What Ever Happened to Chrysler Auto Manufacter?

[Guest American For Freedom]

Remember this story the speech about the return of Chrysler to American ownership given by from John Snow of Cerberus Capital Management last year. Well the Financial Times reported that Cerberus Capital Management has sold "significantly" more than half of its stake in GMAC and Chrysler LLC to a group of about 90 investors. I wonder if they are American.

 

 

July 18, 2007

I want to thank Jerry Zremski, the National Press Club president, for that very kind introduction.

 

When I was last here back in 2004 in a former capacity, I talked about the incredible resilience of our economy, the way it recovers and grows, and how it was such a marvel of innovation. Well, much has happened since, but those fundamental truths have prevailed.

 

Then, it was about using good tax policy to increase investment, get the economy moving again, and thereby creating lots of good jobs. Now, back in private life, I’m still excited to be talking about restoring innovation and dynamism in our economy. And still, the key is the role of investment. But now I have an insider’s view on what I believe is the best hope for restoring our industrial base in this country: the growing role of private investment in our economy.

 

I want to share with you today my thoughts about this growing role, and in particular, about the return of Chrysler to American ownership, brought about by private investment. I believe this has a lot to say about how America can regain its competitive edge, and keep lots of good high paying jobs here in this country. We’re also bringing a fresh face and a new perspective to the auto industry—an industry that, truth be told, has lost some of its standing and credibility here in the nation’s capital. So I’ll be sharing some frank talk from a newcomer’s viewpoint.

 

Let me begin by telling you a bit about Cerberus and the growing role of private investment. Cerberus is one of the world’s leading private investment firms with approximately $26 billion under management. Our investors are primarily made up of pension plans, charitable endowments, insurance companies and other long-term savings and retirement programs, including many state pension funds. Our investors represent a broad snapshot of Americans and their savings and investments for the future.

 

Another reason I’m so pleased to be involved with a firm like Cerberus is because it’s right in the middle of the growing and positive role that private investment is playing in revitalizing the economy. Carpenters fix up old houses and rebuild them. Likewise, Cerberus fixes up underperforming companies and rebuilds them. Our entire focus is on improving the performance of the companies we buy. We bring real operational expertise to bear on our investments, with a cadre of over 150 seasoned, senior-level proven executives who are able to provide a wealth of advice, as well as supplement management teams to produce superior results. We do this patiently, taking a long-term view on our investments. Unlike many purely private equity firms, Cerberus does not invest with an exit strategy in mind. We invest with a “find, fix and hold” strategy.

 

I’ve now had the opportunity to observe first hand how private equity investing is in many cases the right prescription for success where other forms of ownership have failed to produce good results.

 

For example, companies frequently are forced into the trap of focusing on the next quarterly report, and making short-sighted decisions to boost earnings now, at the expense of investing in the long-term health of the enterprise. It’s a trap that can be hard to get out of, as the stock market pushes for quick results and immediate fixes. Sound, long-term strategy loses out. It can be like running on a treadmill that doesn’t stop.

 

The prescription we offer is patient capital. Because our investors – a broad base that includes pension funds, state workers’ programs, and private individuals – have a long investment horizon, we can afford to have the long view…to do things right. We can provide freedom from the sort-term-itis caused by the vicious cycle of quarterly results. We can take the time to invest in a strategy that may take a couple years, rather than a couple of months, to come to fruition. Moreover, our long-term focus is what allows us to execute a “find, fix and hold” approach.

 

Some of the companies we buy can also suffer from being an unrequited stepchild of a larger corporate parent, perhaps from being swept up in another merger or acquisition. The company can become starved for attention and capital investment, or perhaps serve merely as a cash cow for other unrelated corporate activities. Sometimes they are weighed down by the needs of the parent…like GMAC. Sometimes they are the product of a merger that didn’t realize full potential, like Chrysler.

 

The solution we offer these companies is freedom. We can free a company to focus on what it does best, and provide them with resources to do it. For a starved enterprise with a sound strategy, we can offer much needed investment in products and people, freeing captured value. We are able to inject equity directly, and also efficiently raise capital in the debt markets.

 

Now sometimes people think of “debt” or leverage as bad. In reality, corporate debt and equity are flip sides of the same coin. Both represent positive investments that can create jobs. Debt represents the confidence of the bond markets—people don’t lend money if they don’t have the expectation of a positive return. Either way, we address underinvestment. Many of our investments like Chrysler, for example, actually de-leverage the balance sheet.

 

Some companies hold assets with terrific potential, but lack the right strategy for getting the most value out of those assets. But we are an active parent—we pay attention, sit on boards, and offer expertise and solutions reflecting a wealth of experience. In many ways, we’re like a coach, crafting a winning team out of a group of bright prospects that lacked only the right equipment and guidance to succeed.

