Can the Auto Industry Be Saved?

That’s the question most of the April 2009 issue of The Journal of Corporate Renewal poses. The magazine of the Turnaround Management Association devotes almost all of its editorial content to the subject and delivers some interesting perspectives: Your view of success depends upon where you live, new turnaround rules and conditions have changed the traditional game, and that game is hardball only.

Dan Dooley, a Principal with Morris Anderson, highlights the difference in perspectives, depending on where you live. He posits that Detroiters are by and large a nostalgic group, awaiting the days when the “Big 3” once again return to their rightful place atop the industrial world. Experts outside those spheres of influence have a more skeptical view, seeing the changes in the industry, the economy, and regulations that make full recovery an unlikely possibility.

Dan Weiner and Ryan Heilman (Schafer and Weiner) outline the traditional industry structure and show why it is unlikely to survive the present turmoil. The industry pyramid is built to support the “Big 3” through a series of interlocking support structures – both financial and operational. Operationally, the system is set up to prevent disruptions on the production lines – disruptions than can cost $1 million per plant per hour. Production, not cash flow, is the main driver of this operational system, and participants have been taught to go to extraordinary lengths to prevent any stoppages. That assumes cash will be available and that the financial pyramid will work.

The financial pyramid relies on a system of mutual support in a world of ready liquidity. In the past, troubled suppliers’ loans were guaranteed by another member in the chain until the difficulties could be worked out or the player moved through bankruptcy. Aggressive investment funds were able to build large platforms by buying suboptimized organizations, infusing capital and talent, and assuming a larger part in the value chain. The financial pyramid has broken down because no one involved can be relied upon to make financial guarantees, investment money is no longer playing, and assets’ liquidation value has found a floor far below anyone’s expectations. There are no safe and few reasonable investments in this space.

If you want a primer on some of the more technical aspects of these workouts, Brad Coulter (O’Keefe & Associates) provides more detail on the changing particulars. According to Coulter, the outcome may not be pretty, but will provide tremendous opportunities for those that can survive.

Finally, Mark Freedlander (McGuireWoods) and Dominic Aversa (Morris Anderson) both wrote terrific pieces on how the industry is being destroyed by the same hardball game that brought it to power. The “Big 3” set up a system where power would rule the channels: the strong beat down the weak, and the weakest left the business. The system gave all the power to the players at the top of the pyramid.

The “Big 3” used the same levers when they asked for a bailout. As Aversa puts it, “The Big Dogs from Detroit didn’t go to Washington and say, ‘We need American made cars.’ What they really said was, ‘Give us the money, or we’ll put 3 million people out on the street.'” They used a pure power play to get their money, and the game continues…or does it?

The weakness of the industry, and the resulting inability of any of the players to provide support to any other player, changes the dynamics. The power in the game shifts to those companies that can have the most impact on ongoing production. Speed, leverage, and cash are the three critical elements to any auto industry arrangement in these times. Sure, Detroit automakers may be willing to pay their bills and play by gentlemanly rules; but more likely, it will be those companies that play merciless hardball that will be the ones to survive this downturn and be around to create a new industry.

Take time to read the articles and understand the dynamics at play. The perspectives are fascinating and you will come away with new appreciation for the complication of the system.

(As of this posting, the articles are not yet on line, but will be available at http://www.turnaround.org/publications/articles.aspx in the near future.)


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