Behind the GM Euphoria

Wall Street is always looking for a reason to be euphoric, and it found one this week in the return to the market of General Motors.

Less than two years after filing for bankruptcy and being taken over by the federal government in a $50 billion bailout, the automaker became the darling of investors and commanded a surprisingly high initial price of $33 a share.

Many of those investors had apparently not read the voluminous S-1 Registration Statement that GM filed with the Securities and Exchange Commission. If they had, they would have found a document that in its current iteration requires more than 13,000 words to summarize the risk factors facing the company.

Companies are required to be especially candid in warning investors what they may be facing when buying into a company whose shares are being offered for the first time (after its transformation GM is technically a new firm). But this prospectus is amazing. Here are some reasons why.

  • Acknowledging that its current chief executive and chief financial officer are from other fields, the S-1 says the company’s prospects depend on their ability to “quickly learn the automotive industry.”
  • The document reveals : “We have determined that our disclosure controls and procedures and our internal control over financial reporting are currently not effective. The lack of effective internal controls could materially adversely affect our financial condition and ability to carry out our business plan.”
  • The company admits that it has an image problem: “The automotive industry, particularly in the U.S., is very competitive, and our competitors have been very successful in persuading customers that previously purchased our products to purchase their vehicles instead as is reflected by our loss of market share over the past three years. We believe that this is due, in part, to a negative public perception of our products in relation to those of some of our competitors.”

Inexperienced management, poor financial controls and a negative public perception don’t seem to constitute a foolproof recipe for success. But there’s much more to the recitation of risk factors, including the fact that even after the stock offering the U.S. government will remain by far the company’s largest shareholder.

GM reminds potential investors that its bailout came with some strings attached. For one thing, the company is supposed to take steps to maintain its U.S. workforce at or near existing levels. If GM is a shining example of a renaissance of American manufacturing, as some observers would have us believe, it shouldn’t be a problem to maintain jobs in the USA, especially in light of the concessions that members of the United Auto Workers union consented to in order for the bailout to proceed.

But GM’s management hints that it might be interested in even cheaper labor abroad. The S-1’s summary of the company’s current business strategy includes the following:

Enhance manufacturing flexibility. We primarily produce vehicles in locations where we sell them and we have significant manufacturing capacity in medium- and low-cost countries. We intend to maximize capacity utilization across our production footprint to meet demand without requiring significant additional capital investment.

That sounds like a plan to expand foreign rather than domestic production. Elsewhere the company seems to be complaining when it notes that the federal government “may have a greater interest in promoting U.S. economic growth and jobs than other stockholders of the Company.”

GM’s management also bemoans the fact that “restrictions in our labor agreements could limit our ability to pursue or achieve cost savings through restructuring initiatives.”

In other words, the new GM is beginning to sound a lot like the old GM: blaming unionized workers for problems caused by management failures and market conditions. And like its predecessor, the new GM seems to be itching to dump more of those workers in favor of cheap labor abroad. This may be the main reason it is so eager to bring the federal role to an end.

If cost cutting on the backs of workers — rather than real innovation and competent management — is to be the focus of the new GM, it will probably end up in the same mess as its predecessor.

The investor excitement about the new GM may be good news for the federal government, but it could turn out to be just another market bubble.

Final irony: one of the big beneficiaries of the GM initial offering is Goldman Sachs, which in July agreed to pay the feds $550 million to settle charges of having deceived investors. Goldman is making about $9 million as one of GM’s underwriters.

Toyota Totals Its Corporate Social Responsibility Creds

It would not surprise me if the people who do public relations for Toyota are flipping through their old scrapbooks to cheer themselves up amid the worst crisis in the company’s history.

They might be looking longingly at the 2003 Business Week cover story headlined: “Can Anything Stop Toyota: An Inside Look at How It’s Reinventing the Auto Industry.” Or the 2006 New York Times paean entitled “Toyota Shows Big Three How It’s Done.” Perhaps they are going back even further to the 1997 love letter from Fortune: “How Toyota Defies Gravity.”

These days Toyota is instead experiencing the unbearable heaviness of being exposed as just another unscrupulous automaker that, whether through incompetence or greed, puts many of its customers behind the wheel of a deathtrap.

New revelations that the company knew about the defective gas pedals for years before taking action are all the more scandalous because Toyota had a longstanding reputation not only for business prowess but also for social responsibility.

The company, of course, fostered this image. Its website proclaims: “Toyota has sought harmony between people, society, and the global environment, as well as the sustainable development of society, through manufacturing. Since its foundation, Toyota has continuously worked to contribute to the sustainable development of society through provision of innovative and high-quality products and services that lead the times.”

