Gettelfinger in the ESOP pie?

Chrysler’s future looks increasingly precarious. Union President Ron Gettelfinger has a tough call to make. He may be able to disrupt progress towards a takeover. Or he may soften the Union’s stance over pension rights with the parent company. But that makes Chrysler a more attractive morsel for a predator. ESOPs offer a possible way forward.

The financials make gloomy reading. Chrysler made a $1.5bn loss last year as its US sales deteriorated. Kirk Kerkorian has tabled a $4.5bn offer. Magna is believed to be considering making a marginally better offer. Parent company Mercedes Benz faces 90% loss of the $40bn it paid for Chrysler in 1998.

How ESOPs may be the way forward

An ESOP (Employee Share Option Plan) is an old idea that has found recent favor in Private Equity deals. In principle, an ESOP is a form of worker incentive through participative ownership. As such, it has a distinctly liberal or (dare I whisper the word?) socialistic ethos. Strange, then, that such an idea would be popular in that most red-blooded of capitalistic barbarians at the gate, the private equity consortia.

Unsurprisingly, The Economist takes a mildly cynical view:

If all else fails, hand the workers some equity. That seems to be the new philosophy of America’s private-equity firms, at least, judging by the bidding war for Chrysler [and The Tribune Newspaper]. ..
Anyone seeking in this the spirit of Robert Owen, the father of the workers’ co-operative, or of Louis Kelso, an American lawyer who invented the ESOP in 1956, is likely to be disappointed.

When Daimler bought Chrysler in 1998, it paid $35 billion. Analysts now value it at no more than $8 billion, though Daimler may be fortunate to get anything close to that for a business that some experts think is destined, sooner or later, for bankruptcy, along with Detroit’s other giant car manufacturers, Ford and General Motors.

On April 5th Tracinda, the investment vehicle of Kirk Kerkorian, a buy-out veteran, offered to pay a paltry $4.5 billion for Chrysler .. Mr Kerkorian’s offer assumes that Daimler will retain some of Chrysler’s crippling health-care and pension liabilities and that the firm’s employees will take a big chunk of equity in exchange for giving up some promised benefits.

Overall, ESOPs seem to improve the performance of firms that have them, which may explain why they are increasingly popular. Some 10 million American workers are members of ESOPs, which together control assets worth an estimated $600 billion. However, it is less clear that they help firms in upheaval or confronting possible failure–such as Tribune and Chrysler.

The Economist argues that the move is more based on financial engineering than on the kind of social engineering required to harness the energies of the workforce towards competing globally, and contributing to a change of fortunes of Chrysler, (and by the same token, GM and Ford). In contrast, the rise and rise of the Toyota phenomenon (Toyataoism) is based on production and social innovation.

The view is one shared by those of more leftist disposition, typified by the following quote. I jotted it down from a lecture by a distinguished social scientist who was discussing worker participation schemes: ‘Scratch an enlightened employer, and not far below the surface you will find an unreconstructed exploitative capitalist’ .

But for all the mistrust, the workers at Chrysler may see such deals as offers they can’t refuse. To them, this is far more than an experiment in financial engineering. Magna, with its track record of employee share ownership, could have the better prospect in that respect. The almost forgotten third way of Kelso may attract more advocates.

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Chrysler: The three most-rated raptors

When Chrysler-Daimler boss Dieter Zetsche said recently that all possibilities were under consideration for Chrysler, the vultures began to circle. Is it a simply a matter of time? We assess the three most rated raptors. [Update]

As the Easter celebrations began, so did the take-over rumors around the Chrysler division of Chrysler-Daimler. Tracinder, the investment vehicle for the influential corporate investor Kirk Kerkorian is reported to have made a $4.5 billion offer. Other names mentioned include the canadian engineering firm, Magna International, and the once all-powerful General Motors.

Update: I have no firm news to add to the post. However, I should have mentioned that as well as my identified three predators, there were reports of others. The Detroit News has suggested that Chrysler has opened its books to buyout specialists Cerberus Capital Management.

Original Post

In February, I blogged that Chrysler was in big trouble, and that CEO Dieter Zetsche of Chrysler-Daimler had indicated as much, in saying he would be exploring all options with new partners. He had left the door of the Chrysler hen-house open, with the foxes getting bolder by the day. Today I’ve changed metaphor in midstream. It’s not foxes eyeing carelessly-guarded chickens anymore, but vultures detecting some easy pickings.

Commentators had discounted the chances of takeover by non-American bids on various grounds. The product base was too dependent on gas-guzzlers with long-term declining prospects; the American market is notoriously hard for foreign firms to crack (although Toyota is among the ‘invaders’ who have found the successful formula: if it looks like a sheep, baas like a sheep, herds with the other sheep, perhaps it’s not a wolf in sheep’s clothing).

