View Full Version : Bailouts pay off in Fiat/Chrysler success

06 Jun 11,, 13:27
It was two years ago when Fiat CEO Sergio Marchionne appeared at the airline-terminal-size Chrysler headquarters near Detroit to address a demoralized staff. They were as skeptical as the rest of the auto industry about their newly installed chain-smoking, sweater-clad, Italian-Canadian CEO and his mission to rescue Chrysler, a company burning through $1 billion a month.

Fast forward to the present, when Chrysler stands out as an improbable bright spot in a still-struggling U.S. economy. Not only is the company showing faster sales growth than its rivals, but paying back its $7.6 billion in U.S. and Canadian loans well ahead of schedule. So when President Obama, who had approved the long-shot bailout and merger with Fiat, visited the Chrysler plant in early June in Toledo, Ohio, where Jeep Wranglers are made, the factory tour had the feeling of a victory lap. “I placed my bet on you,” Obama told workers. “What you’ve done vindicated my faith.” Marchionne doesn’t mind being part of Obama’s PR offensive. “I love Obama to talk about Chrysler,” he says. “It’s the cheapest bloody advertising I can get.”

If Chrysler’s Marchionne still isn’t exactly a household name (pronounced “Mar-key-OWN-ee”), his workers now hang on his words. Last month a sea of faces looked to their leader expectantly at company headquarters as 11,000 employees crowded to see him. Marchionne spoke about their status as survivors, recognizing aloud how hard he had pushed them. As he spoke of their commitment, his voice broke, forcing him to stop to regain control. After all, car guys don’t cry.

Later, in his Chrysler office, he described the moment of silence to me as “a never-ending period of time that was absolutely still quiet … not a chair moved, not a phone went off” as the crowd waited for him to continue. What had caused that moment of emotion for Marchionne? “When I asked them to go further and further and kept on saying, ‘No, that’s not good enough, we’re going to go there,’ and this house never said no. The more I asked, the more they gave.”

Marchionne, a lover of opera, jazz, and classical music, can himself be operatic. The drama of the automaker’s revival includes a cosmopolitan CEO who consciously leads by example and stays visibly onstage. At Chrysler, where he boldly laid out a five-year plan for the company six months after joining it, Marchionne has stripped out layers of management and vacated the lavish penthouse office used by previous chairmen for a cookie-cutter fourth-floor office in the technology center—close to the engineering, design, and production executives. He flattened the organizational structure, creating a system—as he did first at Fiat—where 25 executives report directly to the chairman. It’s his way, he says, of creating a tribal bond among top managers. In a Harvard Business Review article, Marchionne described how the “great man” CEO model was dead. More likely, he is in the process of updating it, just as he’s overseen ways to recast dated Chrysler models like the Sebring into the Chrysler 200, or launched the Fiat 500 here as a retro-chic competitor to the Mini Cooper.

At the depth of its woes in 2008, Chrysler was such a lost cause that Cerberus, the private-equity firm that controlled it, reportedly offered to sell the automaker to the federal government for $1. In a close-call decision, Obama decided to offer the financing in support of the Fiat deal, based at least in part on Marchionne’s stunning turnaround of the long-troubled Italian automaker. For Marchionne, taking on Chrysler was an audacious personal gamble: betting the future of Fiat and Chrysler’s 47,000 employees on an automaker long past its prime. The company he took over in June 2009 was battered by a decade of inattention, massive layoffs, and cheapening tactics by previous owners. From the beginning, Marchionne raised quality standards and gave managers room to innovate. (“You’ve got to allow people to make mistakes, even though your gut tells you that the guy is going to get torched.”) But he also made it clear that only a little failure is tolerated; beyond that, “you’re gone.” Others have talked this way, but the mood at Chrysler is palpably different, from the shop floors to dealers. In May, Chrysler sales rose 10 percent over the previous year, pushing it ahead of Toyota in sales for the first time since 2006, while Ford and GM sales stalled. “It’s a simple thing,” says Marchionne, who turns 59 this month. “I just want to make things that people want to buy. I have no confusion about this.”

