Details on the New Fuel Efficiency Standards

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Okay, the White House had a briefing on their vastly improved new fuel efficiency standards. Basically, what they’ve done is get everyone (the companies, the states that wanted higher standards, and the EPA) to agree to one nationwide standard that will be in effect through 2016. And in exchange, CA will drop its push for its own state standards and the standards will be slightly postponed (though the outcome by 2016 will be roughly the same). 

That’s the overview. Unfortunately, I didn’t get to ask,

I can’t help but notice that GM plans to import Chevy Sparks according to the same schedule (2012 to 2016) that the Administration’s new fuel efficiency standards go into place. Did the Administration and GM ever talk about the efficacy of importing cars from China to bring up fuel efficiency?

Instead, a bunch of TradMed reporters (albeit smart ones who know about the auto industry) got the questions.

So here’s the big news.

This is not CAFE standards, as we know it. That is, the new standards (to be released tomorrow) are not one number across the entire fleet (something which forces companies to sell cheap efficient cars that their dealers don’t want). Rather, the standard has an overall fleet average (35.5 MPG by 2016), with segment MPG limits (as a guess, small cars like the Fiesta and the Fit will be expected to make 40 MPG or more), along with a specific target for each manufacturer.  Which will, overall, get us to 35.5.

And no, I don’t know what happens if demand for different segments change over time (that would have been my second question). 

That said, this is smart because it forces auto manufacturers to increase efficiency on all cars, not just small cars that no one wants. 

The cost of this, btw, will be $600 per car over what CAFE standards already require (which will itself cost $700). So expect the price of cars, in an already devastated industry, to go up. 

And, finally, the stats. This works out to:

  • 5% per year increase in fuel efficiency
  • An increase form 25 MPG fleet average to 35.5 MPR fleet average 
  • 1.8 billion barrels of oil saved
  • A reduction of 900 million metric tons of carbon dioxide in the atmosphere
  • The equivalent of 177 million cars off the road–or 194 coal plants shut down

The Advantages and Pitfalls of Auto Bailouts

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picture-103.thumbnail.pngI’m (finally) working on my post on the Chevy Volt.

But before I do that, I want to lay out three data points–and point to some of the policy issues that still need resolved if we’re going to have a viable American auto industry.

The first is the excellent news that Obama has will announce really aggressive CAFE efficiency standards tomorrow [they’re not CAFE standards]–35.5 miles per gallon.

The Obama administration is set to announce tough standards for tailpipe emissions of carbon dioxide from new automobiles, establishing the first ever nationwide regulation for greenhouse gases.

It will also establish high fuel efficiency targets for new vehicles that would set a 35.5 mile per gallon average for new passenger vehicles and light trucks by 2016, four years earlier than required under the 2007 energy bill, sources close to the administration said.

The administration is embracing standards stringent enough to satisfy the state of California which has been fighting for a waiver from federal law so that it could set its own guidelines, sources said. Gov. Arnold Schwarzenegger (R-Calif.) will be among a variety of state and industry officials attending an announcement tomorrow, said sources close to the administration.

The compromise deal, which has been under negotiation since the first days of the administration, includes the White House, the state of California, and the automobile industry, which has long sought a single national emissions standard and has waged an expensive legal battle against the California waiver. The industry will get its single national standard, but at the price of one that approximates California’s targets.

Make no mistake–this is a huge bump in gas efficiency and will have a big impact on our gasoline use.

But I suspect Obama’s announcement came with a trade off–and perhaps not the right trade off. As David Sirota and others have reported, GM’s current recovery plans have quietly included plans to import their Chevy Spark (that green thing above) from China.

GM expects to sell about 17,300 China-made vehicles in the United States in 2011 and to triple that to about 51,500 in 2014, according to a planning document that GM circulated among U.S. lawmakers. The document did not name models or say what their brands would be.

The plans are subject to change pending the outcome of negotiations with the UAW and already have drawn fire from lawmakers and others. If GM goes forward with the plan, it likely would become the first major automaker to ship Chinese cars to the United States.

