Following in Chrysler's footsteps, General Motors filed for Chapter 11 bankruptcy on June 1. Last week, GM's bondholders agreed to clear $27 billion of debt in exchange for a stake of at least 10 percent in the company, and the company announced that it would close 1,100 of its dealers. But despite those moves, bankruptcy protection was necessary for GM to cut the rest of its debt, which tops $172 billion, and continue operations. Under GM's new plan, the federal government will become the company's majority shareholder in exchange for more than $50 billion in aid. The United Automobile Workers will also receive a stake in the company.
Chrysler faced a very similar situation to GM a month ago. With $6.9 billion of debt, it filed for Chapter 11 bankruptcy on April 30 and announced that it would eliminate a quarter of its dealers by early June. The company will now be jointly owned by the UAW, Italian automaker Fiat, and the federal government, which has supplied the automaker a total of $12 billion in aid.
These back-to-back bankruptcies follow more than seven decades without such a collapse in the American auto industry. But while they represent a new low for the industry, the restructurings offer GM and Chrysler an unprecedented opportunity to rebound. The possibility for significant innovation in a currently stale industry is invigorating for many entrepreneurs. We asked the CEOs of five auto-related Inc. 500|5000 companies what they would do if they were at the helm of either automaker. Here's what they had to say.
If you were the CEO of one of the major automakers, what would be your first order of business?
Scott Griffith, CEO of Zipcar, a car-sharing company based in Cambridge, Massachusetts: I think they should really look at key partnerships outside the industry. Ford partnered with Microsoft to create the Sync system, which connects the car to music players and cell phones. That system's too closed in my opinion, but I think they're headed in the right direction. I think the automakers should open up the dashboards so that developers can design applications for people to download into the car, like on the iPhone. If you think of the car as an information platform and a transportation solution, you start thinking about a service versus a product, and that's a huge difference.
Noah Lehmann-Haupt, CEO of Gotham Dream Cars, a luxury sports car rental company in New York City: When I look at the Japanese automakers, their brand strategy is very straightforward: it's consumer brand, luxury brand, period. What I see with the U.S. automakers is this ridiculous proliferation of brands. They exist not because of consumer demand but because of legacy operating agreements and dealership contracts. The first thing that I would do is to get rid of most of those brands. At GM, for example, I would eliminate every brand except Chevy and Cadillac. Pontiac, Saturn, GMC, Hummer—all those are getting out of there.
Michael Schena, CEO of Michigan Custom Machines, a manufacturer in Novi, Michigan that builds test machines for automakers: I would have been downsizing to match the demand a long time ago instead of waiting for things to get this far along. The car companies are geared up for much higher production than what the demand is. I think maybe there were some hopes that things would turn around and they wouldn't have to make the cuts, but now they're operating in a reactive mode.
Al Babbington, CEO of OneCommand, a Cincinnati company that makes customer communication software for the automotive industry: People outside the industry say that the automakers aren't building quality cars. Frankly, that's not true. If you look at the independent ratings of a Buick or Cadillac today, they rate up there with a Toyota or Lexus. But with increased competition, their market share is naturally going to be lower. I would use government support and bankruptcy laws to rightsize the organization and the number of dealers. When the automakers adjust accordingly, they can be wildly successful.
Derek LaFavor, CEO of SellingSource, a Las Vegas company that provides marketing technology for auto loan and other financial services companies: I think the auto manufacturers need to revisit how they market. Right now, they are just making cars and hoping like heck that the dealerships sell them. They have no aftermarket upgrades. And they don't follow up. I have a 2007 Corvette CO6, and I receive an e-mail once a month on the vehicle status. But it's not telling me about upgrades or replacements for that car. They're not taking advantage of that relationship to upsell me.
Do you think the federal government's role thus far has been appropriate?
Scott Griffith: I would hope government doesn't have to intervene, but I think if we're going to see Chrysler and GM survive, it needs to play a role. There are so many legacy costs, retirement and health care costs in particular, that need to be taken care of, and that's a role for the government. On the other hand, if these companies can't innovate and define a vision for new lines for their brands, I think the government has no role. The market should define that.
Noah Lehmann-Haupt: The credit markets out there are not conducive to these companies getting the financing they need to restructure. Without the government, they'd just get destroyed or snapped up by foreign companies. I have no doubt in my mind there is a path to success for all of these companies, but they just have to clean themselves up.