So attention turned to possible North American bids. GM had been mentioned, but had not been tempted by an earlier merger suggestions (by one investor, Kirk Kerkorian) to merge with Nissan and Renault.

Kirk Who?

Mr Kerkorian unsuccessfully opposed the original merger, generating a legal objection, claiming he had been unfairly disadvantaged to the tune of some $billion. He lost that appeal. Now he is back in action. His bid this week requires Chrysler to reach agreement with the United Autoworkers and make progress over unsettled pension and health costs.

Frank who?

Another firm mentioned as interested in acquiring Daimler is Magna. The firm is a relative newcomer, founded by an Austrian entrepreneur Frank Stronach. Mr Stronach emigrated to Canada in the 1950s, and built up a successful auto-business. One of its interesting features is its Governance structure. According to the company web-site,

In 1971 Mr. Stronach introduced his management philosophy, known as Fair Enterprise, to Magna. Fair Enterprise is based on a business Charter of Rights that predetermines the annual percentage of profits shared between employees, management, investors and society, and makes every employee a shareholder in Magna. These rights are enshrined in a governing Corporate Constitution.

And GM?

The old lady has not yet offered a convincing enough denial. The lack of a denial has been enough to induce a few trading jitters. When the news of Kirkorian’s bid came through, GM strengthened. One analyst suggested that the reduced possibility of GM becoming involved with Chrysler helped rally investors.

A three-horse race or a chess tournament?

The moves are taking place as Daimler-Chrysler shareholders met in Berlin for its annual meeting. There were strong representations to the company to get rid of the Chrysler operation.

Chief executive Dieter Zetsche admitted that the group has started negotiations with a number of parties about the sale of Chrysler and was reported by the BBC as saying

“I can confirm that we are talking with some of the potential partners who have shown a clear interest .. We need to keep all options open and I cannot disclose any details, because we need to have the maximum scope for manoeuvre”

If this were a chess tournament it would have the highest rating for the caliber of Grand masters taking part.. But unlike a chess tournament, we don’t even know the full list of competitors.

VW shrugs off leadership shifts but fails to convince its environmental critics

Update October 24th, 2007

With the demise of the so-called VW law, The future of VW seems increasingly connected with that of Porsche. Porsche has strengthened its share-ownership of VW and appears to be following a strategy of creating wriggle-room for a takeover bid at a time that is most advantageous to itself.

[Original report follows]

The VW motor giant has shrugged off its leadership shifts of the last year. New chief executive Martin Winterkorn seems to have re-assured financial analysts of the company’s future and of the successful implementation of its restructuring plans. An environmental perspective, however, indicates further challenges ahead.

In an earlier post, I pointed to the organizational instability that accompanies leadership shifts such as those that had befallen auto-giant Volkswagen. The background was the scandal concluding with a criminal conviction for Peter Hartz, formerly head of personnel at the VW corporation, and an influential figure in labour policy changes introduced by the former German chancellor, Gerhard Schröder.

Volkswagen chief executive Bernd Pischetsrieder had stepped down under unclear circumstances, followed by the departure of Wolfgang Bernhard. Mr. Bernhard pushed through plans to cut 20,000 jobs and extend the workweek during the course of 2006. But in the process, he alienated the powerful Volkswagen union, IG Metall, which is also closely allied with Volkswagen’s chairman, Ferdinand Piëch.

The VW preservation society

Meanwhile a long-rumbling legal progress was grinding its way through the German courts. Last month, The advocate general ruled that the so-called “Volkswagen Law” wrongly prevented the free flow of capital. If this is ratified, the company becomes more vulnerable to takeover.

Two stories are emerging

These were the circumstances under which Martin Winterkorn took over in the New Year. Two stories are emerging. The first points to the improved prospects future profits for the company announced this week. The second concerns the wider environmental picture.

A finance success story was more widely reported. In the UK, The BBC, for example, emphasized the good news, in a piece entitled Upbeat forecast lifts VW shares. The piece might have been more credible if it had managed to get the good Dr Winterkorn’s name right.

Meanwhile, Der Spiegel in an extended interview with Dr Winterkorn was addressing a concern that VW was lagging in its efforts to produce its hybrid cars.

A somewhat defensive Dr W denied that the German auto-industry was lagging in applying technology in the interests of the environment, saying it was ‘nothing but clever marketing on the part of our competitors. It has nothing to do with the facts’ .

What sense can we make of the two stories?