The Chevy Spark is an increasingly popular in China, India, and is being exported from China to Peru (and is, I believe, what GM plans to assemble in the Russian factory it built last year). Read more →

Big Auto Musical Chairs

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Okay, I didn’t see this one coming.

General Motors is staring imminent bankruptcy dead in the eye:

In April, the automaker drew another $2 billion and has said it would expect to need another $2.6 billion from the U.S. Treasury before the June 1 deadline. That would take GM’s debt to the U.S. government to $18 billion.

GM has asked its three major creditor groups to write off at least $43 billion in debt in exchange for ownership stakes in a restructured company.

GM bondholders, who are owed $27 billion, have also been offered new stock in exchange for writing off debt in a bond exchange the automaker launched last week.

GM is targeting a reduction of at least $24 billion, or 90 percent, of its bond debt under the plan and has warned that it could be forced into bankruptcy if that cannot be achieved.

Read the entire article, it is a bleak picture for the General.

Good golly that sounds dire, I wonder what new ideas are afoot to reign in the size and voracious appetite for spending at GM? Well, glad you asked, because they want to acquire a significant stake in Fiat!

Four years after paying $2 billion to extricate itself from a partnership with Fiat, General Motors is seeking a stake in the Italian automaker in exchange for its Latin American and European operations.

General Motors is eager to cede control of its money-losing Opel unit in Germany. But Fiat has also expressed interest in G.M.’s other European operations as well as its historically profitable Latin American business, though the possible terms of such a deal have not been discussed publicly.

G.M., despite its precarious financial position, now feels it has a bargaining chip with its Latin American unit, and is negotiating with Fiat over what it might get in return.
…
But G.M. executives are holding out for at least 30 percent of the Fiat Auto Group, according to these people, who said they were not authorized to comment publicly because the discussions are fluid.

Fiat. You know, the same Fiat that is supposedly saving Chrysler by merging with it. A merger, by the way that is effectively being subsidized by the bailout funds from the US taxpayers. And they are going to cut a deal with GM, who is surviving almost exclusively by the good graces of the US taxpayer.

And here is a nice little kicker, Fiat is looking for Read more →

The Next Anti-Union Myth: Obama Gave Them Chrysler

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Prepare to see lots more stories like this one–stories that suggest Obama, out of whatever good intentions, decided to "give" the UAW Chrysler even while he deprived banks of their rightful return on debt.

Regardless of its literary influences [in Machiavelli], the Obama administration’s decision to give unions a big stake in the ailing Chrysler while strong-arming banks into forgiving a huge portion of debt is a sign of the times.

A nearly bust carmaker, several lenders that owe the government billions of dollars (and, in some cases, their survival) and an interventionist president eager to be seen to be tackling the nation’s economic ills: welcome to the United States of America 2009.

I have heard the arguments supporting the decision to short-change debt holders and carve out Chrysler between the unions (which get 55 per cent but just one board seat), Fiat (up to 35 per cent and three board seats) and the government (most of the rest of the equity and four board seats).

They boil down to this: extraordinary times require extraordinary measures (the end justifies the means, if you like).

In other words, with Chrysler employing more than 50,000 people in the US and Canada, it was paramount to avoid a long bankruptcy that would have destroyed the company.

If that meant giving junior creditors such as the unions favourable treatment at the expense of senior debt-holders, so be it. As for those hedge funds that rejected the plan, they are nothing but “speculators” according to Mr Obama.

Absolutely critical to the myth of the poor little hedge funds being strong-armed by the evil union and the interventionist President is the conflation of "the union" with VEBA, the fund to provide retiree health care that is controlled by the union to which Chrysler actually owes the money. I know it makes Financial Times readers lash out to hear of an evil union budging ahead of productive hedge funds, but in truth this was a matter of dealing with Chrysler’s biggest creditors–whether it be JP Morgan Chase or a fund run by a union–and not a matter of class warfare. 

Now to be fair, there is a germ of truth in this article: the poor little hedge funds purportedly being strong-armed by the union do hold debt that takes precedence over the VEBA fund. In relative terms, a tiny bit of it. Read more →

JP MorganThe Banks Forces Chrysler into Bankruptcy

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the end of Chrysler

photo courtesy of S and C

The UAW was willing to negotiate, but the banksters weren’t. So Chrysler will now enter bankruptcy.