Michael Schena: I don't think that the government should be in the car business. By stepping in, it offers a safety net that doesn't hold people accountable for their actions. It's the same thing with the banks. Unfortunately, we bailed them out. Yes, a lot of people would have been affected, but a lot of people benefited from the risky decisions that were made earlier. Now the taxpayers have to suffer.
Al Babbington: I have been extremely impressed with the administration's role in getting cooperation from shareholders. The majority owners of Chrysler, who put $10 billion into the company not long ago, agreed to give up their equity. They've basically said, "Listen, we're going to help you get this profitable so that you can build your futures again." I don't think that could have occurred without strong administrative support.
Derek LaFavor: This is not about the government supporting the auto industry. It's about how many people we are going to put out of work. How many businesses are we going to bankrupt? How many communities will cease to exist? The taxpayer is going to pay either way. I don't believe that government should be supporting any business, but I do believe in the government supporting thousands of jobs at the community level.
China has begun focusing on hybrid and electric vehicles. Where should U.S. automakers look to innovate?
Scott Griffith: One opportunity that's been overlooked is diesel. There are clean diesel cars in Europe that are much more fuel efficient than any gas-powered car we have, but diesel got a bad rap in this country back in the '70s and '80s, when the engines were still unreliable. Also, it gets taxed at a higher rate than gasoline. I think the government should subsidize diesel for 5 or 10 years. That's actually a better use of money than bailing out the auto companies.
Noah Lehmann-Haupt: There are opportunities for innovation beyond the internal combustion engine powered by fossil fuels. But people won't buy electric cars until plugging in is as simple as filling up. You can't just tell everyone, "You've got to plug your car in at night." It has to be the automakers' role to take a lead in this. They have to build the cars before Shell has recharging stations everywhere.
Michael Schena: I think hybrids will be a flash in the pan, because they still rely on fossil fuels. GM's Chevy Volt is a good move. It is designed to operate fully electric, and its gasoline backup engine offers consumers comfort. The biggest roadblock is that we Americans enjoy our big v8 engines and our SUVs. But right now everything's changing, so this is as good a time as any to introduce new things.
Al Babbington: Ford and GM have spent extensive amounts of money to develop outstanding technology, but they haven't made the final investment to bring it to market. Four-dollar gas isn't gone forever. In fact, I think the administration should look at an energy policy that gets us at $4.00 gas right away and forces the builders of vehicles in America to think about alternative energy.
Derek LaFavor: We all talk about electric vehicles and hybrids, but I don't think the automotive manufacturers really know what the American public wants. Once we understand what they want, we've got to go back to the infrastructure. Do we have the right cost base to compete effectively with foreign manufacturers who don't have the same legacy agreements and plants?
Is the current crisis just limited to the U.S., or is it an issue for the industry at large? Are there any examples outside the industry that could help the automakers right now?
Scott Griffith: Car companies in Europe have the same exact challenges. They've got to retool around much smaller sales numbers and production runs and move from selling a product to selling a service. I think the challenge is as big as what computer companies faced in the 1970s. IBM adopted the PC early and got out of the mainframes business. Digital Equipment Corp. didn't. That's exactly the type of challenge that car companies face today.
Noah Lehmann-Haupt: The Big Three are dealing with a fundamental business issue, not a geographical issue. Whether you're making cars or computers or TV sets, you have to build what consumers want, not what you're obligated to build. The current leaders of these companies are not the ones who entered into these big union contracts and made commitments to dealerships and brands, but we've got to figure out a way to get out of that stuff.
Michael Schena: Companies around the world are feeling the economy just like we are. The automotive industry in Europe is down, and there's a huge surplus of inventory on the lots. The key is how the companies are managed. Look at Starbucks. It's not a car company, but it's a global brand, and with people cutting back on $4 cups of coffee, Starbucks has quickly closed up stores to compensate. I'm sure that when the economy picks up, it will be able to put stores up just as fast.
Al Babbington: The American auto industry has been hit so hard because we invented the industry. GM, for instance, has over 1,000 retired employees that are 100 years old. But there are things that the industry can look at elsewhere. We could learn from big-box retailers. When I go to Best Buy, I can look at four name brands together, but the auto distribution network has prevented different manufacturers' vehicles from being under the same rooftops.
Derek LaFavor: I believe it's purely an American issue. When foreign manufacturers can build plants here cost-effectively, what does that tell you? We've evolved into a model that doesn't allow us to be competitive. It's like what happened in the dot-com industry in the late '90s. Companies had to rethink what the Internet was all about. I think the American auto industry needs to think just like it's out of business and start from scratch.