First, that the financial markets have absorbed the uncertainties regarding VW’s less secure future when and if the Volkswagen protection laws are removed. They are also unshaken by the leadership scandals, and by the risk that VW is falling behind Toyota in the development of its hybrid car range. (Strictly speaking, that is a wider concern for the future success of the German premium automobile marques, VW’s Audi, but even more so, BMW and Mercedes). At least Martin Winterkorn seems to be enjoying a leadership honeymoon.

Chrysler Chills: Is this Thermal Denial?

Ford and GM have shed nearly eighty thousand jobs. Chrysler now announces another 13,000 job cuts in North America. Chrysler/Daimler faces a tricky future as its head, Dieter Zetsche, weighs up all options for the ailing partnership. Against the growing reality of the job-cuts we ask: is there still thermal denial in the American auto-industry?

The overall story is now well-established. The mighty auto-industry in America is in a tailspin. There is a sense of the decline and fall of the Fordist Empire. Some of us learned that was caused by enemies within, as much as enemies from outside. Which translated points to the fiendish plot by Foreign-owned auto-companies to metamorphose into American companies.

Sales and sales projections say that big is not as beautiful as it was. It seems likely that the invaders such as Toyota can probably scale upwards in the new midi- or cross-over utility vehicle market more easily than the American auto-giants can scale down into the market.

Meanwhile at the Detroit Show

Meanwhile, the Detroit show recently indicated the approach to the market from the ailing giants. Chrysler could claim to have played a big part in creating the market for the rather large People Carriers. Tom LaSorda, head of the American Chrysler division of the partnership said as much at the show. He also indicated that the future product the company was backing was …The Grand Caravan, another people carrier.

In a sideshow, the Corporation’s chief economist was offering another interesting take on its thinking. Van Jolissaint described a gulf between views he found prevalent in Europe, and those in the States. He was dismissive of the Stern report and suggested that climate change was “way, way in the future, with a high degree of uncertainty”. He added for good measure that the Europeans appeared to be suffering from a quasi-hysterical condition producing Chicken Little behavior, running around saying the sky was falling in. The audience from within the auto-industry seemed to find both solace and confirmation of the correctness of its own views from his argument.

It may have escaped the notice of the audience that the Chrysler part of the partnership was performing particularly weakly, with strongest performance from the European Mercedes-Benz car and truck operations.

After the Show was over …

After the Show was over the auto-makers returned to their beleaguered manufacturing bases, and economists to wherever economists return to (Platonia? Milton Freedonia? Maynardsville?).

Then on Valentine’s day (of all days), Chrysler announces 13,000 job losses. The Chrysler Chief (sounds like part of a music group) is pressed about the future of the American side of the partnership. Dieter Zetsche, for it is he, indicated that he would be exploring all options with new partners.

But Mr Zetsche who used to run Chrysler, has also been engaged in a little denying. According to the BBC:
Mr Zetsche denies any plans to sell the company and pointed out that its problems could be temporary and cyclical .. “No one knows if there is a long-term shift in trends”

So what’s going on?

From a leadership perspective, who would wish to be in change of a global car operation at present? There are a very small number of names who are frequently mentioned as today’s super-leaders, and inheritors of the mantle of earlier greats. Am I right in thinking that the names are largely non-American? If so, is that not puzzling? And who will be in change of whatever is left of Chrysler a few years down the line? Probably not Mr. LaSorda, and that’s not at all because he bears an uncommon resemblance to another once powerful leader. I will leave that as a little challenge to anyone interested.

And why do I think the current crop of successful Auto-chiefs are not American? I hesitate even to offer the most tentative of hypotheses. I am still trying to work out why there are have been so few great English football managers, and such a statistical surfeit of Scottish ones. Or am I wrong about that as well?

Poor Leadership slammed at Ford and GM

Leadership at Ford and General Motors has been identified as a key factor in their decline against Toyota and other competitors. As Ford plugs its innovative link with Bill Gates, industry experts predict a further decline in its fortunes. It is possible that the industry has developed mechanisms that are protecting it from acknowledging the extent of its decline.

In a recent post we asked whether Toyotaoism is replacing Fordism. The debate following that post has continued. This week’s news from the US Motor Show is accompanied by further press reports on the competitive challenges facing US car manufacturing, that bell-weather of the economy. The battle for commercial success seems to be favouring the more philosophical arguments for Toyotaoism.

BBC reporter Steve Schifferes was at Detroit for the motor show. He interviewed its North American head Mark Fields, but interestingly, the Company’s new overall leader, Alan Mulally is not giving press interviews at the Show. The company has retained its high profile stance at the show, emphasizing its continued innovation, majoring on a link with Bill Gates and Microsoft which will produce a new in-car audio system (‘Sync’) in an exclusive one-year tie up.