The Obama administration will announce at noon today that it will take Chrysler LLC into a historic bankruptcy to force a cut in debt key to a partnership with Fiat S.p.A. after three firms refused a sweetened offer.

With the UAW late Wednesday ratifying cost cuts in its contract and cuts in the money due its retiree health-care trust fund, President Barack Obama will announce a Chrysler-Fiat deal and the government’s “surgical” bankruptcy plan later today.

The administration "was willing to give the holdout creditors a final opportunity to do the right thing," an administration official said. But "the agreement of all other key stakeholders ensured that no hedge fund could have a veto over Chrysler’s future success."

The lack of an agreement will not "impede the new opportunity Chrysler now has to restructure and emerge stronger going forward," the official said.

The Administration claims they’ll be able to pull off a surgical bankruptcy and still pull off the Fiat deal on the other side, leaving Chrysler with some lease on life. But meanwhile, the banksters get to collect on their bets against Chrysler and get rich rich rich! All while sucking at the Federal teat. 

Update: JPMorgan Chase may have been willing to deal. It was a couple of hedge funds that were the final holdouts.

The holdouts are no longer the big four banks (and TARP recipients) that together own 70 percent of Chrysler’s debt. Both the Journal and the Washington Post have fingered three hedge funds — Oppenheimer Funds, Perella Weinberg Partners’ Xerion Capital Fund and Stairway Cap Management — as the sticklers. The government is faced with the unenviable prospect of getting unanimous consent from all the bondholders to make a deal, which gives the hedge funds extraordinary leverage. In the parlance of Wall Street, taking a hit on what you are owed is known as a "haircut." The hedge funds seem to be allergic to the barbershop.

From Obama’s statements.

He starts by saying they get a new lease on life. 

Talks about its role in US history, and in building the middle class. 

It’s been a pillar of our economy, but a pillar that’s been weakening. Designing cars that were less reliable and less fuel efficient than competitors. As I’ve said from the start, we cannot keep this Read more →

Obama’s 100 Days of Auto Bailout

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I’ve been asked by several people to comment on Obama’s first 100 days (I’ll put up links later). But no one has asked me to comment specifically on his 100 days of auto bailout. Reading this article, though, made me want to do a post addressing the auto bailout specifically. Thus far, I’d give Obama a A-. 

To explain my thinking, let me first remind you of what I said when Obama first inched Chrysler and GM closer to bankruptcy:

Let me start by saying I’m non-plussed by the call for Rick Wagoner’s head. I think Wagoner was making the right moves recently, but he was also responsible for years of inaction. So I’m not sorry to see him gone. In any case, Obama is forcing out the entire board of GM, so Wagoner would have had to go anyway. [ed: this last bit was incorrect–they’ve been changing part of the board membership]

[snip]

Thus far, it’s tough to tell whether this is a good plan or not. As far as Chrysler, they can’t survive alone. So the forced marriage gives it one chance to avoid bankruptcy that otherwise seems inevitable. I don’t think Fiat will take the deal, so I expect Chrysler to enter bankruptcy within the next month.

As for the GM plan, they are finally talking about dealer concessions (which a "quick rinse" bankruptcy would help, too), which was the element that everyone had thus far ignored. And some of this tough love with GM seems to be a logical next step given bond-holders’ intransigence since December. GM had been, thus far, unable to get its bond-holders to accept the losses they had told GM, in November, they would take, so Obama is threatening to use a court to make them do so–followed by UAW concessions.

At the time, I believed this was the right (albeit incredibly painful) decision. I was skeptical that the auto task force could pull off anything viable with Chrysler. Things are still mighty uncertain, just a day before the deadline. But analysts increasingly believe that Chrysler will avoid liquidation, which impresses me.

