GM: Chrysler's White Knight Against Foreign Invaders?
February 20, 2007

Last week's rumors that General Motors was in discussions to buy the Chrysler Group were immediately dismissed from Wall Street to Main Street as nonsense to sheer lunacy.

But maybe the idea isn't so crazy after all for GM. Maybe GM is playing defense, not offense.

If a foreign automaker – particularly one from China or Korea – were to make a bid for Chrysler, GM could sweep in like a knight in shining armor and save the damsel in distress – not Chrysler, but itself.

GM faces significant risk if a Chinese or Korean automaker buys Chrysler and gains instant access to its coast-to-coast dealership network to widely distribute vehicles that can be priced below the competition because they come from low-cost production sources.

Ford would be hurt as well, but it's broke, so it can't put up a solid defense. GM, however, is in reasonably good health to put the brakes on such a foreign invasion.

The GM-Chrysler Buzz Won't Die Down

Though Korea's Hyundai, Chinese automakers and private equity firms are mentioned as possible suitors for Chrysler, the buzz keeps coming back around to GM buying Chrysler, which suggests something is going on there.

Detroit newspapers report GM Chairman Rick Wagoner and DaimlerChrysler CEO Dieter Zetsche met in December and the automakers' top financial officials continue those discussions. The substance of the talks is under debate; some reports insist they involve GM's purchase of Chrysler while others say talks are centered on joint projects.

Both automakers decline to comment. GM's policy is not to comment on any such speculation, except to say top auto company officials meet with their counterparts frequently.

Likely a number of scenarios are being considered, so here's one more to consider.

The White Knight-Foreign Invader Scenario

Say Hyundai steps in with an offer for Chrysler. Already, Hyundai and its affiliate Kia have been eating into GM sales and market share. GM has much to gain by blocking their further inroads.

What about a Chinese automaker like GM's nemesis Chery, with which GM battled over copyright infringement. GM charged Chery (note its name is one letter off from Chevy) with copying its small-car design for the Chery QQ. Not surprisingly, Chinese courts found GM's charges baseless. Yet Chery is chomping at the bit to gain a foothold in the U.S. It appears to be exploring every alternative, from going it alone to pairing with entrepreneur Malcolm Bricklin to late last year reaching agreement to produce small cars for Chrysler.

Not to be ruled out is Shanghai Automotive Industries Corp., China's largest car company. It, too, is eager to set up shop in the U.S., but is proceeding cautiously and eyeing Europe first. Any forays to buy Chrysler on its own, however, would be risky, since its largest partner is GM.

Nor are Western European automakers to be ruled out. Volkswagen is a possibility; so is Renault or Peugeot-Citroën. Both French companies have been out of the U.S. for more than a decade.

Whatever foreign invader attempts a Chrysler buy, GM steps in at the last minute to save Chrysler. But in the end, it saves itself from more intense, offshore competition.

A great sigh of relief would follow. An American icon would be saved, and the foreign invaders held at bay. Even the United Auto Workers union would hail GM as a savior. Though long resented by the union, GM would be a less bitter pill for the union to swallow than a Chrysler purchase by a foreign automaker or, worse, a private equity firm.

The Machete Versus Pruning Shears

But there's no happily-ever-after ending to this fairy tale.

The reality of the merged companies would set in, and the real work would begin.

As has been said repeatedly before, GM already has far too much of what Chrysler adds to the mix: too many brands, too many nameplates, overlapping models, too many dealers, too much manufacturing capacity.

Chrysler would be absorbed lock, stock and barrel into GM. An inventory of its assets would be taken. And as all white knights do, GM would discard what it doesn't need.

Forget the pruning shears GM has been using thus far; it would haul out the machete.

"It's counterintuitive, but the redundant product lines and the very scale of the overlap would allow massive restructuring that would ultimately benefit the industry," says Edmunds President Jeremy Anwyl. "Of course, in the short term, it would be hugely disruptive."

Indeed it would be disruptive as the massive restructuring job takes place. The morale of the newly joined troops could plummet, management's attention would be diverted and GM's own fledgling turnaround could be at risk. And it would be ugly. A combination of GM and Chrysler would lead to deep cuts with a bloodbath of layoffs.

So What's Chrysler Worth?

It may come down to the price. Chrysler may be too much of a bargain for even GM to pass up. Analysts are estimating its worth between $5 billion and $13 billion, a pittance compared to the $36 billion Daimler-Benz paid for it nine years ago and only a fraction of its total revenue in 2006. Word is DaimlerChrysler would pay Chrysler's unfunded pension liabilities and outstanding health care tabs up front.

GM loves bargains. Years ago, a GM PR person based in Europe said, "We only buy companies that are cheap." That was the case with Korean automaker Daewoo. It was cheap, and GM has more than gotten its money's worth on it. The Daewoo venture builds small cars mostly sold as Chevys throughout the world, from the U.S. to China.

Wall Street has been vociferous in its objection to any notion of a GM purchase of Chrysler. And other suitors bidding beyond GM's reach are always a possibility.

Such a dramatic move would be seemingly out of character for GM Chairman Rick Wagoner. But in the long term, the American auto industry – and GM – may be better off with dramatic structural changes done.

"Perhaps it's better to trigger the change than wait for change to happen to you," noted Edmunds' Anwyl.

Posted by Michelle Krebs at 2:26 PM under Analysis , Chrysler , Commentary , GM | Comments (2) | digg this | Seed Newsvine