One bankruptcy isn't more efficient than two

Rumours recently swirled that Chrysler was in talks to be acquired by GM. Now while this makes a certain sense for Mercedes, er Daimler-Benz, which has finally come to the realization that it has to unload this horrible, horrible acquisition, it doesn't make any sense for GM.

This page pretty much summarizes GM and Chrysler's problems. Toyota is eating their lunch not by paying their workers poorly, on the contrary they are paying well in excess of typical manufacturing wages, about $30 per hour.. The difference is that the UAW contracts that U.S. automakers are under impose huge legacy costs, including a jobs bank to pay employees not to work, very lucrative medical plans, and very lucrative pensions.

And it can be argued, that the UAW has stood in the way of U.S. auto makers using their workers most efficiently, reflected in the extra hours it takes to build U.S. cars. The UAW has been so "successful" that they've killed hundreds of thousands of their own jobs, and the pension and medical costs for retired auto workers is about to kill GM, Ford, and Chrysler. Quite simply, the U.S. automakers business model doesn't work, and won't ever be competitive without a substantial change in their labor contracts.

The auto makers have one shot to fix this in their next contract negotiation with the UAW. It seems clear they will get some compromises, even the UAW realises how close to the brink the big three are. But combining GM and Chrysler before those negotiations would be the worst possible mistake. It would create a single entity with deeper pockets and less leverage against the UAW, it that could be shut down by union fiat in any disagreement. This is why Daimler must get rid of Chrysler now, because the UAW will never compromise if it thinks ownership has deep pockets. This is why GM's leadership made a huge mistake in selling GMAC instead of spinning it off, they put more cash back into their dying business so the UAW would have less incentive to compromise.

The clear solution is a bankrupcty filing by each of the big three. A bankruptcy judge is likely to cancel the UAW contracts and make Ford, GM, and Chrysler competitive again. And current equity might even remain, and possibly even increase in value.

But so far we've seen no inclination by management to do the smart thing. Until then, an investment in a domestic auto maker is foolhardy. The automakers may have bounce backs during strong economic years, but the end result is inevitable. By the time the next management team decides to use bankruptcy court, it's unlikely common shareholders will have anything left.