As far as GM goes, I went to GM’s Tech Center yesterday to test drive the Volt (I’ll do a couple of posts on that on Friday and next week). And while the GM restructuring is, in some ways, even more intractable than the Chrysler one, I came away yesterday believing (for the first time in a long while) that "as goes GM so goes the nation."  And–speaking as someone who watched from a close vantage point when Alan Mulally almost immediately provided leadership at Ford in 2006, which largely explains why it has avoided the plight of GM–I got the sense that Fritz Henderson (who replaced Wagoner) was exercising that kind of leadership now at GM. 

Read more →

GM Restructuring Plan, Take 20

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1978-grand-prix_pr.thumbnail.jpgBy now you’ve heard that GM has released a new restructuring plan–this one assuming total US vehicle sales of 10 million a year (that means GM’s projects and plans are finally catching up to how badly the auto market is contracting), and one assuming an ambitious debt to equity plan for its bond-holders (which means it’s still a long shot, IMO, and which means Treasury would have a car company to go with its insurance company).

And of course, Pontiac, along with Hummer, Saab, and Saturn, will be killed. I learned to drive on a Pontiac V8 Grand Prix with an 8-track that played Journey, Boston, and Pink Floyd.

And of course, tons more job losses.

That said, today’s plan finally gets around to cutting the number of dealers that GM will need to cut to turn itself around–they’re talking of closing 2,600 of their 6,200 dealers across the country (did I say tons more job losses?). 

On a conference call with GM CEO Ray Young, I asked how they were going to pull this off–was the government going to help them get out of their contracts? As a later questioner noted, the elimination of the Oldsmobile dealers was a very costly process. Young basically said that GM now could use the Oldsmobile process as a lesson in how not to do things. 

That said, Young wasn’t prepared to explain how GM plans to get out of 2,600 dealer contracts without billions in costs. The government is not going to help–so this is still an area where bankruptcy would offer an advantage to GM over this restructuring. Young said the impacted dealers would be approached over the month of May, and dealers would be wound down over 2009 and 2010. One of the reasons for the big factory idling, he explaned, was to help dealers sell down stock before they closed up shop (which means dealers may be able to pay off their debt before closing their business.

I also asked about Bob Corker’s biggest worry, the Spring Hill plant (See Bob, I’m looking out for you!) As of right now, the Spring Hill plant would be treated like any other plant (it currently assembles the Chevy Traverse, not Saturns). But I thought Young was noncommital about what will happen as GM picks factories to close Read more →

GAO: Advanced Hybrids May Not Be Best Way for GM to Rebound

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picture-98.pngThere’s a lot of good information (and bleak news) in this GAO report on GM’s and Chrysler’s efforts to become viable again–including this picture that shows the key relationships in the industry and the credit that underlies each of those relationships.

But I wanted to point to GAO’s explanation of something I’ve often argued–to much skepticism here and elsewhere. Investing heavily in new technologies like hybrids may hurt GM’s efforts (certainly in the short term) to become more viable.

In a section addressing the things that GM and Chrysler aren’t doing to achieve viability, GAO warns that advanced technology vehicles don’t have the return on investment GM needs to become profitable again.

Several panelists noted that not only is developing advanced technology vehicles expensive, but also the return on the investment in those vehicles can be low because the initial demand for new technologies can be slow to develop. For example, the Toyota Prius was on the market for 10 years before reaching 1 million units sold. According to our panel, given the high development costs and low initial demand, especially if gasoline prices remain relatively low, these new vehicles are not likely to generate a profit for several years. Thus, changing the companies’ product mix to include more advanced technology vehicles may not be the best way to improve the financial bottom line in the short term. Furthermore, at least one panelist questioned whether the necessary energy infrastructure, such as electrical outlets to charge batteries, will be available to support these new technologies. Without adequate infrastructure, consumers will be reluctant to purchase these new advanced technology vehicles. GM officials acknowledged these challenges but indicated that the company decided to continue investing in advanced technologies even during the current financial crisis because they need this technology in their fleet to help meet federal fuel economy standards in the future. In addition, GM officials said they are planning for higher oil prices than current futures market expectations, in order to make GM’s plan more robust against oil price volatility. [my emphasis]

Now, frankly GM is right to remain committed to the Volt even given such challenges. The Prius took a long time to become profitable, but the halo effect Prius has had on Toyota’s overall brand is one of the main reasons people believe a company that invested heavily, strategically, in the Tundra is all about gas efficiency.