Industry insiders remain unconvinced

Industry insiders remain unconvinced of Ford’s prospects. Ford lost $ 17 Billion last year and its factories are in hock to its $20 Billion bank borrowings. Its voluntary redundancy plans are proceeding apace.

Professor James Levinsohn of the University of Michigan said the US companies have only themselves to blame.
”

Ford and GM regularly round up the usual suspects when searching for a reason for their troubles but the real culprit is the obvious one. These firms are not making products that people want to buy. The responsibility for that lies with what passes for leadership at these firms.”

Blanking out the bad news

Levinsohn claims that he has been unable to find a placing for his analysis in auto-industry publications. He believes that the publishers are concerned that such the magazines are worried that such bad news stories would put a magazine under pressure from its advertisers.

State of denial

It is not unknown for academics to claim that their work has been rejected on non-academic grounds. Independent evidence to assess such a claim is hard to obtain. However, the brave face of the industry at Detroit is itself some evidence of the industry’s need to talk itself up. Yet, Ford’s main claim for innovation as the Microsoft link seems peripheral to its commercial problems. We may be witnessing what Chris Argyris has called covering up the cover-up. That is to say, a state of denial

Tundra vanilla with cherries?
The show also signalled the continuing advance of the Totota brand. Its Toyota Tundra is marketed as an American pick-up, designed and manufactured in the good ‘ol US of A.

The Asian automakers have cornered the market on vanilla,” says Global Insight automotive analyst Rebecca Lindland “..Now they’re adding the hot fudge chocolate with cherries on top, which is what they have to do to progress in the US market .. They are going after a new segment with its truck – heartland America, NASCAR drivers, who are more patriotic [and] not Toyota drivers typically”

The story is not completely bleak. The Economist has been following the auto-industry for some years, and commented (January 13th 2007) that prospects for GM ‘have dramatically improved’. Even this more positive view suggests that the company seems to have been galvanized by stake holder Kirk Kerkorian’s decision to pull his 10% stake last year, and that recovery and rationalisation if it works ‘will achieve economies of scale that only Toyota can match’, and that GM’s core North American operations are still only ‘heading in the right direction’.

Questions to ponder

In which case there are further questions to ponder. Are we witnessing leaders operating with a clear vision for the future at Ford and GM? Are the companies putting on a brave face? Or are they operating in a state of denial?

Will Toyotaoism replace Fordism?

Sometime in 2007, Toyota seems likely to become the World’s biggest auto manufacturer. According to Professor Fangqi Xu, the 21st Century will be an era in which the Fordist principles of production will be replaced by a more creative leadership style. I suggest Toyotaoism would be an appropriate term for characterizing the emerging Post-Fordist era.

Sometime in 2007, Toyota seems likely to become the World’s biggest auto manufacturer. In contrast, Ford workers face substantial job cuts. Toyota represents one of the outstanding illustrations of developments which have been gradually refining and replacing the production line processes and mentality of the 20th Century.

The company has pioneered a fusion of Fordist methods with a more Eastern philosophy of respect towards the environment, customers, and employees. The fostering of empowered teamwork in Toyota is a central element of the philosophy, production system, and leadership style of the corporation.

Beyond Lean Production

In broad terms, the Toyota system has been equated with the arrival of lean production and subsequent higher efficiency gains. This has simplified out the production gains from the deeper philosophical implications. These bring the system closer in spirit to the European experiments in socio-technical systems design at Volvo, itself briefly hailed as a revolutionary innovation for manufacturing. However, insiders argued that Volvo’s experiment failed in face of ‘Toyotism’.

The best-known Western account of the Toyota system is arguably from the MIT researchers led by James Womack. Their study raised popular awareness of Toyota’s Just in Time system, and the broader concept of Lean Production.

From Toyotism to Toyotaoism

I would like to propose the acceptance of a slightly different term for the significance of the changes implied by the Toyota approach. Rather than the narrower perspective of Toyotism, I suggest Toyotaoism. The term hints at a philosophy that goes beyond a shift in production system. The philosophy is particularly appropriate in its Eastern origins. Western authors have already simplified some of the principles in The Tao of Leadership.

One leading scholar has been developing this idea is Professor Fangqi Xu of Jiangsu Polytechnic University, China. Professor Xu is the Director of International Connectionas of Japan Creativity Society, and also a student of Ikujiro Nonaka, the renowned Knowledge theorist. Professor Xu has made a detailed study of creativity courses around the world. His studies have convinced him that the 21st Century will be an era in which the Fordist principles of production will be replaced by a more creative management style.