Chrysler’s Phony Recovery And The Delusions Of Its Bubble Merchant CEO
One theme of the false recovery narrative peddled by the Wall Street/Washington axis is that the leading symbols of the 2008 crisis—-the big banks, AIG, housing, the auto industry—-are all fixed owing to Washington’s drastic and massive interventions at the time and since then.
But the truth is just the opposite: Nothing has been fixed because all cans have been floated down the road by the Fed’s deluge of money printing. What has happened is that credit market debt outstanding—public and private— has soared from $52 trillion on the eve of the crisis to $59 trillion today, thereby putting a floor under the economy temporarily, but one which will become a huge burden down the road to households, business and governments alike as interest rates eventually normalize.
Likewise, the liquidity driven stock market is up by nearly 200%. This is temporarily providing a “wealth effects” boost to the discretionary spending habits of the top 10-20% of households, but one which will quickly reverse when today’s giant stock and “risk asset” bubble finally bursts. And sectors such as autos which were hit by a sharp one-time inventory liquidation in the winter-spring of 2008-2009 have had a modest rebound to more normal levels of production and inventory. But this doesn’t represent investment and productivity based organic growth—-just a natural, short-term rebound from crisis conditions.
The truth is that the auto bailouts did not save or create a single new auto job. As I demonstrated in the {adinserter 1}Great Deformation, they just shifted 25,000-50,000 assembly plant and supplier jobs from south of the Mason-Dixon Line to the rust belt in Ohio, Michigan, Wisconsin and Illinois. That is, the North American and global auto industries were drowning in excess capacity on the eve of the crisis, and the only question was whether consumer demand for new cars would be satisfied by the efficient foreign transplant suppliers located in Alabama or high-cost, long-in-the-tooth UAW dominated plants in the north.
Thus, the political decisionof the Bush and Obama Administrations to allocate auto jobs based on electoral politics and crony capitalist coddling of the UAW and the Chrysler/GM business complexes did not add a dollar to GDP; it just reshuffled the given level of consumer spending on new cars among regions. And the ultimate result is that the free market was blocked from doing its job of liquidating excess investment and uncompetitive suppliers and plants. In short, true national wealth was reduced by the auto bailouts.
Yet the damage goes beyond dollars and cents. The bailouts have also enabled the rise of a whole generation of soap-salesmen CEOs who tout miracle “recovery” stories, thereby reinforcing the “all fixed” meme. Fiat-Chrysler is a standout case of the latter, and its CEO, Sergio Marchionne, is a bubble illusion merchant of the first rank.
The illusion of recovery stems from violent inventory fluctuations that were triggered by the Fed’s bubble finance. Chrysler’s sales and production numbers can be made to look impressive on a three-to-four year basis because the 2009 low-point of US sales at 10.5 million units was an artifact of the crisis and the current run-rate in the 15-16 million unit range is a unsustainable peak fueled by a renewed explosion of sub-prime auto lending.
In truth, the trend rate of US new car sales never really dropped below 12-13 million. And it will probably fallback to the 13-14 million unit level—once the Fed’s latest financial bubble collapses and sub-prime loans dry-up and go into a new cycle of defaults.
In that context, the idea that Chrysler’s North American sales will grow by nearly 50% of the next five years, as Marchionne proclaimed at Chrysler’s recent analyst day, is a laughable delusion.
In fact, Chrysler and Fiat are the auto junk yards of the western world. In a honest free market, Fiat would have been bankrupt decades ago, and Chrysler would have been reorganized out of existence in 1979—–when it was bailed-out the first time. As a Congressman from Michigan at the time, I was the only member of the delegation to vote against the bailout; and I did so on the grounds that it would establish a horrible precedent for over-riding the verdict of the free market, and that state intervention would become habit-forming.
The subsequent history of Chrysler and Fiat, too, is a testimony to that danger. By the time of the Great Recession, the Italian government had pumped tens of billions of subsidies into Fiat, and Chrysler was a museum relic that should have been liquidated. Its only viable parts—-the Jeep SUV and Ram Truck franchises—-could have been readily sold off to any one of a dozen solvent global auto markers.
Instead, both parts of the Fiat-Chrysler were propped up by their respective governments and then consolidated in a classic case of the halt leading the blind. Yet take-out the massive taxpayer subsidies, the one-time rebound of car sales and the phony-baloney “fresh start” accounting gimmicks that flowed from Chrysler’s faux bankruptcy and you have the next crisis waiting to happen.
Indeed, the during the five-year plan touted by Fiat-Chrysler’s bubble-blowing CEO last week one thing is virtually certain: unless there is another massive Washington bailout—this time of an Italy-based company that is moving production from North America to Turin—-Chrysler will experience its third bankruptcy of the last half century.