That sense of clarity carried over to Chrysler’s advertising, including the celebrated Eminem Super Bowl commercial, a two-minute mini-movie that followed the rapper in a gleaming Chrysler 200 through the streets of Detroit. What gets forgotten in these days of Chrysler success was the riskiness of using a controversial star (“Eminem’s not a universal cup of tea,” Marchionne says dryly) and the year’s most expensive airtime. “The last thing you want is a group of senators who just lent you seven and a half billion dollars to sit back and go, ‘Look at these jerks and how they’re using taxpayer money,’ ” he says.

If the typical Detroit CEO is a buttoned-down, terse engineering type, Marchionne is the opposite: with his bohemian appearance and intellectual range, he seems to belong on a college campus or boulevard café. Marchionne was a philosophy major in college, before earning degrees in law and business from Canadian universities. He disdains linear thinking, peppers his speeches with quotations from Kierkegaard and Einstein, and speaks to commitment and passion as much as he preaches quality control. He pulled up to a new Fiat dealership outside Detroit recently in a Maserati—one of the many brands Fiat controls, including Ferrari and Alfa Romeo. “In a gray world, he’s creating a lot of color,” says former Michigan governor Jennifer Granholm.

The son of an Italian military officer and a Croatian-born mother, Marchionne spent his early years in Italy, before being transplanted to Toronto at the age of 14. The culture clash was painful at the time but ultimately paved his ability to move between cultures, time zones, languages, and industries. By the time he was 20, he’d successfully extinguished most traces of his Italian accent, finding it “was not a cool thing.”

While much of Chrysler’s comeback is of its own making, the company is also benefiting from good fortune. As industry expert David Cole points out, Chrysler’s lower costs post-bankruptcy and favorable currency valuations now give the company a couple-thousand-dollar price advantage over Japanese and European competitors. With private financing now available at cheaper rates, Chrysler announced May 24 that it would pay back all its government loans, and earlier this month said Fiat would buy back the 6 percent ownership stake held by the Treasury Department. Challenges remain—from rising gas prices, expiring UAW labor contracts, and the urgent need for Chrysler to introduce an appealing, thrifty, small car. But Marchionne has achieved head-snapping acceleration toward his goal, as he told employees, “to bring about, in the shortest possible time, the birth of a single group.” Emblematic of the transatlantic fertilization is a redesigned Dodge Viper that uses Ferrari technology, due next year. While Marchionne’s career has straddled disciplines from law and accounting to banking and automaking, he is now, adamantly and believably, a car guy running a company, he tells employees, “that’s been to hell and back and yet still dares to dream
I always believed the GM bailout was a sound choice for the economy and the workers. I thought Fiat was making the same mistakes as Mercedes Benz. Evidently the new management style is paying off. Maybe the issue in manufacturing in US is more highly stratified, layered management than unions and Fiat could teach a few multinationals a lesson.

06 Jun 11,, 13:35
Original article if you don't mind.

06 Jun 11,, 15:05
wans't that hard, just google the first two sentences

here is the link (http://www.newsweek.com/2011/06/05/the-chrysler-miracle.html)

06 Jun 11,, 18:12
What happened to the original shareholders of GM and Chrysler stocks?

06 Jun 11,, 18:31
You mean the bondholders chrysler was privately owned by an equity group that offered to sell it to Uncle Sam for a buck.....Now how much do you think bondholders were going to get if Cerebus was giving the company away?:rolleyes:

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May 2, 2009
High & Low FinanceWhy Chrysler’s Bondholders Should Stop Whining By FLOYD NORRIS
“It’s not fair.”

That is the response from many on Wall Street to the Obama administration’s rescue plan for Chrysler. The union is being treated better than the bondholders, and that is said to violate decades of bankruptcy law traditions.

If this were a normal bankruptcy, that complaint might be justified. But this one is far from normal.

The relevant law, it seems to me, is not bankruptcy but charity. Uncle Sam is acting as a philanthropist coming to the aid of a dying corporation. If this were Bill Gates choosing to fund public health agencies in Kenya but not Ethiopia, we might question his judgment, or try to persuade him to change his mind, but no one would argue he had a legal obligation to spread the money around.

If Chrysler were going into bankruptcy with available exit financing, the bondholders would have every right to fight for their share of the pie, and to argue that other creditors were getting an unfair share. It has no such financing available, other than from a government with no legal obligation to provide it.

