Unintended Consequences

So Chrysler has filed. Suppliers and dealers are scrambling for financing. Dealerships and plants are shutting down. This is all just a mini-preview of what would happen if GM had to file. In a shaky economy where there is some evidence the downtrends are decelerating, this would be an almost certain way to print a negative GDP in the third and fourth quarters and to raise the risk of a much more extended recession. At that point it will be difficult for this administration to say, “don’t blame us.”

Other news: Toyota loses $7.74 Billion in its latest fiscal quarter, more than the $6 Billion loss GM incurred for the same period. As we said, no one can make money at the current auto sales rate. Now, in addition to the GM debt holders being obstinate, the politicians are concerned that GM might add manufacturing capacity outside the US over the next five years, possibly taking the percentage of cars made elsewhere and sold in the US from 15% to 23%. Therefore, maybe we shouldn’t lend GM money if it is going to invest a portion of that for factories and jobs outside the US. As Robert Reich puts it (no longer a politician but an academic), “…it raises fundamental questions about the purpose of bailing out these big companies. If GM is going to do more of its production overseas, then why exactly are we saving GM?” Well, maybe it has something to do with the 77% that will be manufactured and sold domestically as well as the dealer networks that will be involved in 100% of the sales. It may have something to do with the efficiency of production that is sold not just in the US, but in local and growing markets elsewhere. It might have to do with the possibility that if GM isn’t making those cars to satisfy a segment of the US car buyers, someone else–probably not a US company–will.

Maybe it has something to do with having a large enough company with the design and engineering capability to be a leader in the next generations of electric and other non-fossil-fuel vehicles. This will be one of the first decisions in which this administration is involved where it has to take full responsibility for the consequences—intended or unintended.

This entry was posted in Automobile Industry by Jack Rivkin. Bookmark the permalink.

About Jack Rivkin

Jack Rivkin retired in 2008 as EVP, CIO, Head of Private Asset Management of Neuberger Berman(NB) and from NB's Executive Management Committee. He was also on the Lehman(LB) Council on Climate Change(CC) and the NB CC Fund Advisory Board. He has been engaged with the United Nations and other entities on policy issues related to Private Capital and CC. He is an Associate Fellow of the Asia Society. He has continued on the NB Mutual Fund Board and with his CC responsibilities. He began his investment career in 68 as an analyst at Mitchell Hutchins(MH), and became Director of Research(DOR) there. After Paine Webber(PW) acquired MH, he served as DOR; CFO of PW; CEO of PWMH-the equity trading and investment arm of PW; Chmn of MH Asset Management and President of PW Capital. 87-92 he was DOR and, subsequently, Head of the Worldwide Equities Division of LB. 93-95, he served as a Vice Chairman and DOR at Smith Barney (now Citigroup). He was an EVP with Citigroup Investments 94-01, responsible for private equity investments. He was also an adjunct professor at Columbia University teaching a course in Security Analysis. He joined NB in 2002. He is the co-author of “Risk & Reward—Venture Capital and the Making of America’s Great Industries,” Random House, 1987. He is a regular guest on various media. He is the principal subject in a series of Harvard Business School cases describing his experience as DOR and Equity Head at LB. He has served as a director of a number of private companies and the NYSSA. He is currently a director of Idealab, Dale Carnegie, Operative, World Policy Institute and other private companies. He is a member of the Economic Club of NY, the Anglers Club, Theodore Gordon Fly Fishers, and a lifetime member of Trout Unlimited. He continues to be an active private equity investor when he isn’t fly fishing. Mr. Rivkin earned his Professional Engineering degree from the Colorado School of Mines and his MBA from the Harvard Business School

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