All big corporations make similar declarations, but Toyota managed to convince outside observers of its pure heart. Last year the Ethisphere Institute included the automaker on its list of “the World’s Most Ethical Companies.” Toyota is ranked 14th on the “Global 100 Most Sustainable Corporations in the World.” And it received the highest score among automakers in a 2006 CERES assessment of corporate governance changes adopted by large corporations to deal with climate change.

Toyota’s environmental reputation is not completely unblemished. In 2007 the company incurred the wrath of green groups for its opposition to an effort to toughen fuel economy standards in the United States (a stance it modified in response to the pressure). In 2003 Toyota agreed to pay $34 million to settle U.S. Environmental Protection Agency charges that it violated the Clean Air Act by selling 2.2 million vehicles with defective smog-control computers.

Overall, however, Toyota was regarded as a much more environmentally enlightened company than Detroit’s Big Three. In fact, its successful efforts to bring hybrids into the auto industry mainstream made it something of a corporate hero in green circles. Michael Brune, who was recently named the new executive director of the Sierra Club, brags that he and his wife have been driving a Prius since 2004.

Toyota’s more laudable stances on sustainability issues did not prevent it from being completely retrograde when it came to respecting the collective bargaining rights of its U.S. employees. It has successfully kept unions out of its heavily-subsidized American plants and has taken advantage of contingent workers to keep down costs in those operations.

Just as good environmental policies do not automatically lead to good labor practices, the current safety scandal shows that a company can be green and totally irresponsible at the same time.  Despite Toyota’s claim about promoting “harmony between people, society, and the global environment,” it appears the company put its business interests ahead of the safety of its customers and others with whom they share the road.

The automaker’s safety scandal is another indication that voluntary corporate social responsibility policies go only so far. It is only through rigorous government regulation, backed by aggressive environmental and other public interest activism, that major corporations can be kept honest.

Toyota to California: Drop Dead

nummiThe U.S. market, especially in states such as California, has played a major role in Toyota’s ascent to the top of the global automobile industry. Now the company is showing its appreciation by announcing plans to put nearly 5,000 people out of work in the San Francisco Bay Area by closing its New United Motor Manufacturing Inc. (NUMMI) operation. The move came shortly after the new federally subsidized General Motors decided to exit what had been a 25-year joint venture between the two companies.

If Toyota ignores the pleas of California public officials and proceeds with the shutdown, the closing would represent a sharp break with the company’s paternalistic traditions. “It’s as if a long-held doctrine at Toyota – that it doesn’t shut down factories and it doesn’t fire workers – has crumbled,” a Japanese auto analyst told the New York Times. “Some would say this is a new era for Toyota.”

To be accurate, Toyota’s paternalism has not extended to the contingent workers it has employed at home and in the United States, and earlier this year it used voluntary buyouts to thin the ranks of regular workers at various U.S. plants.

Conditions are admittedly tough for Toyota. It posted its first annual loss in half a century for the fiscal year ending in March amid the sharp economic downturn. Yet it cannot be an accident that the only one of the company’s ten U.S. manufacturing plants to be put on the chopping block is the one where the workers are unionized.

Toyota, like other foreign automakers, has made sure to keep its U.S. operations non-union. NUMMI was a special case. It was created at a time when GM thought it needed to learn the secrets of Japanese auto production, Toyota was looking for ways to increase its U.S. market share without inflaming anti-import sentiments, and the United Auto Workers union was willing to experiment with new work rules that raised productivity amid rising industry layoffs.

The UAW took a lot of grief for its “jointness” arrangement at NUMMI, where the intensified pace of production was denounced by critics as “management by stress.” The contracts negotiated by the UAW have forced workers to earn a portion of their pay in the form of production bonuses. Earlier this year, the U.S. Labor Department ordered NUMMI to pay its workers an additional $862,000 because the company had miscalculated the bonuses for 2008 (Labor Relations Week, 6/25/09).

Despite the extent to which the UAW and NUMMI workers bowed to Toyota’s way of doing business, the company did not hesitate to shut down the operation once GM was out of the picture. Toyota has apparently given little thought to the impact of the closing on California’s economy amid the recession and the state’s fiscal crisis, which was resolved only by enacting cruel cuts in education and other public services. Instead, it is complaining about labor costs at NUMMI compared to its non-union plants in places such as Kentucky.

Not long ago Bloomberg reported that Toyota was considering using the NUMMI plant to produce its popular Prius. That would be appropriate, given the hybrid’s popularity in California. But the company quickly quashed that rumor and insisted that instead it would add Prius capacity at its planned plant in Mississippi once the market begins to recover. The Mississippi facility is slated to receive some $300 million in state economic development subsidies and, of course, will be run without a union.

Despite all that California has done for Toyota, the company’s message to the Golden State is: drop dead.