If President Obama is willing to let Chrysler die if creditors do not accept his division of the money provided by the government, then creditors of Chrysler face a relatively simple set of questions.

First, can Chrysler raise the needed cash elsewhere? No.

Second, are bondholders likely to do better forcing a liquidation, and standing in line to collect whatever the assets bring at a bankruptcy auction? (What is the bid for an auto assembly plant in Detroit, with machines built to produce cars that will not be produced anymore?)

It is hard to imagine that the bondholders would be better off with such a sell-off. If so, and if the bondholders cannot persuade the government to raise its offer, they should take what is available, whether or not it seems fair. If Mr. Gates chose to offer less money to Ethiopia than to Kenya, would anyone recommend Ethiopia turn down the money because the split is unfair?

Analyses going around of how the new Chrysler stock would be distributed in a typical bankruptcy assume that Chrysler has the right to claim the government’s billions, and then split them among its own creditors. It does not.

To be sure, it is disquieting that in a capitalist economy it is the government making these decisions. But that is one result of the mistakes made by Detroit and Wall Street, over decades and in recent years. This is a company that cannot be saved without a lot of government help.

What is amazing in the Obama plan is how tough it is on the company. Rather than accepting optimistic assumptions of miraculous recovery, the administration forced the company to make some tough choices that it had been unable or unwilling to make in the past. Workers will lose their jobs. Dealers will lose their franchises, probably without the compensation that state laws seemed to provide. The current owners are losing everything they invested, and the former owner, Daimler, has been forced to put up a lot of money to avoid being sued.

In essence, the Obama administration has decided to spread around the stock in the new company based on its evaluations of the relative claims of differing groups. Would others make the same evaluation? Perhaps not, but that does not make it improper.

The stock being handed out will have value only if the new Chrysler survives. It is to be distributed to Fiat and the United States government, which are putting up a lot of cash and assets to help the company, and to retiree benefit plans. That increases the chance, but certainly does not assure, that more of the health care promises will be kept for Chrysler’s elderly former employees.

There is an argument to be made that bondholders have a better claim than the retirees, but it seems to me that a reasonable person could make the choice Mr. Obama made. The president chose to emphasize the contrast by calling the hedge funds, which bought the bonds at discount, speculators. That sounds nasty to some, but it is accurate. It is no doubt true that there is pension money invested in those hedge funds, but no one thought a hedge fund investment was risk-free.

It is said that the United Automobile Workers, which supported Mr. Obama in the election last year, is effectively being paid off by treating the bondholders worse than the retirees. I disagree. The retirees may have a little better chance of getting benefits they were promised, but the current workers are getting little more than being allowed to keep some of their jobs. Walter Reuther, the man who built the U.A.W., must be spinning in his grave at the concessions his successors are making.

This may come to be seen as Mr. Obama’s “Nixon in China” moment. Just as it took a conservative Republican to open relations with the largest Communist country in the world, it took a liberal Democrat to break the U.A.W.Floyd Norris comments on finance and economics in his blog at nytimes.com

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06 Jun 11,, 18:33
What happened to the original shareholders of GM and Chrysler stocks?They got screwed.
The shares and warrants will be distributed to unsecured creditors whose claims have been allowed by the bankruptcy court. For every $1,000 of allowed claims, these unsecured creditors will receive 3.802187 shares, 3.456534 warrants to acquire shares at $10 per share and 3.456534 warrants to acquire shares at $18.33 per share.

Taxpayers spent about $13 Billion total bailing out Chrysler. In the bankruptcy, the Obama administration forgave more than $4 Billion.

This loan payoff is phony- just like GM using it's gov't LOC to pay back it's TARP loans. Just check-kiting by another name.

The gov't gave Fiat an incremental call option to buy 16% of the stock at a cut-rate price, but the condition was that Fiat had to pay back $3.5 Billion in TARP loans first. But Fiat couldn't get private lenders to loan the money.

So Steven Chu agreed to loan Fiat $3.5 Billion from the DOE to build a fuel-efficient vehicle.

This is just money coming from one federal department going to another.

The viability of Chrysler and GM long-term will depend on their ability to raise private capital, and that's yet to be seen.

06 Jun 11,, 19:53
What happened to the original shareholders of GM and Chrysler stocks?
They gambled and they lost.