Tuesday, May 15, 2007

Mercedes Leaves Chrysler at the Side of the Road

Mercedes, who bought Chrysler almost 10 years ago, has been regretting it ever since. The stockholders have been pleading with them for years to dump it. Finally, yesterday, they announced that they have found a buyer. Cerberus will now buy Chrysler for $7.5 billion.

Let's keep in mind:
1) Mercedes (Daimler-Benz) paid $36 billion for it when they bought it.
2) Of the 7.5 billion, 5 billion goes back to Chrysler itself immediately, and the other 2.5 billion are chewed up in outstanding debts, etc. so Cerberus will effectively get all their money from the purchase back.
3) In the end, Daimler-Benz will get less than nothing for the company. In fact, they will have to spend about 650 million dollars to facilitate the transfer - just to scrape Chrysler off it's books. So the whole exercise will cost Daimler-Benz over 37 billion plus the running losses over the past 10 years.
4) As soon as they announced they had dumped Chrysler, Daimler-Benz stock jumped up.
5) Actually it made more sense for Canadian Frank Stronach of Magna Corporation to buy them. His was the losing bid at 5 billion. At least, in his case, it made some sense because his company supplies almost all the body parts for Chryslers. So this purchase would have consolidated his vertical supply chain, and ensured his continued business for his core company.
6) But no one can figure out why in the world Cerberus would buy them - even though, as it turns out, they get the company for free in the end. Still, it loses billions of dollars per year. It just doesn't seem to make sense for a financial investment company.
7) When a financial investment company like Cerberus buys a company, they will usually break it up and spin it off into smaller companies and sell those off piecemeal at a profit. That's how they work. Is that what we can now expect for Chrysler? Would Jeep or Dodge Ram Trucks make it on their own? Do the economies of scale not apply across brands? Time will tell.

Why is it that Chrysler is so bad as a company? Is it that their cars are too expensive, that they don't sell? No, their cars are among the least expensive cars in the market. Is it that Chrysler cars are THAT poor in quality? Well no, maybe not. (although they aren't that great, according to quality surveys.) But that's not really the point. The point is that Chrysler loses money as a company. So does GM and Ford for that matter. They simply are not profitable companies. But experts say it's not because they make poor quality cars.

So what is the real problem?

Well, according to the automakers, it's apparently all about healthcare costs in this country. American automakers can't make as much profit as European or Japanese automakers because they have to pay ridiculously high healthcare insurance premiums for their employees, and none of the foreign car companies have that burden. Each of the big three has over 1 million employees and former employees to pay for - for life, whether they work there or not. Not all companies have to pay for former employees as well as current employees. That is a special burden that the automakers bear. However, the high cost of healthcare insurance is a problem ALL American companies face when competing with companies from other countries.

If the average U.S. worker's family healthcare premium is $1,000 per month (that's about what what mine is) then that is about $1 billion per month, or $12 billion per year. That's a lot of money! In Chrysler's case, their healthcare insurance cost is far more than the entire value of the company - every year!!

No other industrialized countries have this kind of system (except South Africa). Every other civilized country in the world has a government provided healthcare program. It is considered a basic service that a government provides for it's citizens. But somewhere along the way, people in this country were convinced by healthcare companies, and doctors, and big pharmaceuticals, and the politicians that support them - that that is somehow a bad idea, and that we should have a privateer system and pay 3 times as much as any other country in the world for the same or sometimes lesser quality of healthcare.

And what causes these high costs? Besides high rates for all medical services and products that produce huge profits for the healthcare industry, there are also malpractice insurance fees, and uneccessary testing to prevent malpractice lawsuits. And why are there so many malpractice lawsuits? Well, perhaps it's because lawyers take a percentage of the proceeds of the action if successful. So they become opportunistic.

As far as I know, this practice does not exist in other modern countries. Elsewhere, lawyers are restricted to being paid by the hour - as a professional service. They are not permitted to be paid a percentage of what they can sue for. So therefore other countries don't have as many spurious suits as we have here. Suing someone in this society has come to be seen as something akin to winning a lottery. They feel that if they can win a big enough settlement, then they are set for life. It's no longer just about compensation for loss or damage, as it is in other countries.

And it's the lawyers who have spurred and sustained this perception. They are the ones who spin up the dollars of a $35,000 loss to a $3 million dollar windfall. Of course, it's because they get a percentage of it. And it's usually a LARGE percentage.

This has led to a strange phenomenon in recent years where young people going through medical school are not going through to become doctors, but rather continue on to also get their law degree. The goal is to be a lawyer who knows all about medicine so they can make a fortune in medical malpractice law.

Now we can see the domino effect.
Greedy lawyers create more lawsuits and the suits are for more money. More lawsuits at higher settlements mean higher insurance payouts, which means higher premiums to doctors. Often, well over $100,000 per year. Also, the doctors order many more tests to protect themselves. More tests and especially higher malpractice insurance premiums, means higher doctors rates for services. Higher rates for services means higher health insurance costs for health insurance companies which in turn means higher premiums for us. Higher insurance premiums means much smaller profits for American employers, and that makes it more difficult to compete with other companies from other countries that are not similarly disadvantaged.

Something has to change. We cannot keep going on like this indefinitely.


At 5/16/2007 8:01 PM, Anonymous igor said...

What really pisses me off here is the following:

that adventure cost $billions to the MercedesBenz - ie - to its owners(stockholders), to its workers, to other people dependend on that big company. And it turned out a HUGE mistake by MercedesBenz top management.

If I do THAT kind of mistake, I am out in no time with no pay and with references that give no chance of future employment other that at lowest level.

Are the Benz' top managers going to pay for their mistake? Make a guess...

... like you said about those CEOs couple of posts back ...


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