of the two-mode collaboration and has access to that technology. No gain there. If GM cannot find enough economies of scale selling eleven global brands, there isn’t much hope they can do so by adding three North American brands.

A little busy, perhaps? And this would be only the U.S. brands…

All About the Benjamins
There is one agreed-upon potential benefit to the tie-up: Cash. You do often have to spend money to make money. If GM could increase its cash on hand by merging Chrysler LLC in, some say that will help both get through. But merging also means initial expenses and time to integrate and implement processes that could lead to cost reduction. The cash infusion needs to sustain all eleven GM brands (eight not including international brands) and three Chrysler LLC brands for the short term, because it costs money to close a brand.

Some say GM could gain some ground with the UAW if they appear to be working to save their rival American carmaker. But merging manufacturing and engineering will ultimately result in fewer plants and lost jobs; the saving angel image wouldn’t hold for long.

Merging these two companies carries risks, combining two weak entities into one does not create for a stronger total, and it will result in lost jobs at OEM, manufacturing, and dealership levels. It will also probably result in lost brands and reduced product offerings, elements likely with or without a merger.

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