 

We bring a fresh set of eyes. We have a roster of the best of the best; a full-time, world class management team of 150 seasoned executives who know how to improve operations. Turning things around requires ingenuity. It requires trying different things; taking intelligent risks. It requires asking questions that, in many cases, haven’t been asked before, not just doing the same things better, but doing better things. We often find the solutions from our experiences or best practices in entirely different business sectors…things that those who have been too close to a company for too long have not recognized.

 

But the real spice in this recipe is the ability to offer the right kind of focus as well as powerful incentives to retain and align owners, managers and workers to one goal, making the company viable again, and thereby more valuable.

 

Private investment is no magic elixir, but in certain cases like Chrysler, we believe it offers simply the best hope for restoring competitiveness to sectors of the U.S. economy that need it most. And stronger, growing companies are the best way I know of to provide job security, increase employment, raise living standards – and keep America’s economy strong.

 

While still small by comparison with the size of public equity markets, private equity is transforming the way capital markets operate, claiming more and more of global merger and acquisition activity. In the process, it is improving the efficiency and productivity of businesses everywhere, adding a new forceful element of innovation and vitality to business enterprises here and abroad. Private equity has been instrumental in returning many underperforming companies to financial health and competitive vigor, to the benefit of their employees, suppliers and the communities in which they operate.

 

The development of private equity is another chapter in the continuing evolution of competitive market economies, the latest manifestation of market economies’ singular capacity to continuously innovate. The large pools of capital directed by private equity make our capital markets more efficient, providing higher returns for millions of average citizens whose pensions invest in private equity funds; and importantly making the real economy – the performance of business enterprise – more productive and more competitive. Private investment today is a powerful force shaping global economic activity and driving businesses to higher levels of performance and productivity.

 

America’s prosperity depends on well-functioning business enterprises that innovate and invest in new technologies. These are the enterprises that create the products we desire and the jobs that drive prosperity. Well-functioning businesses are the key to economic success and private equity is a vital force in promoting competitive and productive business behavior. Private equity is continually raising the bar, keeping public companies on their toes and helping underperforming companies to improve.

 

Over twenty-five years ago, when Chrysler faced bankruptcy, it turned to the United States government for assistance. Today, Chrysler again faces new financial challenges. But it is private investment stepping in to inject much needed support. That speaks volumes for the transformation of our economy. Private equity was virtually unheard of at that time. Now, Cerberus has the opportunity to use the tremendous financial innovation of private investment to turn Chrysler around, to restore it to financial success, and to help it be a continuing source of good jobs for many Americans, as well as great products for American consumers.

 

Chrysler is a company with some of the best brand names in the world. It’s also a company with a dedicated workforce, a talented management team, and a sound, long-term, turn-around plan. We firmly believe in Chrysler becoming a strong American car company again. We’re betting on Chrysler, its workers, and its leadership. And we’re betting on America. The idea of America without a strong auto industry in unthinkable. It’s the cornerstone of the American manufacturing sector. No other industry has such far reaching effects on the American economy. No other industry so well defines and enables the American spirit of individual freedom.

 

That is why I was so pleased and proud to have been part of the historic announcement made on May 14 in Stuttgart. We announced that Cerberus would be purchasing 80% of Chrysler Corporation, including the Dodge, Chrysler and Jeep brands, as well as Chrysler’s auto financing arm. We have quickly cleared the necessary regulatory steps with the FTC, and we remain on course to close the sale by the end of July. We are working hard with Chrysler dealers, the union, and management for a successful turnover and getting back on the road to long-term success.

 

Some people have expressed surprise that our bid received support from the UAW. But that came as no surprise to us. In many of the companies we have invested in, the workforce is represented by organized labor. We respect that; we have good relations with labor. Good labor-management relationships are critical to any enterprise’s success. We understand the environment of union companies. We have a sound record of working effectively with union companies and helping them achieve long-term success.

 

I spent my business career in the transportation industry – railroads, ocean transportation, ports, terminals and so on – and worked closely and productively with labor organizations over a long period of time.

 

We very much appreciate the support we received from Ron Gettelfinger of the UAW and Buzz Hargrove of the CAW in this transaction. We look forward to a highly productive, cooperative and mutually advantageous relationship with them as we move forward together.

 

Now I know the big question lurking on many people’s minds: Why will Cerberus be able to turn Chrysler around when so many other valiant efforts have not?

 

We are not naïve; we know the course ahead will be difficult. We come to Chrysler with our eyes wide open and a clear sense of the challenge. But we are confident we can meet the challenge. We believe in the U.S. manufacturing industry in general, and we believe in the future of the U.S. auto industry and Chrysler in particular. We have already invested extensively in the U.S. manufacturing sector, as well as the auto sector—in firms like Guilford Mills, Peguform, as well as more recently, in GMAC.