Ruling by Fiat

marchionneThe outpouring of angst about the bankruptcy and downsizing of General Motors is overshadowing what is perhaps an even more dramatic transformation at Chrysler. The smallest of what we used to call the Big Three has been delivered on a silver platter to a foreign company with outsized ambitions. It is now clear that the federal government is in the business of picking winners and losers, in certain industries at least. The question is why the Obama Administration has been so eager to make Fiat one of those favored few, given that it apparently aspires to challenge GM, the presumptive flagship U.S. automaker in which the feds are investing some $50 billion.

Only a few years ago, Fiat (profiled here) was accorded the same basket-case status that came to be applied to Chrysler and GM. In fact, in 2000 the Italian automaker was forced to turn to GM for help as its market share began tumbling both at home and in the rest of Europe. GM purchased a 20 percent stake in Fiat as part of a strategic cooperation deal between the two companies. In 2004, as Fiat’s condition grew worse, it invoked a provision of the cooperation agreement that would have compelled GM to buy the company. GM had no interest in taking on Fiat’s huge debt load, so it paid $2 billion to get the Italians to go away.

Fiat’s chief executive Sergio Marchionne (photo) decided that the company’s only path to survival was to combine with other car companies. He saw an opening earlier this year when the federal government agreed to provide emergency loans to Chrysler but pressured the company to restructure and find a partner. Fiat agreed to be that partner without investing any cash.

When Chrysler went back to the government for more aid, the Obama Administration took an even harder line, explicitly requiring the company to join with Fiat. The feds later pushed Chrysler into a bankruptcy filing designed to bring about the emergence of a reorganized company run by Fiat.

Marchionne took full advantage of his privileged position to intensify the pressure on Chrysler’s unions to make major contract concessions. He took a tough stance both with the United Auto Workers and the Canadian Auto Workers, threatening to scuttle the deal unless they capitulated. Canada’s National Post headlined its story FIAT PUTS GUN TO CHRYSLER UNION HEADS. Both unions gave in to the pressure and signed new contracts with major givebacks.

Fiat is no stranger to hard-line labor relations. Its relationship with unions has been tumultuous throughout the company’s history. The 2002 announcement of a 20 percent cut in the Fiat’s Italian workforce opened a new period of unrest in its domestic operations. In recent months, as Marchionne has pursued his grand plans for the creation of a new auto giant, Italian metalworkers have grown worried that they may lose out. Last month they held a national protest near the company’s headquarters in Turin. Frequent work stoppages and blockades have been taking place at various Fiat plants.

Chrysler’s workers may soon find themselves resorting to similar tactics.  Even though 55 percent of the company will initially be controlled by the UAW’s Voluntary Employee Beneficiary Association, it is likely that Fiat’s executives will be the ones really calling the shots. The VEBA will have its hands full meeting its obligations to workers. In fact, UAW President Ron Gettelfinger has said the union would probably sell its Chrysler holdings as soon as it is financially feasible.

The party that has the most to gain from Chrysler’s restructuring is Fiat. Even though Marchionne was thwarted in his attempt to go from the Chrysler coup to the purchase of GM’s European operations, he still has grand dreams and is seeking other industry partners. In the meantime, the Chrysler deal will enable Fiat to expand sales of its small cars in the North American market, creating more competition for the new GM. How nice of the Obama Administration to use U.S. taxpayer dollars to make this happen.

Pushing Uncle Sam to Be an Activist Investor

unclesam4Now that it’s becoming clear  that the federal government will end up owning nearly three-quarters of the shares in General Motors, the question is: What kind of owner will Uncle Sam be?

In certain respects, the Obama Administration has been acting like a private-equity firm that imposes conditions on a company it is taking over. It already booted out GM’s chief executive, restructured its debt, pressured its union to make contract concessions and bullied its main minority shareholder — which in this case is the autoworkers’ healthcare trust — and is wiping out other investors.

Yet, despite maneuvering to gain an expected stake of some 70 percent in the automaker, the feds don’t want to manage the company. According to the Wall Street Journal, the Treasury regards itself as “a player that has no intentions of directly guiding the company once it emerges from bankruptcy.” Unnamed sources in the federal government told Reuters: “We want to be shareholders for as short a period of time and almost in as inactive a way as we can responsibly be.”

One is tempted to ask: why? The Obama Administration has already taken some bold steps with regard to the rescue of GM. It is disingenuous to now act as if it is improper for the government to exercise any influence.

No one is suggesting that Treasury Secretary Tim Geithner or the Secretary of Transportation take over day-to-day control of the company, but there is still the question of broad policymaking exercised through the board of directors and annual shareholder meetings.  This will not be a situation in which government has a small interest whose voting power is far outnumbered by private investors. GM is heading for a situation in which it is nearly a wholly owned subsidiary of the United States of America.

