CEOs of GM, Peugeot Lose Their Jobs as a Result of Auto Industry’s Great "Global Glut”

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By William Patalon III
Executive Editor
Money Morning/The Money Map Report

The Obama administration will give General Motors Corp. (GM) enough aid to restructure over the next two months – requiring Chief Executive Officer G. Richard Wagoner Jr. to resign as one of the conditions – and has told Chrysler LLC it must complete a deal with Italian automaker Fiat SpA (OTC ADR: FIATY), media reports stated yesterday (Sunday).

The administration is supposed to detail its plan for automaker aid today (Monday), Bloomberg News said yesterday.

Indeed, yesterday was a tough day for the world's automakers in general – and should serve to underscore just how much overcapacity exists in the global automobile market.

The board of directors of French carmaker PSA Peugeot Citroen fired CEO Christian Streiff and replaced him with Philippe Varin, who will take up the position on June 1, the company said in a statement.

Varin, 56, was CEO of Anglo-Dutch steelmaker Corus Group Ltd., which he helped turn around after a long stretch of losses. Yesterday, Varin said that Peugeot – No. 2 in Europe in terms of sales behind Germany's Volkswagen AG (OTC ADR: VLKAY) – posted a net loss of $460 million and said it expected to stay in the red until 2010.

The Lowdown on GM

Wagoner's departure – officially being termed as a "resignation" – was nevertheless "requested" by the White House before GM can receive more government aid.

U.S. President Barack Obama will today unveil his plan to prop up General Motors and Chrysler, offering them more money if the companies agree to shrink and refocus their businesses, The Washington Post reported.

Wagoner, 56, joined GM in 1977 and has been chairman and CEO since 2003.

As GM's business prospects spiraled downward late last year, the company's woes progressed at the end of last year and Wagoner was compelled to seek federal aid. Some members of Congress suggested that he resign, and as early as December. Obama seemed to agree, saying management should be replaced if the "team that's currently in place doesn't understand the urgency of the situation and is not willing to make the tough choices and adapt to these new circumstances."

The Big Three Need to Shrink

In an appearance yesterday on this morning on CBS TV's "Face the Nation," President Obama said that General Motors and Chrysler still needed to present more streamlined business plans. Before the federal government offers more financial aid to the U.S. auto industry, GM, Chrysler and Ford Motor Co. (F) must offer a plan that makes it "much more lean, mean and competitive than it currently is," President Obama told his interviewer.

General Motors and Chrysler received $17.4 billion in loans in December, and have come back to request $21.6 billion in additional assistance.

Both companies have submitted business plans that promise to shrink their work forces and product lines in response to the startling plunge in U.S. auto sales. But the president signaled that those plans do not meet the administration's demands.

"They're not there yet," President Obama said.

Their plan has "got to be one that's realistically designed to weather this storm and to emerge at the other end much more lean, mean, and competitive than it currently is," the president said. "And that's going to mean a set of sacrifices from all parties involved, management, labor, shareholders, creditors, suppliers, dealers. Everybody's going to have to come to the table and say it's important for us to take serious restructuring steps now in order to preserve a brighter future down the road."

Just what President Obama meant by the phrase "they're not there yet" was not exactly clear.

The Auto Sector's Global Pains

The point that President Obama may have been trying to make was that the two companies have yet to win required concessions from their creditors. Under the original terms of the $17.4 billion in federal loans, GM's bondholders and the companies' retiree health plans were supposed to give up their claims to billions in debt in exchange for an equity stake in the companies. But those concessions, which are due today, have yet to be delineated.

But Obama may have been alluding to a disagreement over how much smaller Chrysler and GM should become. One of the key points of contention between the two companies and the Obama administration is just how much the U.S. auto market will shrink in the near term and where it will be in the future.

General Motors has offered a more optimistic scenario and based their business plan accordingly. Members of the president's auto task force have questioned those projections, however, and some industry analysts argue that the companies may need to contract their operations even more than planned.

For now, GM is surviving on U.S. loans worth $13.4 billion and is asking for as much as $16.6 billion in additional financing. Chrysler CEO Robert Nardelli, whose company has received $4 billion and is asking for $5 billion more, hasn't been asked to resign, people familiar with the talks have told news agencies.
An aide to President Obama also said that Chrysler would have 30 days to complete the partnership with Fiat, and that if an agreement is reached the company could receive as much as $6 billion, Bloomberg reported.

The travails of Chrysler, GM and Peugeot Citroen underscore the global overcapacity that now exists. In short, there were already too many carmakers, with those in Europe (England, Italy, and France), Korea and Japan. But now India and China are coming onto the scene, promising to add to the capacity overhang that many economists refer to as "the global glut."

Vehicle makers around the globe are seeking innovative new ways to lower production costs and boost sales. Europe's auto market just posted its biggest full-year contraction since 1993, and Peugeot's outgoing CEO, Streiff, last month reported a second-half loss of $1.44 billion. Paris-based Peugeot, Europe's No. 2 automaker and the biggest car producer in France, received 3 billion euros in government loans to save jobs and to ride out the slump.

Clearly, changes are in store.

"The market will like the change," Michael Tyndall, a London-based auto analyst at Nomura Securities Co. (ADR: NMR), told Reuters. "The expectation is that Varin will look to remodel the business in a way that makes it more attractive to other partners."

The industry has so far resisted sweeping tie-ups. Fiat SpA's plan for joint production with Chrysler is the closest two of the world's top automakers have come to consolidation since the credit crunch and global recession began to wipe out sales last year. Bayerische Motoren Werke AG said this month it will expand joint parts purchases with Daimler AG.

Peugeot has routinely denied speculation of tie-ups with Italy's Fiat and France's second-biggest carmaker, Renault SA.

"The company and its staff remain entirely mobilized to deliver on the operational objectives identified by Christian Streiff," Peugeot spokesman Hughes Dufour told Reuters. He declined to comment further.

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About the Author

Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning. With his latest project, Private Briefing, Bill takes you "behind the scenes" of his established investment news website for a closer look at the action. Members get all the expert analysis and exclusive scoops he can't publish… and some of the most valuable picks that turn up in Bill's closed-door sessions with editors and experts.

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  1. [...] Business School professor Clayton Christenson – who was also a consultant to G. Richard Wagoner Jr., the former GM CEO who was also the architect of GM’s China strategy – told Time that inexpensive, Chinese-made Chevys, exported to the United States, could be [...]

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