Autos: War Stories & Anecdotes
We look back at a few war stories and anecdotes to drive home that the only Detroit 3 constant is volatility.
We look back at a few strange episodes across the cycles in the auto market and in the evolution of the legacy Detroit 3 peer group that has had an ample supply of lowlights each decade since the 1970s.
We provide some examples of how strange the auto industry can get as the UAW in 2023 looks to use the current peak earnings stretch to shoot for maximum wage gains, roll back the tiered wage structure, and reload some of the legacy liabilities that had been a big part of the Detroit 3 competitive erosion.
The legacy Detroit 3 downsized, devolved, and restructured over time as some of the bellwethers saw their share of industry-level and issuer-specific crises.
The menu the UAW has put on the table may go a “demand too far” given the histories.
The action from the UAW is moving to the next level in this contract round, and this week gave a taste of what escalation means. The Detroit 3 (“D3”) is on the receiving end of the first wave of UAW attacks as the union kicks off its game plan to extract major wage and benefit gains. The game plan is focused on production disruptions and keeping the D3 off balance with tactical targeting of each of the D3 from assembly plants to parts manufacturing and as of today parts distribution.
The move today against just GM and Stellantis is to send a message that the cooperation is rewarded (in this case Ford). The action today offers evidence of an apparent willingness to essentially attack dealers and car owners by going after parts distribution centers. That is an aggressive move when so many assembly plants are still running. The UAW is conserving strike fund cash and rolling out a game plan that is a ground game (for now) across each OEM with some of the aerial attacks (e.g., full size pickups) yet to come.
We published a broader commentary on the UAW actions earlier this afternoon (see UAW: Going to the Mattresses 9-22-23). This piece is more of an add-on to hammer home the theme of “a lot can happen in this industry in a hurry…both good and bad.” In the earlier commentary, we gave some histories, and this one is more anecdotes and personal war stories covering the sector.
The goal is to draw out some histories, so when I see a laundry list like the one from the UAW in this contract round, the reaction is “You can’t be serious.”
Below, I combine anecdotes with the message that people of all experience levels, axes, histories, and assumptions can look at a situation and come away with very different opinions. The lookback includes a more frequent visit to the periodic crises at Chrysler but also the industry swoon that was unfolding in 2007 on the way to ad hoc bailouts in 2008 and the full bailout in 2009.
Memory lane for auto crises…
I have watched autos since my buy side days back in the early 1980s, so I thought some memory lane war stories on auto industry trauma might be of interest when framing what lies ahead as the industry wrestles with the UAW 2023 demands.
Wage hikes for a contract term are one thing, but when a structural obligation with a high degree of permanence (major increases in pension obligations, reinstating OPEB liabilities) is put on the table, the stakes get much higher. That means embedding permanent differentiation in cost structure vs. the peer groups is asking for trouble. Taking something away is a lot harder while wages are still about peer groups and profitability.
The history for the D3 is a bad one with recurring crises. Even Ford had the infamous Jacques Nasser business mix meltdown at the turn of the clock into the new millennium. That said, Chrysler and GM upheavals do carry more of the historical story.
The 1980s…
One of my first roadshows was catching the Lee Iacocca show at the Palace Hotel as the first model year for the minivan was rolling out as Chrysler’s savior (I still mourn the loss of my Matchbox Minivan from the time). Chrysler was given up for dead in the late 1970s after it was bailed out by Carter on the way into a brutal period of stagflation and higher interest rates.
Chrysler soon would be a big winner again by the late 1980s as it rolled up the credit tiers back to investment grade. The acquisition of AMC (the Jeep brand) in 1987 and success of the Chrysler minivans was gold. (Note: I took my driver’s license test in an AMC Matador in the 1970s).
The winnings never last (something to ponder when the UAW quotes the income run rate of the D3 now). The bond swoon of Chrysler in late 1990 and early 1991 was one for the ages. One major Chrysler bond issue (“Auburn Hills” as a noncallable bond with a rating-sensitive coupon-step-up feature) dropped into the 50s (when it was IG rated) and later rose more than 100 points higher as the credit was downgraded and the UST curve plunged, etc.
You don’t see 100-point gains on bonds much in a lifetime since bonds mature at par. The Chrysler microcosm of old swinging from a Carter bailout to investment grade in a decade then back to 50 cents on the dollar should offer a reminder of industry volatility.
