The domestic auto makers must change fundamentally or fail.
Speaking of GM, it has a lot of problems that Kerkorian cannot fix unless there are major changes in its labor structure. It is a healthcare company and a finance company that also builds cars. Do we have that backwards you may ask. Well, just look at what GM can and cannot do in making cars. If the car market slows or it cannot compete with other manufacturers say from, I don’t know, JAPAN, what can it do? Most companies would try to get better product and make necessary cuts to better compete. New product development takes time, so that means the interim step is to cut costs. Because of its labor contracts, however, GM CANNOT idle certain plants or lines. In short, no matter what the market conditions are, GM has to run certain plants. The labor is telling management how to run the company; the tail is wagging the dog.
Thus, just like the federal government, it has entitlement spending that it cannot get rid of unless there is fundamental change. Put another way, there has to be new, realistic attitudes toward the world and the market today. The auto market is no longer a three ring circus run by the US makers; the US makers are losing to the foreign makers. That is not new, but the rate of change is rising and the US makers, because of their labor agreements that are throwbacks to the ‘big 3’ days, cannot keep up and compete. Unless there is fundamental change in the structure of the domestic auto business it will not survive. Steel had to change and it did, helped by surging demand. That made it easier. GM and F have no easy road ahead, but the Kerkorian ‘threat’ may engender the realization that change is needed, and they had better do it themselves or have it done for them.
GM tender offer may not save GM but it sure helped change the market attitude.
While the Kerkorian offer may or may not spur the needed change in GM, it did spur the market. Many say Kerkorian could ‘unlock value’ in GM by forcing a split, e.g. selling the valuable Cadillac brand. What his offer did for the market was unlock value; in other words it opened some eyes that stocks could be a bit low in price. If Kerkorian thinks GM is at a price where it is ripe for buying and harassing into change then other areas and businesses in the market could be equally ready. Right now big money is poring over potential breakup buys. Sounds like the 1980’s and Gordon Gecko’s ‘greed is good’ speech, but it may be a big player in how this market proceeds. Don’t believe this is like the 1980’s? Well recall that back then there were California freeway shootings just as there are now. The parallels make you shiver, huh? Human behavior runs in cycles and is reflected in the markets and how we treat each other. Anyway the M&A activity is up with companies loaded with cash. They are looking to use the cash to buy, cannibalize, keep the strong, toss the chaff. It is a way to run the market higher, though it is no one’s favorite.
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