 

Fundamentally, we view Cerberus’s role as helping Chrysler achieve its full potential. Private ownership offers many advantages in that regard. As a private company, Chrysler will be able to implement a plan to build longer-term value, to make strategic investments and to focus all of its energies on improving the company’s performance – all without fear of short term negative market reaction from quarterly public company reports and the pressures to meet analyst targets.

 

Chrysler has many strengths that we aim to build on. First, we are fortunate to have a well-thought-out strategic plan developed by the Chrysler team. We are impressed by it and by the company’s commitment to it.

 

Second, we will support this team with talented and able advisors from Cerberus, who bring to the table their substantial operational expertise.

 

Third, we are impressed by the range of new products and technologies that Chrysler is developing, such as the relaunch of their mini-van line this fall — a product Chrysler invented.

 

Fourth, Chrysler has talented and dedicated employees. Chrysler people care about their company and are devoted to its success.

 

Fifth, Chrysler enjoys an extensive and excellent dealer network and a great group of suppliers.

 

None of this is meant to gloss over the very real underlying challenges facing Chrysler and the U.S. auto industry, due to intense global competition, and here at home, dramatically rising health care costs.

 

Rising health care costs in America have eroded the competitiveness of the auto and manufacturing sectors. The long-term viability of these industries requires addressing the root causes of this problem in a comprehensive fashion. I’m pleased to see that the presidential candidates on both sides have made solving the healthcare problem a high priority. Any real solution should include some essential components: empowering consumers to be better purchasers of healthcare; fixing our broken malpractice liability system; employing modern information technology throughout healthcare; eliminating medical errors; and dealing with the current patchwork of health insurance coverage. On the latter point, our current system unfairly imposes higher costs on all the industries that provide good health coverage, like the automotive industry, as costs are shifted from all those industries that don’t. These burdens need to be borne in a more equitable manner. Attention to this important national problem now must be sustained beyond just the campaign season.

 

But today we are focusing our attention on an immediate, critical debate in Washington that will fundamentally determine the future of the auto industry in America. The stakes are simply that high. It is a topic with which I have some experience, because back in 1976, as administrator of the National Highway Traffic Safety Administration, I was charged with putting the first CAFE standards into effect.

 

The U.S. Senate recently passed what I would call a one-sided approach to fuel economy standards. I say one-sided because automobile use in the U.S. consumes only 20% of our national energy usage. It makes no sense then to put a disproportionate share of the burden of energy reduction and environmental improvement on the back of one industry. But, that is exactly what the Senate bill does. It does little to encourage energy conservation by the other 80% of the economy, and next to nothing to expand our domestic energy supplies.

 

Despite hard work by Senators Levin, Stabenow, Voinovich, Bond, Pryor and McCaskill, along with many many others, we came up short on efforts to achieve feasible fuel economy standards in the Senate. The Senate bill has to be fixed in the House. We believe it will be. So much depends on getting that done.

 

We’re so very fortunate to have John Dingell, the illustrious Chairman of the Energy and Commerce Committee, leading the effort in the House to produce a sensible outcome. No one gives a better lesson in the basic economics of this issue. No one is a better or more able champion of good public policy in this area. We’re also working closely with other senior leaders, including Fred Upton, Joe Knollenberg, Dave Camp and Sandy Levin. But make no mistake; this will be a very hard fight.

 

I have heard from people in Washington and elsewhere that Detroit has been foot-dragging and stone-walling on these issues for decades. Let me be clear that we understand the need to wean ourselves off of uncertain foreign sources of energy and gain greater energy independence. As Americans, we understand the value of cleaner air and the need to reduce production of CO2. But we are also committed to keeping a strong, viable auto industry right here in America with good paying jobs. We believe ALL of these worthy public policy goals are essential goals.

 

These goals are laudable, and we think achievable. But they are not “free.” Chairman Dingell highlighted this point with a recent legislative proposal which was really intended to make the point to the American people: what is this going to cost?

 

You see at present gas prices, the incentives in the marketplace are not leading to the outcome that many policymakers want to see. So that leads to some kind of government intervention to override the market. A tax would lay bare the true cost of such an approach. A regime such as CAFE attempts to achieve the same objective indirectly by substituting the judgment of law for the judgment of the marketplace, but also at a cost. As a result, consumers don't get the products they would otherwise demand, and producers have to retool and invest substantial sums to change what they produce. These costs are very real.