But I wanted to point out Read more →

Dan Quayle’s and John Snow’s Flunkies Putting Greed Ahead of America

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quaylegmcrop.thumbnail.jpg (Image by twolf)

Now for an update from the most loathsome intersection of the financial and the auto crisis…

You’ll recall that last we heard, Chrysler was hoping to stay alive long enough to have Fiat’s Sergio Marchionne swoop in and save it. Even if that happens, though, Chrysler will need to get some customers to buy its cars until such a time as Marchionne can do his magic.

And to get customers, they’re going to need to get credit to offer those customers. As a reminder, to get credit, they’re sort of reliant on Chrysler Financial, a separate company from Chrysler, the part Cerberus wants to keep.

Only, the flunkies that John Snow and Dan Quayle have running Chrysler Financial are refusing to take government money to get that credit because–you guessed it–they don’t want executive pay limits.

Top officials at Chrysler Financial turned away a $750 million government loan because executives didn’t want to abide by new federal limits on pay, sources familiar with the matter say.

The government had been offering the loan earlier this month as part of its efforts to prop up the ailing auto industry, including Chrysler, which is racing to avoid bankruptcy. Chrysler Financial is a vital lender to Chrysler dealerships and customers.

In forgoing the loan, Chrysler Financial opted to use more expensive financing from private banks, adding to the burdens of the already fragile automaker and its financing company.

Oh. And don’t wory. Jamie Dimon and Vikram Pandit are in on the act, too:

But by forgoing the government loan, the company must borrow money from a group of private banks, including JP Morgan and Citigroup, sources said. That line of financing had been arranged in August, when the company was on the brink of bankruptcy, according to an industry official. The financing from the private banks comes at a higher borrowing cost for Chrysler Financial, a source said. 

Because that’s what Michigan needs, to owe JP Morgan Chase more money.

Read the whole story. It’ll get you saying "loathsome" too.

So nice to see the guy who used to be Vice President and the guy who used to be Treasury Secretary showing such an interest in the future of our country.

Do CEOs Really Matter?

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There’s a BusinessWeek report that confirms two things I’ve been arguing for a while: that Bob Nardelli will be ousted no matter what happens with Chrysler in the upcoming two weeks.

Chrysler CEO Robert Nardelli confirmed in a letter to employees today that he will likely be replaced as CEO of the automaker in the coming weeks as the company faces either an alliance with Italian automaker Fiat or a bankruptcy reorganization or liquidation. The company’s board, too, would be replaced, he said.

And that one of the reasons the Obama Administration treats the Fiat deal as a viable option for Chrysler is that they hope to put Sergio Marchionne, the head of Fiat, in charge of the merged company.

In Nardelli’s letter to employees, the former Home Depot CEO said a new board of directors will have the power to appoint a new CEO. “The majority of the directors will be independent (not employees of Chrysler or Fiat),” Mr. Nardelli wrote. He added that the board “will have the responsibility to appoint a chairman and select a CEO with Fiat’s concurrence.”

Executives close to Chrysler say that it is possible that Fiat CEO Sergio Marchionne will hold the title of CEO, similarly to the way Carlos Ghosn was CEO of both Renault and Nissan for a few years after he was granted the job at Renault. Renault has a controlling interest in Nissan, and had sent Ghosn to Nissan to turnaround the then-ailing Japanese automaker.

 Now, Marchionne is a darling of the Wall Street types because he managed to turn Fiat around. 

"The turnaround he steered at Fiat was just as miraculous as what Carlos Ghosn did at Nissan," says Tony Faria, business professor at the University of Windsor. "Fiat was in big difficulty, losing a lot of money. He had them in profitability in less than two years. The turnaround he steered was just magnificent."

Fiat–one of the oldest industrial businesses in Europe–was on the brink of bankruptcy when Marchionne was appointed CEO in 2004. Less than two years later, the maker of such brands as Ferrari, Alfa Romeo and Maserati returned to profitability as a world leader in environmentally friendly vehicles.

Read more →