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President Obama bought Chrysler some time. But the automaker is clearly still in big trouble, and the implications of its failure, should it come to pass, extend way beyond the U.S. borders, and for more than the obvious reasons.
Chrysler filed for Chapter 11 bankruptcy and will attempt to reorganize its businesses after gaining concessions from labor unions and crafting out a deal with Italy's Fiat. Yet, if you look at the situation closely enough, you see the potential for more trouble ahead for the company, as well as others with whom it does business.
Fiat's initial stake in the deal is 20%, with the option to increase its ownership position to 35% by 2016, if it does certain things, such as make Chrysler successful at turning out small, fuel efficient cars that people in the U.S. will actually buy and drive. The U.S. government, the Canadian Federal Government, and the government on Ontario will take a 10% stake, with the U.S. taking 80% of the stake.
From a business standpoint, the fact that Fiat is the savior of Chrysler is at the very least somewhat questionable.
According to Stratfor.com: "the impact of the bankruptcy will be felt in other countries also. In fact, the U.S. plan for Chrysler hinges on a transfer of technology from Europe, meant to help the beleaguered company learn the ways of small and efficient automobile manufacturing. The irony is that Chrysler intends to keep Jeep and Dodge — neither of which are considered small or efficient — as the core assets of its new fleet."
Strafor further noted: "Chrysler has turned to the Italian automaker Fiat, which has had financial difficulties of its own, for manufacturing and business acumen. In Europe, Fiat’s vehicles have suffered decades of image problems, depressing the price that the Turin-based company can ask for its cars. Furthermore, Fiat went through exceedingly difficult times in 2003 and 2004, when (again ironically) it was General Motors that was nearly forced to bail the company out. By 2005, Fiat was in such dire straits that it exercised an option to sell its car division to the American manufacturer, forcing GM to buy it at market price. But GM was so wary of Fiat’s enormous debt and unimpressed by the car division that it chose to pay a $2 billion penalty instead of taking ownership."
Yet, aside from economic impact the Chrysler bankruptcy will have international implications, including some that could impact national security, in the U.S. and abroad.
Stratfor.com noted: "Further questions arise over the impact that the Chrysler bankruptcy will have on U.S. neighbors Canada and Mexico. For Canada, the key is Ontario’s manufacturing sector, which accounts for 42,000 assembly and 75,000 auto parts supplier jobs. Having suffered heavy job losses in both sectors in 2007 and 2008, the minority Conservative government cannot allow further economic hardship to strike in Ontario — the government already has faced multiple challenges from the Canadian Liberal Party during its tenure."
In fact, Stratfor thinks that Mexico's problems from these developments are "a matter of life and death," as "The auto-manufacturing sector employs roughly 450,000 people — 100,000 in Ciudad Juarez alone."
As readers of this space are well aware "Juarez is at the center of a drug war that has pitted the Mexican army and federal law enforcement against several cartels, which also are battling each other for control over key drug transshipment points into the United States," which means that "Massive layoffs in the automotive sector would create a large pool of disaffected but able-bodied people, who would be great recruits for the cartels. The situation also could widen the rift between the notoriously rebellious and independent-minded residents of Chihuahua and the federal government in Mexico City, complicating efforts by federal law enforcement to conduct operations in Juarez."
And the timing couldn't be worse for Mexico, as it is reeling from the Swine flu's effect on its international image and its tourism industry and "substantial decline in remittances from emigrants living abroad and low prices for its energy exports — which the government depends on for about 40 percent of tax revenue. Added to this would be the cost of a program that obligates the government to pick up one-third of autoworkers’ salaries when companies suspend factory operations."
Beyond Chrysler, though, there is GM. Analysts are in agreement that Chrysler is the "canary in the coal mine" for this process. Any successes or failures with Chrysler are expected to be applied to GM, whose future is also in doubt.
Stratfor noted: "Given GM’s global reach, the potential collapse of that company, following the Chrysler bankruptcy filing, would cause shock waves for a number of countries and leave their governments to deal with the domestic effects. And that might sour the Obama administration’s relations with some key allies in the future."
Conclusion
The hands of Chaos, more specifically "The Butterfly Effect" are all over this as unintended consequences are certain to develop.
To be sure, any intangibles that surface could have positive or negative effects. It's too early to tell. What is certain, though, is that if the Chrysler deal fails, GM will likely be in an even more difficult position than it already is.
There are signs, though, that the U.S. economy's troubles have begun to bottom out, at least in some sectors of the economy. In our neighborhood there are houses that are sporting "sale pending" signs. And soft indicators such as freeway traffic at rush hour and off times seems a bit heavier at times than it did just a few weeks ago.
The Federal Reserve and some private forecasters are seeing some small signs of improvement as well.
In other words, there is still danger for Chrysler and GM, but they may be helped if the U.S. economy actually starts to recover. The next two to three months will be critical.
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