The early 1990s Chrysler rebound and cash flow crisis of GM…
Chrysler was always an adventure. I got to represent the credit business in a “debate” on Chrysler viability when I was at Lehman back in 1991 and some bankers were squaring off. I supported the view of a senior investment banker in the room as we discussed the viability of Chrysler later in 1991. She wanted to “steal the books” from Salomon Brothers on a common stock underwriting but got a lot of push-back from the commitments committee.
The lineup around the table included some senior leaders including an Amex board member. The group around the table included a guy named Penske (who was no slouch!!) and a gent who was a Lehman banker but also the former CEO of Ford (Caldwell). My gut told me at least one guy in the room really did not like Iacocca (who was President of Ford at one point).
My credit case was that Chrysler asset protection offered 100% coverage of both debt and unfunded pension just from the Minivan and Jeep plants alone, an easy maturity schedule at the OEM level, a strong finance unit, and the reality that the cycle will turn and the market would be forward looking. The views in the room were certainly not uniform (to say the least). The equity analyst folded like a cheap suit in the face of the industry grandeur in the room (at the time he had a “Hold” on the stock which was among the most bullish on the street).
The end of the story was that “Solly” kept the underwriting books, and the stock deal was a home run. A well-heeled guy named Kerkorian reared up not long after that with his 10% area holding (he bid for the company in 1995). The stock ratings mix across the street on Chrysler in 1991 naturally changed once the underwriting happened with a lot more underwriting fees floating around out on the horizon. The sudden change of heart on Chrysler’s stock rating was very 90s given the fees now up for grabs.
I recall being at the Global Auto Congress in Detroit listening to some sell side equity brand names who went far in the auto business. It was always hard to get them to say whether an OEM would or would not go bankrupt. That created the opportunities.
For Chrysler, the ensuing convertible preferred deals of 1992 and more common stock issuance in 1993 saw the equity and credit pricing rally impressively. The cycle was rolling again soon, and Chrysler shockingly became the most profitable OEM per unit by 1998 on the back of a wave of product and model mix successes from the early 1992 year on (LHS sedans, Grand Cherokee launch, etc.).
That 1990s success of course was on the way to its next crisis after the Daimler merger and later the Cerberus LBO. Things move fast in the US Auto OEM business. When things are bad, they even tend to speed up. That is worth keeping in mind if the D3 starts layering in long term structural liabilities and hair trigger strike rights mid-contract.
Why lessons from the past matter…
The experience of the 1980s and 1990s for Chrysler was a reminder for later scenarios that a lot of the moving parts in Detroit can change in a hurry on cyclical trends and model wins/losses.
People do not talk about the GM crisis of the early 1990s much in looking back, but GM was facing a cash flow crunch and market share collapse that would have been even uglier if the rating agencies had marked GM’s credit metrics in 1992-1993 to market. The restructurings, outsized charges, downsizings, and UAW battles were recurring items that would get backed out with a more positive view of what was to come. The 1990s fortunately went into a protracted, record expansion.
Books were written about what a mess GM was at the time (I have a few on my shelf), but the memory banks tend to be more about the weakness of Chrysler. My Wards Yearbook collection from a few decades detail big wins and big failures in operations and financial strategies for each of the D3, but the near-death experiences for Chrysler were more common. GM and Chrysler did not end up in Chapter 11 by accident. Those are histories for another day as we wade back into autos.
2008, 2009 and a few judgment days (think Terminator, not Bible) …
The end of the story for legacy entities of GM and Chrysler came in late 2008/2009 with the post-crisis unraveling. The chaotic, erratic and ad hoc solutions came in the form of a multi-stage bailout that started in late 2008 after Lehman and AIG sent the bank system, capital markets, and investor base into shock as “anything ABS” came under a cloud.
We will revisit some other lookbacks in volatile auto stories with more granularity in later publications, but the timeline on the auto crisis went from bailout attempts in Congress in late 2008 (blocked by GOP in the Senate on a lack of 60 votes) followed by a legally questionable but very helpful use of TARP funds by Bush that allowed a hand-off to the new Obama team.
Bush saved the industry over the short term so the GOP and Bush would not have to “take the fall” for a bankruptcy wave. Then the adventures really began on the way to bankruptcies and bailouts after production effectively came to a standstill in Jan 2009 (around 25% capacity utilization that month for light vehicles).