There are encouraging reports that the federal government will name a substantial number of GM’s board members. But who will these appointees be — and will they be expected to pursue certain policies? It is easy to imagine Geithner installing business types with the mindset of conventional directors who are free to act as they please.

And then there’s the question of whether the federal government will vote its shares at annual meetings. If the government does not make its will known through the board or vote its shares, then who will control GM? Will the UAW healthcare trust end up calling the shots — or perhaps the governments of Canada and  Ontario, which will reportedly end up with a small holding in exchange for the financial assistance they are giving the company.

As the federal government uses its large investment in GM to help steer the company back to some semblance of financial health, why can’t it also use its influence to turn the automaker into a paradigm of the most enlightened corporate governance and accountability practices?

Keep in mind that GM’s track record is not only one of bad business judgments. It also has a long history of acting irresponsibly toward its critics (Ralph Nader et al.), its workers (the speedups that led to the Lordstown revolt in 1972), communities (destruction of streetcar lines in the 1930s and 1940s), the environment (pushing SUVs long after it was clear they were disastrous for the climate), etc. etc.

For years, activist investor groups have tried to promote better practices through proxy resolutions. GM has not yet issued the proxy statement for this year’s annual meeting, which is scheduled for August (two months later than usual), so we don’t know what issues will be voted on by the shareholders. Last year, the resolutions were on issues such as the reduction of greenhouse gas emissions, support for healthcare reform, full disclosure of political contributions and shareholder advisory voting on executive compensation — all of which were opposed by management.

Abstaining from voting on such matters would in effect mean preserving the status quo and giving implicit support to the backward policies adopted by the company for decades. As long as the federal government (and by extension the taxpayers) owns the overwhelming majority of the shares, it should use its influence to clean up not only GM’s financial accounts but its social ledger as well.

Richard Shelby: United States Senator or Foreign Corporate Agent?

Alabama Senator Richard Shelby has emerged as the leader of Republican opposition to a federal rescue of the Big Three U.S. automakers. Shelby would have us believe that his position flows out of a deep belief in market forces. “The strength of the American system,” he said recently,” is it allows us to take risks—to create, to innovate, to grow, to succeed and sometimes to fail.”

While Shelby (seen in photo with Saddam Hussein) is credited by some for consistency in that he also opposed the big federal bailout of financial institutions, he’s been called a hypocrite because his home state lavished major economic development subsidies on Asian and European automakers—a total of more than $750 million to Mercedes, Honda, Toyota and Hyundai over the past 15 years. These transplants, all non-union, have given the Yellowhammer State one of the country’s largest auto sectors, albeit one that is foreign controlled.

Shelby insists that Alabama’s handouts to the foreign automakers are not relevant to the current debate, but what he and his critics are both ignoring is that the funds channeled to the likes of Mercedes and Honda have not been only state and local. The federal government has also provided assistance to the transplants, and Shelby, along with other members of the Alabama Congressional delegation, helped that happen.

A stroll through the archives of Alabama’s newspapers on Nexis makes this clear. In 1993, when Mercedes was lured to the state with a $250 million incentive package, Shelby praised the deal, stating: “Alabama put together a smart investment package that in both the short and long term will yield solid results for our state” (Birmingham News, 9/29/93). Federal money helped pay for some of the highway improvements that were promised to Mercedes to make the site more appealing (Birmingham News, 10/21/93).

In 1999, when Honda was induced to build a plant in Alabama with a $250 million package of its own, the Alabama delegation quickly mobilized. On May 7, 1999, Michael Brumas of the Birmingham News reported: “Alabama members of Congress said Thursday they will be looking for ways the federal government can help underwrite part of the costs associated with building the new Honda plant at Lincoln. And the lawmakers pledged to help the automaker maneuver through the federal bureaucracy as it prepares to build the plant.” The article said Shelby, as chair of a transportation appropriations subcommittee, was expected to funnel money for road projects near the site.

In 2001, when the Korean automaker Hyundai was deciding where to locate its first U.S. plant, Shelby and other members of the Alabama delegation met with the company (Birmingham News, 10/11/01). After the state won the plant with yet another package of around $250 million, Shelby arranged for $445,000 in federal funds to go to the Alabama Tombigbee Regional Commission, which planned to arrange free bus and van service to take construction workers to the Hyundai site (Montgomery Advertiser, 9/10/02). And these are only the cases that found their way into the press.

Shelby is far from the only senator to have used his office to arrange for federal funds to help a company in his state. But the fact that Shelby has worked so hard for the foreign automakers and now opposes measures deemed necessary to protect the jobs of three million American workers in the auto industry and related sectors makes one wonder whether he should be seen as a U.S. Senator or a foreign corporate agent.