 

Congress needs to understand that auto companies must not only meet the demands of good public policy, but they must also meet “the market test.” Auto companies survive only if they manufacture vehicles that people are willing to buy, given available technology and fuel prices. Government mandates requiring production of certain types of vehicles — particularly ones that are smaller, lighter, and less safe -- won’t work unless consumers want to buy those types of cars. If companies don’t listen to their customers, they will go out of business. Higher fuel standards are really the equivalent of a “tax” on gasoline and on autos. Therefore, Congress needs to be very careful when intervening in the market to come up with a standard that is workable and sustainable, versus one that would be impossible to meet without killing thousands of American jobs.

 

In the United States no other single industry is more linked to U.S. manufacturing or generates more retail business and employment. It is has a tremendous “ripple” effect with regard to income and jobs across the economy. This relationship also exists in the reverse. Jobs lost in the auto sectors spread pain across the entire U.S. economy.

 

Some are now saying that the move to higher fuel efficiency standards is some kind of free lunch; that it won't cost anything in terms of lost dollars or jobs. In this case, as in every other one, there is no “free lunch.”

 

I understand those who question the whole idea of the government imposing auto fuel economy standards in the first place. After all, what they amount to is the government telling people what kinds of vehicles they can buy. Our economic system is based on the fundamental premise that people as consumers should decide what they want in what color, size and shape, rather than having the government decide what is best for them.

 

As a result, many members of Congress oppose the whole idea of CAFE and are pledged to vote against any legislation containing more stringent CAFE standards. I certainly appreciate their view. But the winds of politics have created a Hobson’s choice. That choice is between reasonable legislation that significantly raises auto fuel economy standards, but gives the industry a fighting chance to survive, versus severe legislation that would certainly cripple the industry, destroy jobs and make auto manufacturers in the U.S. uncompetitive. Given these two choices, there is only one sensible answer in my view.

 

We are urging the Congress to embrace the kind of bipartisan approach taken in H.R. 2927, a bill put together by a diverse and growing group of legislators. We think this bill strikes the right balance. This approach is no cakewalk – it will be very tough to meet. But it is a standard that will challenge – not crush – the industry. I’m pleased to see increased interested in finding a workable solution as evidenced by other thoughtful proposals. I want to note Joe Barton and others for their contribution.

 

We are not asking for handouts or special treatment. What we are asking for is a fighting chance to turn this great American company around. We believe in Chrysler and we believe that it can overcome its current difficulties and return to profitability. That is our goal.

 

We’ve expressed our support for the turnaround plan underway at Chrysler, led by its current management team. We believe the plan is viable and that it will lead Chrysler back to a path for profitability. However, unworkable proposals like the Senate bill, or similar bills in the House, would make Chrysler’s turnaround plan impossible to achieve. The wrong policy out of Washington will result in the loss of thousands of jobs in the U.S. It could, perversely, increase the number of jobs going elsewhere.

 

It’s essential that our efforts succeed. I believe they offer the best hope for both the industry and the Detroit region to thrive again. The health of the auto industry remains of critical importance for the country itself, because it has served as a traditional bellwether for the state of our economy. This is shown by the fact that the auto industry, all in all, provides the greatest number of jobs of any industry in America. We want to see that continue.

 

The auto industry has also been and continues to be at the center of meeting our nation’s needs for a strong national defense. The industry’s military and technological contributions, contrary to some recent commentators, are an engine of both economic and national security. We take a back seat to no one on that point.

 

In conclusion, I want to thank you again for letting me share my views with you today on the opportunity we have to revive the great American icon that is Chrysler. I’ve also shared with you my belief that the involvement of private investment in the economy, as seen in the Chrysler purchase, offers perhaps the last best hope of turning around the auto industry and basic manufacturing in the U.S. But to get this job done, we need policy makers here in Washington to give us a fighting chance to make it work. That’s all we ask. But make no mistake--the wrong policy will result in the loss of hundreds of thousands of jobs – well paying jobs – in areas of our country that can least afford it.

 

Our best and only hope is that our elected leaders craft reasonable and responsible policies for energy security, climate change, and for a strong and healthy U.S. auto industry. Thank you again for inviting me here today and I look forward to responding to your questions.

[Guest LAW_*]

I think you saw this story on the Financial Times.

 

Investors share GMAC and Chrysler woes

By Henny Sender in New York

 

Published: June 1 2008 23:37 | Last updated: June 1 2008 23:37

 

The fallout from the troubles at Chrysler and GMAC could extend beyond Cerberus Capital Management as it has emerged that the buy-out firm has sold “significantly” more than half its equity to about 90 investors.

 

Although Cerberus invested $7.4bn in both transactions when it took the companies private in two of the biggest deals of the leveraged buy-out boom, it has since sold on the majority of its equity, people familiar with the situation said.

 

http://www.ft.com/cms/s/0/1a321e64-2fff-11...?nclick_check=1

 

The Financial Times fired the reporter who speculated and wrote the story.