I was able to get a ringside seat for one of the earlier bailout undercards in late 2008 when I got invited down to Washington to meet with the House Democratic leadership committee. They had pushed for the bailout and approved it, but then the Senate (Corker, Shelby et al) derailed it. The GOP did not see enough concessions by the UAW or a credible plan from management teams. They were of course “axed” with major transplant operations competing with the D3 across numerous states with GOP Senators.
Every now and then you get to see how Washington works. This meeting was in the Speaker’s conference room with a handful of guests from different disciplines. We had a group at the table that included a UAW rep, an equity markets rep (a major West Coast asset manager), a climate/fuel efficiency expert, someone on governance, and someone with a view on how all this might play out in the credit markets (that was me). The “Speaker and Team” meeting was one of those no handouts meetings where they give you 2 minutes each and then open it up for topical discussion.
My main memory was the #3 leader (a now-retired MA Congressman) was trying to counter the realities of lien priorities and capital structural rights with the statement of “We are Congress. We can do whatever we want.” The guests had to be polite, but the death of the bailout soon after in the Senate answered that question. That bailout, capital structure high jinks, and government largesse would await a new administration.
When some of the most senior party leaders in the room were hammering the D3 (notably GM) for gas guzzlers and opposing California emissions rules, the clean energy advocate cited the need for much higher gasoline taxes. I find it perplexing that the order of priorities was not the environment but election risk as one of the most senior leaders at the table cited “electability” concerns.
The group was polite, but it appears blaming the D3 for making vehicles that customers wanted (notably light trucks) seemed illogical to some. That is an old tale if there was no policy dissuading consumers from buying them, i.e., gas taxes.
Just as election risk was a good reason to take no action on gas taxes, the D3 had made the decision to sell more cars. It still did not keep them out of a financial crisis. Requiring OEMs to change their mix in exchange for support would mean making cars people would not want and that Congress would not try to influence via gasoline taxes. That was eye opening.
Multiplier effects risks than and now…
I got invited since I did not work on Wall Street for a major bank at the time (the banks were in their own bailout mode and my former employer was already toast). I had been publishing a lot on the topic and around how much chaos would ensue with very damaging multiplier effects that were not being discussed by our “leaders” in Washington.
My guiding light on how the industry’s chain reaction would work comes from an old book entitled “The Machine that Changed the World” (published 1990). That book was an offshoot of an MIT-driven study of the global autos wrapped around the Toyota Production System and what later became more broadly called “lean manufacturing.”
After years of trying to put such systems in place, the D3 supplier chain was even leaner and even more fragile by 2009 and after all the crisis period restructuring and growth of the non-US and especially China supplier chain.
The domino effects of a D3 collapse was being grossly understated in Washington back in 2008, and they needed to see how bad it could get. The way the bailout played out was highly political but also very much stacked to offer advantages and numerous zero-sum solutions that benefitted the UAW.
That bailout included a major wealth transfer from bondholders and lenders to the UAW which marked a difference from a pure taxpayer bailout. The shady (but legal) backroom exercises and Section 363 sleight of hand is a story to revisit on another day.
On the topic of lean and fragile supplier chains, we just saw that again with COVID. Years of low-cost offshoring has left the supplier-to-OEM chain more exposed to disruptions than ever (e.g., semiconductor supply). That fragility includes weakness in the face of strikes as we are being reminded right now. We will be looking at more on those topics in coming commentaries.
The next step in legacy liabilities…
One complicating factor for the 2023 UAW attempt to boost pay and solidify UAW members at full pay rates higher than the entire industry is the attempt to restore all the defined benefit plans and retiree health care. That demand is likely to meet fierce resistance from D3 management and shareholders as well as objective observers of the industry.
If the UAW keeps hammering the D3 for too long, the flashbacks to survival instincts for the D3 may kick into gear. Unlike in 2008-2009, they have the financial wherewithal to lock out the UAW and hunker down and give them an equal and opposite reaction. Whether that makes the UAW profit sharing evaporate and the UAW households start facing more stress than necessary is something that will start flowing into the headlines.
Our base case is that the wage tiers get eliminated and wages are materially boosted. They get COLA. There will be no strike rights for plant closings and no additional defined benefit plan or OPEB. There will be no plant closing moratorium.
Let’s see where this goes from here.