In the attached piece from BloombergView, Edward Niedermeyer cogently reviews the real facts—namely, that there is nothing sustainable under the hood at either company. And as China’s red capitalism goes into it post-bubble phase of rooting out corruption and enemies of state it will become evident that Fiat’s only profitable units—the ultra-luxury Ferrari and Maserati brands—were temporarily feasting off the greatest bubble in human history.
Fiat Chrysler Automobile gave its latest Five Year Plan journalists and investors on Monday in a presentation that, according to the tweets of exhausted attendees, lasted more than 11 hours. Having attended the 2009 version of Chrysler’s quintennial Powerpoint deathmarch, emerging more dazed by the ordeal than enlightened, I was a little surprised to see another Ironman Marathon rolled out for analysts.
But as tweets of despair turned to stories credulously reiterating the day’s slides, it became clear that the tactic was once again basically successful. A day-long onslaught of information and projections, directed by the company’s mercurial Chief Executive Officer Sergio Marchionne, has turned out to be an reliable way to maintain the illusion that one of the most marginal of automakers is a viable player in the brutally competitive global marketplace.
Still, illusion it most surely is. Fiat, the ostensible rescuer of Chrysler in 2009, has seen its European and South American strongholds suffer in the face of economic headwinds and intense competition. New Fiat-based products in the U.S. have received a mixed reception at best, and the company’s product lineups have dwindled as models are cut and not replaced.
Meanwhile, neither of the merged firms has any presence worth mentioning in China, the key global volume-driving market. For the moment, FCA is functionally little more than an Italian luxury car company (the Ferrari and Maserati brands) and an American truck and SUV company (Ram and Jeep) propping up a number of loss-making attempts at volume car brands. In some respects, the fact that Fiat and Chrysler even made it through their first five year plan is an impressive achievement, but the onus is on Marchionne to explain how his patchwork empire is worth more than the sum of a few of its parts.
To that end, he has one real weapon: a fantastic starting point for his graphs. In 2009, when the he set about merging Fiat and Chrysler, the global economic crisis had brought the U.S. auto market crashing from over 17 million units to just over 10.5 million units, hitting Chrysler the hardest. The subsequent rebound toward the 17 million level has been rapid, buoyed by an explosion in auto loan availability, and has driven an 82 percent increase in Chrysler’s Nafta-nation sales over the last five years.
But with the U.S. subprime auto loan market showing signs of mounting risk, and gas price pressure growing, the U.S. truck and SUV sales boomlet on which the company’s fortunes rely is looking decidedly fragile. Even if a gas price shock or credit crunch doesn’t take out FCA’s key profit centers, the inevitable cooling of U.S. auto loan expansion will cut heavily into its projected 48 percent sales growth in North America. If continued anticorruption campaigns in China further affect luxury car demand there, Maserati’s four-fold projected increase in volume (another key profit contributor in FCA’s plans) is in similar trouble.
After all, FCA’s mass market plans are only just taking shape. Having initially presented Chrysler as a pseudo-luxury brand in its 2009 plan, the latest presentation saw a rapid about-face, with Chrysler now being positioned as a mass-market volume brand, taking on Ford and Toyota with an expanded lineup.
Yet the first new Chrysler models won’t actually hit showrooms until 2016 at the earliest, and then the only new models are a re-badge of the lukewarm Dodge Dart compact and a a plug-in hybrid version of the Town & Country Minivan. New full-size and mid-size crossovers won’t debut until 2017 and 2018 respectively, and there’s no sign that Chrysler will compete at all in the fast-growing compact crossover segment. Having slashed R&D to the bone to keep the lights on for the last five years, FCA desperately has to fill a yawning abyss where its new product pipeline should be.
Moreover, the firm has no fewer than 18 architecture families underpinning its relatively small global volume, putting it miles behind the intensive platform rationalization being pioneered by Volkswagen, Nissan and others. Add the firm’s inability to develop hybrid, plug-in or electric technology for anything other than regulatory compliance, and the technological gap between Fiat Chrysler and the global majors widens to the point of absurdity.
What FCA seems to be offering in lieu of high technology or new product is a portfolio of brands that, Marchionne asserts, have “more DNA” than competitors. But as the delicate balance between FCA’s American and Italian interests demonstrates, brand DNA can be as much a risk factor as an asset. FCA’s planned ramp-up of imports into Nafta, from 32,000 units in 2013 to 360,000 units in 2018, including a new Italian-made Jeep Renegade, could well re-open ugly debates from the 2012 election. In any case, all the brands in the world are no substitute for the new product or global rationalization strategy that FCA doesn’t have.
